Blue Chip Issue 81

OFFSHORE
There are three reasons for this. South Africa is a small
portion of the global emerging markets universe, accounting
for 3% of MSCI’s emerging markets index (and less than 1%
of the global index). There is a lot of opportunity out there in
the emerging markets universe. It is also worth noting here
that this universe comprises a heterogeneous selection of
emerging markets, with each market offering investors a very
different set of investment risks and opportunities. Taking
South African investments as proxy for emerging market
exposure leaves local investors deprived of many potentially
rewarding opportunities that tend to be unique to other
emerging markets.
Secondly, that EM universe has changed dramatically over
the past decade or so. It is now firmly centred on Asia, and with
a much larger exposure to technology shares and the growing
middle-class consumer in those countries. It is much less of a
proxy for commodity prices, which is what South African equity
is to an extent.
Thirdly, we have long believed that the global equity
benchmarks have too little exposure to emerging markets, only
12% even though emerging markets account for a much larger
share of global economic activity.
There is a concern that global markets look expensive. Is this a
good time to invest offshore?
Overall valuations look stretched by historical standards, but again
we need to scratch beneath the surface. For instance, the forward
price: earnings ratio on the MSCI All Country World index is 18,
which is near a level it last was in the early 2000 in the wake of the
dot.com bust.
But we need to bear in mind that interest rates are much lower
today than in 2000 and this eliminates the potential for either
cash or bonds as a suitable investment alternative to equities. For
instance, the 10-year US government bond yield is 1.3% versus 5%
in 2000. European yields are negative. You can’t ignore that.
Valuations are very different across regions and companies. The
US is most expensive because investors are prepared to pay up for
those growth companies. Other markets are much cheaper.
Finally, global growth is positive, and companies are generating
incredible earnings. In this macro environment, it makes sense to
remain invested.
However, elevated valuations do suggest that the easy money
has been made, and that investors should not necessarily expect
the kind of returns we saw in the previous decade.
How do you find these managers?
We start by doing a quantitative screen, using the global databases
that we have access to. Here we look for some basic characteristics
like track record, size, domicile, benchmark, etc. From this screen we
can do more qualitative research on a short list of managers. The final
step is to spend time with managers to find out what makes them tick.
We really want to understand their philosophy and process. We want
to know who the key people are and how they interact. How do they
generate ideas? How do these ideas end up in a portfolio? When do
they buy and when do they sell? How is risk managed?
Once a manager is appointed, we have regular engagements
with them to monitor performance, but mostly to make sure we
still understand what is behind the performance and whether
that remains consistent with their investment approach. Once we
identify truly talented stock pickers, we tend to stay invested for
the long term and in some cases we have been invested with the
same global manager for over a decade.
The OMMM Global Equity fund was launched in March 2020
as a dollar-based UCITS fund. Despite the recent inception date,
it is worth noting that our expertise in global manager research
expands close to two decades.
You won’t get positive alpha
every day. It is lumpy.
Speaking of managers, where do you stand on the active vs
passive debate?
I think the main thing is that investors need to get value for money.
If you can find active managers who outperform, it is worth paying
somewhat higher fees. If you can’t, indexation is an attractive option.
We believe that skilled active managers earn their fees and then
some. Investors just need to be patient. You won’t get positive
alpha every day. It is lumpy.