MLC Investment Management Investment insight Research trip notes: meetings with MLC’s global share managers September 2013 I recently returned from a research trip to Asia, Europe and North America. My focus was visiting managers of global shares and global listed property. In visiting 11 cities, I met many of MLC’s current and some prospective investment managers. These managers had some interesting views about global share markets, the macro environment and the outlook. Here are some of my observations. Myooran Mahalingam Portfolio Manager, Global Equities & Global Listed Property MLC Investment Management Market returns are likely to moderate Most of the managers I met were fundamental, bottom-up managers, who typically assess the attractiveness of individual companies rather than markets. However, they made some interesting high level observations on share markets. Their views on the markets ranged from “fairly valued” (at best) to “struggling to see opportunities” (at worst). This doesn’t mean that markets are expensive. Rather, it’s a reflection of the recent strong run in share markets, which means it’s an increasing challenge to find companies with the potential for significant share price rises. The overall message from these conversations was that in a low growth economic environment, future share market returns will be more moderate than those of the last 12 months. Surprising strong performers in the market rally The recent market rally has been unusual in that defensive sectors – those that are generally less affected by market sentiment – have performed best. For example, sectors like Healthcare and Consumer Staples have outperformed, while Information Technology has underperformed over the last 12 months. Generally, businesses that are geared towards economic recovery do well in a strong market, but that hasn’t been the case in this market rally. That’s because rather than supporting companies that are reinvesting in their business for future growth, investors have rewarded companies that return capital to shareholders (through buybacks or dividends). With bond yields very low for most of the last 12 months, investors have favoured “bond proxies” – shares in defensive companies that deliver income. A challenging macro environment Another feature of the recent share market rally is that it has been based on investors’ growing optimism about the global outlook and investing in shares, rather than on companies delivering earnings growth. For the market rally to continue, there needs to be sustainable earnings growth. Meetings with MLC’s global share managers Page 1 MLC Investment Management Research trip notes: meetings with MLC’s global shares managers And the macro environment is still uncertain. Despite monetary and fiscal stimulus across the world – on a scale never seen before – the global economy is still only growing moderately. What happens when this stimulus comes to an inevitable end? • In the European Union, new rules on investment managers’ remuneration are being introduced. While this mainly targets hedge fund managers, the way investment managers are compensated continues to be an issue to watch. Our investment managers acknowledge that the macro environment is very difficult to predict. As a result, they’re focussing on businesses that can grow shareholder value regardless of what’s happening in the macroeconomic environment. Other observations The impact of increased regulation These comments and anecdotes give a flavour of managers’ views on a range of topics. Growing regulation is increasingly impacting companies. This has been seen in several ways: • • • At a time when governments have large budget deficits, they are looking at ways to increase their revenue. For example, Britain has led a push for corporates to pay more tax and not to funnel revenue through tax havens. A recent US migration bill has explicitly restricted the number of visas that can be given to foreign nationals for jobs in the US. This • energy and materials shares – they have also fallen significantly behind in the market rally. Has the market over-reacted to the slowdown in commodity-related spending, or could their prices go down further? is likely to hit some companies hard, like Cognizant Technology Solutions, an Indian outsourcing company with part of its workforce onsite in the US. Is this protectionism in a different form? I often asked investment managers which area of their portfolio was generating the greatest debate within their investment team. The responses tended to focus on: • Japan – will “Abenomics” work and is the current Japanese market rally sustainable? • emerging markets – they’ve been a significant laggard in the current market rally, so is this an opportunity? • The social cost of austerity in Europe is high, but often unreported. For example, a successful fund manager retired from Scotland to live in Monaco and southern France. After being burgled twice, he returned to live in Scotland. Conclusion In the strong share markets of the last 12 months, MLC’s global share and global property managers have managed their portfolios with discipline and remained true to their investment processes. With the macroeconomic outlook still very unclear, it’s important to be highly selective about the businesses that are purchased. My discussions from the trip indicated that MLC’s investment managers are doing just that. 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You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product issued by MLC Investments Limited (ABN 30 002 641 661) and MLC Nominees Pty Ltd (ABN 93 002 814 959) as trustee of The Universal Super Scheme (ABN 44 928 361 101), and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au. Past performance is not indicative of future performance. The value of an investment may rise or fall with the changes in the market. Meetings with MLC’s global share managers Page 2