Global equities have generally delivered solid returns through the first nine months of this year.
The big story, however, has been the worldwide dominance of the US.
The S&P 500 index posted double-digit gains for the year to the end of September on the back of strong corporate earnings, which have received a substantial boost from lower corporate tax rates and economic growth.
Nevertheless, some global equity managers are further forward beyond this theme.
‘From a portfolio perspective, we have been building up our defensive positions in names that are less dependent on accelerating growth, but where we have insights into growth and improving returns,’ Citywire AAA-rated David Eiswert, said.
‘We have found several idiosyncratic ideas in Japan and Europe that fit our investment framework in areas the market currently dislikes that we think should perform well if the global economy slows,’ he said.
Eiswert, who runs the T. Rowe Price Global Focused Growth Equity fund, is ranked fifth in his sector. His fund has returned 62.9%, over the past three years, compared with 31.54% from his average peer.
The fund has repositioned some of its financials holdings by moving away from more interest rate-sensitive names towards high-quality businesses with more exposure to volatility.
Furthermore, Eiswert has gradually increased his focus on high-quality emerging market assets as valuations have come down, and he has broadly maintained his exposure to emerging markets even though currencies have devalued.
‘We think there are cyclical aspects of the last 12 months that could continue into 2019,’ Eiswert said.
‘Consequently, we have exposure to several unique and high-quality assets in the semiconductor space that should perform well in a downturn but continue to grow regardless of the market environment.’
‘As the bull market approaches its 10-year mark, there are increasing signs of a dual-speed global market,’ said Citywire A-rated Jason White, who runs the Artisan Global Discovery fund which has returned 60.6% over three years.
Non-US markets are reflecting the early negative impact of largely US-driven trade pressures, which weigh not only on markets and economies but also on consumer and investor confidence.
Conversely, investor and consumer expectations remain relatively healthy in the US as the country’s economic data has generally looked positive.
This divergence naturally leads to questions about whether, when and how global markets realign – with many possible outcomes, said White, who is ranked fourth in the sector.
Banking on secular trends
The Artisan Global Discovery fund continues to find high-quality, interesting franchises that benefit from ongoing secular trends and which are not dependent on rapid global growth or trade conditions.
‘One such trend is the shift toward digital payments, which are seeing rapid uptake globally,’ White said, adding that this is particularly the case in emerging economies.
White has positioned his portfolio accordingly to capitalise on this theme but his research at a company level takes precedence over macro considerations.
‘Our sector- and country-level exposures are always a byproduct of our bottom-up stock selection process, rather than any deliberate, top-down decision,’ he said.
A close watch on valuations
Citywire AA-rated Christian Schneider said equity valuations around the world have reached high levels, particularly in the US.
Schneider, who manages the Allianz Global Equity Unconstrained fund, is ranked seventh in the sector and his fund has returned 50.51% over the past three years.
The fund’s investment strategy is benchmark agnostic, and its investment team can invest in global listed companies across market caps, sectors and regions, without being constrained by index weights.
‘We favour stocks with tangible, secular growth potential, rather than speculating on the short-term whim of the market,’ Schneider said.
Over the course of 2018, Schneider has reduced exposure to holdings that reached more demanding valuations due to strong price appreciation.
At the same time, he has added to some of his long-term high conviction names where prices have been weaker.
‘We think the compounding capabilities of these companies are underappreciated by the market,’ Schneider said.
This article was first published in the November issue of the Citywire Private Wealth magazine.