Fund managers raise the bar

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It is more vital than ever that managers in international share markets have superior stock selection skills and a robust, “bottom up” investment process.

According to research house van Eyk’s latest International Equities Review, managers in international equities are more competitive than ever. Heightened risks in international markets are making it more important that they show the ability to deliver returns in excess of the benchmark.

Managers are living up to the expectations, with four managers receiving the top AA rating, compared to no managers getting it last year. Fifteen received an A rating, but three had their A ratings downgraded. Nine managers were screened from the review because they were not competitive enough.

When looking out for good international equities managers van Eyk lead analyst Nimalan Govender said it was vital that they clearly articulate their investment process and “show a particularly thorough understanding of the stocks and industries they were investing in.

“You need managers who can see through this volatility and have the conviction to choose quality stocks for the long term and avoid the stocks that will get an undeserved lift from the effects of the liquidity flood.” Chopping and changing stocks is a sign of someone who doesn’t believe in their investment process, according to Govender.

Strong, “bottom up” research built investment ideas from the ground level and was more likely to lead to the original investment insights that enabled managers to find sources of return missed by the broader market. “These people don’t just pick up the Financial Times in the morning for their ideas,” Govender said.

Govender said there was no clear majority view among the managers reviewed about the outlook for different regions. Some were underweight the US and overweight Europe while others had the opposite leaning. “It’s more a case of stock-picking rather than sector tilting among managers at this stage,” he said. “If there’s any trend it’s towards quality stocks with sustainable cashflows.”

van Eyk’s model balanced portfolio currently recommends an overweight exposure to international equities because their valuation is less than the long-term average and they are better value than the Australian share market at the moment. However, van Eyk favours defensive stocks given the heightened risks in international markets.