In today’s low growth environment fund managers have to hunt harder to get returns. Carmignac’s Rose Ouahba has singled out three clear growth themes: emerging market countries that are undergoing structural reform, global leader companies and firms benefiting from US cultural growth.
These three areas are driving asset allocation decisions on the Carmignac Patrimoine fund that she co-manages with Edouard Carmignac.
“After the global financial crisis growth rates are under their potential in any region of the world,” she says.
When looking for global leader companies, which account for 17 per cent of the total portfolio, Ouahba and Carmignac have hunted out businesses “that are able to maintain profits even though the cycle is not super strong, those that have a leading position in their sector,” says Ouahba.
This has led the managers to one of their largest holdings – Amazon. The fund has 1.85 per cent of the fund in the internet company, an allocation that was cut to zero a number of years ago before being brought back recently.
“The company’s management finally looks more inclined to focus on the group’s earnings capacity and its leading position in cloud data storage and management,” says Ouahba.
Within the emerging markets space, the duo are looking for countries that have ongoing structural reform, which points them to India and China. The emerging markets story makes up 11 per cent of the portfolio.
“We remain highly selective both in terms of regions and stockpicking. We increased our exposure to Chinese middle class consumer spending through Midea, a particularly well-managed and leading player in the household appliances segment,” she adds. The fund also has a 1.56 per cent allocation to Indian bank ICICI.
On the US growth story, which accounts for 15 per cent of the portfolio, Ouahba is aiming to capitalise on cultural changes taking place in the country, which predominantly pushes her to internet and new technology companies. She is investing in firms such as outsourced remote IT services provider ServiceNow, household names like Google and Facebook, and internet access consolidator Level 3 Communications.
Outside of these three main themes, Ouahba says the portfolio is cooling on the US generally, seeing the risk of inflation in the country as underestimated by the market.
She has also cut the dollar exposure in the fund, having had 70 per cent of the currency allocation in the US at the start of the year. This has now been slashed to 40 per cent in favour of the euro, being taken down in two steps in March and then April. Euro exposure now stands at just over 45 per cent, with Ouahba adding “we don’t think any other currency now will be really stronger”.
“The idea is that we were very bullish on the dollar in the last couple of years, but we are now entering a phase where the dollar strength should slow down, so we have taken our profits from the past two years,” she says. An expected gradual hike of US interest rates will also be less of an advantage to the dollar, Ouahba adds. “We still presume the dollar will be stronger than the euro but not as strong as if the Fed had been aggressive [in rate hikes].”
A main feature of the Carmignac Patrimoine fund is that it can go to a maximum of 50 per cent in equities and as low as 0 per cent, while the fixed income allocation can go between 50 per cent of the fund and 100 per cent.
This makes the fund “flexible and quite unique in the marketplace,” she says. “Particularly in 2008-2009 we fully used the flexibility of the exposure of the fund and especially to the equity market. That’s the main feature of the fund.”
The duo also vary the modified duration of the bond section of the fund. Modified duration measures the bond portfolio’s riskiness to changes in interest rates. For a sensitivity rate of +2 a rise in interest rates of 1 per cent would lead to a 2 per cent drop in the value of the bond portfolio.
The fund parameters allow the managers to go between -4 modified duration and +10, which is intended to allow them to generate performance regardless of whether it is a bull or bear market for fixed income.
“When we have the modified duration negative, when rates go up the valuation of the portfolio goes up. It’s a very interesting feature,” she says.
Last month the duo reduced the fund’s overall modified duration so it is better equipped to deal with higher US and German yields. An example of how the modified duration is managed is where Ouahba sold futures to hedge against her US 10-year bond holdings.
She is also cautious of German rates rising, believing that the raft of QE in Europe has benefited the nation, with inflation and growth rates picking up while bonds are still below their fair value.
The pay off here is that rates in Italy, Spain and Portugal will be lower in the next month, Ouahba predicts. However, the fund still has 21 per cent of assets allocated to European government bonds in those three nations.