It seems investors’ patience runs very short nowadays. Too often they grow restless if they see their fund underperforming for a short period – even three or four months. Really you have to give fund managers more of a chance than this, particularly in markets dominated by political decisions, macro-economic events and geopolitical risks. It is virtually impossible to switch whole portfolios from one direction to another, and it is also very costly. Managers have to stick with their long-term strategy, so it pays to have some patience and assess a fund’s performance over a longer period.
That said an investor is entitled to be disappointed with lacklustre progress. One such fund for me is the Schroder Global Alpha Plus fund, which is run by Virginie Maisonneuve. Her high conviction approach favours good-quality growth companies investing for the future. Despite many admirable aspects to the fund, performance has been poor over the last year, so I recently met with her to understand what has happened.
Her honest reply was to say that very little had gone wrong. Turnover has been low, and she has stuck rigidly to her process – a good sign. Quite often chopping and changing can be a road to ruin in fund management, and it usually tells you the fund manager has lost their nerve. Whilst there have been a small number of stock-specific disappointments, what really seems to be driving underperformance is the types of stocks she picks are not finding favour with the wider market. In short, her ’style’ is currently at odds with the prevailing mood.
To explain this it is necessary to look at the central themes of the fund. Virginie Maisonneuve looks at the world as an increasingly interconnected “global village” and considers how companies are being confronted by trends that are continually shaping the world. These include climate change and the need to cut emissions; demographics and the resulting shift in demand likely to result from changing consumption patterns; and growing demand for commodities and natural resources. Clearly these are all long-term themes, and with many investors primarily looking at the next year, or even the next quarter, of company earnings, it is easy to understand that her longer term outlook may not be shared by others.
Looking at the portfolio it is reassuring to find there is real quality. Apple and Google are two stocks that have fared particularly well, capitalising on the proliferation of mobile computing through devices such as smart phones and tablets. Virginie Maisonneuvebelieves Google is good value and retains a 4 per cent exposure in the fund, whilst she has begun to trim her position in Apple following the stock’s tremendous run. She believes we are approaching saturation in the mobile phone market and while the tablet business offers further growth, profit margins are not as high. Elsewhere, Home Depot, a US home improvement retailer, has also been doing well. Property prices in the US seem to have bottomed and consumer confidence is picking up.
Other stocks, though, have not worked so well. Atlas Iron, an iron ore producer based in Western Australia, has been hit by the fear of a Chinese economic slowdown. Continuing urbanisation means iron ore inventories are actually quite low in China and Virginie Maisonneuveexpects a recovery in the share price. Similarly, Infineon Technology, a German semiconductor company, has struggled due to falling demand for its chips. The business is highly cyclical and she thinks better times lie ahead.
Herein lies the problem in my view. The market is more interested in defensive, high yielding stocks than the higher growth companies Virginie Maisonneuve is seeking out. Indeed, the fund has tended to perform particularly badly in “risk off” periods such as December last year and May and June this year. Yet these stocks have a latent value, and although they might be perceived as more risky, they could now be good value compared to the more fashionable defensive stocks investors are currently enamoured with. Defensives may offer greater certainty of earnings but they have less scope for growth – a key ingredient for long term returns. I suspect funds like this are due a return to form, though in a market dominated by the actions of central bankers and politicians I fear it may be some time coming. Nonetheless, for investors with some patience, exposure to good-quality growth companies via a fund such as this should pay off over the long run.
Mark Dampier is head of research at Hargreaves Lansdown