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Investors should ignore macroeconomic noise and focus on finding the best value when investing in global equities, says fund manager Josh Jones.
The shock of the Brexit vote, concerns over Chinese growth, and commodity price fluctuations have all damped the prospects for global stocks at one time or another. However, you can still find value in the market providing you stick to rigid discipline in looking
for companies capable of outperforming, regardless of the economic backdrop, he says.
“Stock selection and the resulting sector allocation will become even more important as investors navigate growing macroeconomic noise in the later stages of the current economic cycle, says Jones, who is co-portfolio manager of the Boston Partners Global Premium Equities fund with Chris Hart.
Boston Partners follows the tried-and-tested ‘three circles’ philosophy in pursuing only those stocks that are attractively priced relative to the market, have good business fundamentals and exhibit positive business momentum.
“Global Premium is an all-cap, bottom up product, but what investors often want to talk about is macroeconomic news and the noise in the market,” Jones says. “People can relate to the macro, because it’s what they read about every day. But what drives the portfolio at the end of that day is finding the right businesses with the right characteristics. And what the noise often does is produce dislocations, especially in the small and mid-cap space.”
“We consistently get asked how we outperform in up and down markets when investing in the full market cap range of companies, and that’s usually because we’re buying higher-quality companies, even if they’re smaller ones. That flexibility has been a big advantage of the fund.”
The Global Premium fund particularly focuses on ‘value’ stocks – those that trade at share price multiples that do not reflect the company’s potential. Subsequently, it largely ignores ‘growth’ or ‘defensive’ stocks which are often very costly when the underlying valuations are taken into account.
“In recent years, growing macroeconomic fears have led many equity investors to chase only momentum, believing that this would be safe territory,” says London-based Jones. “Subsequently, market values for growth stocks along with high yielding defensive stocks have rocketed, and they became quite expensive.”
‘We won’t compromise on our core principles, no matter what the short-term environment looks like’
“Always adhering to the three circles investment process has led to the fund being unable to find worthy opportunities in sectors such as Consumer Staples, REITs and Utilities, as their share prices did not meet the portfolio’s strict value or business fundamentals criteria. This has sometimes led to the fund significantly deviating from the MSCI World Index that serves as its reference index, sometimes to its disadvantage when momentum was the only show in town.”
“But we won’t compromise on our core principles, no matter what the short-term environment looks like; when you have a process that works over the long term, short-term results cannot alter your thinking and approach.”
So, what to pick, given the absence of real value across much of the market during ‘noise’ periods? “What has often worked in the fund’s favor have been three ‘unloved’ sectors that generated most of the alpha through stock selection; energy, materials and industrials,” Jones explains. “We went in and found good businesses with positive momentum in the value sector of the market.”
“For obvious reasons, energy was a bad sector last year as the oil price was down, but there were still some good businesses that were actually doing quite well, despite the weak crude oil environment. And there were some industrial businesses that had some very stock-specific reasons for doing well, so we bought those, and avoided those industrials businesses that had weak earnings because they were exposed to energy, metals and mining.”
The Brexit vote is perhaps the best example of why it is important to rise above a large political issue and focus on stock-picking, Jones says. The fund’s exposure to the UK was around 7% in the days leading up to the historic vote in June, and its positioning remained unchanged on the day of the announcement that the UK had opted to leave the EU.
“Our UK exposure today is still mainly consumer focused, mixed with some defense-oriented companies. This exposure is split across market capitalizations as a variety of opportunities became more attractively priced in the wake of the Brexit vote.”
‘In the aftermath of the Brexit vote we continue to screen for the same characteristics’“In the aftermath of the Brexit vote we continue to screen for the same characteristics, in some cases identifying added valuation support but increasingly questionable business momentum,” Jones says. “The UK holdings in the portfolio on average generate over two-thirds of their revenues from outside of the UK, which should translate to a more stable future, no matter what is the end result of the UK’s eventual departure from the EU.”
“So we try to just find businesses that are doing well and generating a lot of cash, and let the fundamentals work through.”