Can China entrants make access to coveted markets pay?
1 March, 2009Smart Investor: Up to speed – March 2009
1 March, 2009Australian Financial Review – Managed Funds Quarterly, March 2009
2008 was a miserable year for international share funds, with one redeeming feature: the currency.
The decline in the value of the Australian dollar against the US dollar through 2008 had the effect of boosting returns from international shares despite the fact that, in local currency terms, they underperformed Australian ones. Consequently, while the median performance of Australian share funds in the regular survey compiled by consultants Mercer was minus 36.6%, for international share funds it was minus 26.1% in Aussie dollar terms. That’s damning with faint praise, for sure – but it could have been worse.
A closer look at the numbers, though, reveals some cause for alarm. The Aussie share funds obviously had a horrible year but they did at least beat the market, on average: the S&P/ASX200 dropped 38.4%. But the MSCI World ex-Australia index, the most closely followed index for global shares, dropped 24.9% in Aussie dollar terms in 2008, meaning that the median fund underperformed the index by 1.2 percentage points – and that’s before tax or fees.
Few funds emerged with much credit from the mess, but there were some notable exceptions. Head and shoulders above the rest was the Magellan Global fund, which logged only a 1.3% decline in one of the toughest years for global shares in history. Until the very end it was in positive territory for the year. Magellan is run by former UBS banker Chris Mackay and Deutsche banker Hamish Douglass, and takes a highly risk averse approach to investing through a concentrated portfolio of what Douglass calls “the outstanding businesses of the world” – high return on capital and long term sustainable competitive advantages.
In practice, this has meant holdings in groups like McDonald’s, Google, Nestle and Procter and Gamble (and one of the real oddities of the fund’s stellar performance is that its biggest holding for much of the year was in an absolute bomb, American Express). Interestingly as of November 30 the fund considered 53.37% of its portfolio not to be from any one region but “multinational”, which it defines has having more than half its revenues from outside its home country.
While many had hoped the worst was over by the start of the final quarter of 2008, in fact it turned out to be even worse than three previous ones: a median 11.8% decline in international share funds from October to December. In that horrible environment, the stand-out fund was the Zurich Global Thematic, which dropped only 3.1% and is the only international fund in the entire Mercer survey to still have a positive return over three years (0.4%). This fund is actually run by another manager, Lazard, and operates by using a series of investment themes with quirky names like “antimatter”, “rescue and regulate” and “assets of choice.” In practice this has led to an unusual list of top holdings as of December 31: Canada’s Barrick Gold, China Overseas Land, and the US energy group Anadarko Petroleum.
One could argue that the Zurich/Lazard theme sounds a lot like Magellan’s, in its focus on top global businesses. “Based on the belief that there is one global economy, the fund’s investment approach emphasises global themes and relationships rather than geographic regions,” says the manager.
Groups like this were very much the exception: at the bottom end the Bernstein Global Strategic Value fund lost 43.7% in 2008 despite the free kick from the currency. A look at the portfolio on September 30 provides a clue: at that point its largest position in sector terms was financial services, accounting for 30.12% of the fund. September 30 was the cusp of some of the worst crashes in American bank stocks in history. The fund lost 20.8% of its value in the fourth quarter alone.
Despite the unpredictable nature of markets in 2008 some find the general underperformance by the industry to be difficult to comprehend. “The median manager’s underperformance of the index is poor, and well behind last year’s 0.9% outperformance,” notes Mercer.
