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Worldly wise

In contrast to the reams of stockpickers out there, Walker Crips’ Jan Luthman and Steve Bailey take a macro-thematic approach to investing.

This focus on economic, political and social factors has enforced a global outlook and led to top performance on their UK growth, UK high alpha and UK income funds.

Luthman says current macro themes are more forceful than ever, with unprecedented globalisation, population change, global warming and quantitative easing.

“These spawn various sub-themes and are too powerful to ignore. If you can construct your portfolio to benefit, that represents an extremely powerful wind behind your performance,” he says.

As for stockpicking, the duo feels the regulatory environ-ment since the mid-1980s has eliminated opportunities to achieve significant outperformance through company-specific analysis.

“With companies required to announce everything to the market – and senior staff likely to sandbag in one-to-one meetings – it is difficult for analysts to get any kind of information advantage in a regulated market like the UK,” says Luthman.

“This means they tend to underestimate upturns and downturns in share prices. In contrast, there are no restraints on using macro or thematic information to shape a portfolio and it is possible to skew investments to firms likely to thrive in different economic conditions.”

Luthman and Bailey see this method of running money as inherently less volatile than stockpicking and also limit their maximum position sizes to shield investors from individual micro concerns.

In terms of current themes, Luthman highlights what he calls the ongoing resource grab as a key play, meaning an overweight position in sectors such as oil equipment services.

“We are not believers in a commodities supercycle but have a situation where most of the world is anxious to secure future supply – led by China – and this sector has been a major driver of our performance,” he says.

Just as key has been the team’s aversion to banks since 2007 and they remain zero weighted in UK-centric plays.

“We had long been positive on banks as the enablers of globalisation but we got to a point of massive overleverage, particularly in the housing market, and exited the sector before most of the market noticed this,” says Luthman.

“Banks will recover but it is unclear how much shareholders will participate in that and we feel the sector remains too opaque.”

Another underweight has been utilities – a rare call on an income fund – with the managers concerned about UK suppliers having to produce more and more electricity from renewable sources.

“Because wind is intermittent, these firms have to keep their base load capacity intact at all times, meaning when the weather is actually right, they already have the required electricity stored,” says Luthman.

He believes this is making these businesses increasingly inefficient, their performance driven by political rather than free-market factors.

Other favoured sectors are tobacco and pharmaceuticals, as the team sees both benefitting from repositioning business models towards emerging markets.

“Consensus is increasingly negative on pharmaceuticals, highlighting a lack of growth and pricing power against a background of patent expiry,” says Luthman.

“We benefitted from being out of the sector for most of 2002 to 2007 but these companies are now cheaper than utilities and have changed their businesses to focus on emerging markets as well as more lifestyle aND over-the-counter products.”

Luthman and Bailey are similar to many peers in that they see a challenging macro outlook for the UK but are long-term positive on equities.

They see common problems across all high-cost economies, particularly as China remains reluctant to relinquish its fixed-rate currency exchanges, and feel a need to flood away this renminbi peg is an unspoken reason behind QE.

“The problem with the first round of QE is that not enough was transmitted into the real economy and we would suggest the Government buys mortgage-backed securities as well as gilts if it goes down that route again,” says Luthman.

Despite macro problems, he remains bullish on equities, particularly the global exposure offered by many UK stocks.

He says: “Investors are in a unique position to buy the world at UK prices and we ask why people would want to pay between 30 and 40 times earnings for opaque emerging stocks when they can access the stories via well-regulated UK companies on 15 times.”


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