What makes a quality global stock picker in 2022?
Driven by an outbreak of global inflation not seen in decades, markets have shifted dramatically in 2022. Global equity managers with quality attributes are well-placed to steer their portfolios through these market challenges.
Thirteen of 170 global equity managers that Morningstar researched received rating upgrades while 20 managers were downgraded. This recent qualitative assessment was part of the Global Equity Sector Wrap with assessment taken during Morningstar’s 2022 fund manager review cycle.
There is no doubt that investors do have a home bias, however, access to global companies are important in any diversified portfolio. Indeed, Morningstar’s recent asset class comparison shows global equities outperforming Australian equities over the 3-year, 5-year and 10-year time frame.
So, what should investors look for when choosing a quality global stock picker? Morningstar’s ratings of fund managers are based on medallist ranking of Gold, Silver, or Bronze. In the 2022 review, 141 global equity strategies reviewed by Morningstar achieved a medallist rating.
For Morningstar Director of Manager Selection Aman Ramrakha, awarding these medallists are based fundamentally on the people and process behind the global equity fund manager as well as the fees charged.
Obviously, a successful fund manager has a solid track record in leading a good performing fund but for Ramrakha the other key component is their ability to interact with their team.
“There is normally a lead manager who is responsible for building a portfolio with a number of analysts around them. It can either be small or big teams, but what is important is the cohesion between the team. Ultimately you want the team to be following a consistent process where each analyst has the confidence to interrogate and provide that granular analysis to the portfolio manager. There have been high profile managers leaving the business, Magellan a case in point. Here Ramrakha highlights the importance of succession planning in the people factor. “We don’t necessarily downgrade a fund because of key person risk per se, however, it is important that there is another suitably qualified person who can be parachuted into the role when a key person leaves the business.” In the case of Magellan, Morningstar did downgrade its flagship global fund in part due to the lack of succession planning across the fund.
Investment processes and performance
Consistency in how the fund manager applies their processes is what Ramrakha and his team are looking for when awarding a medallist rating in this area. “Once a fund manager has defined what they do, do they consistently apply this process to their everyday decision making in building their portfolio.” We can apply this analysis by taking a peek into the processes driven by the the Barrow Hanley Global Share Fund – now part of Perpetual Asset Management. The fund was upgraded from Silver to Gold in the recent review. The team builds exposures where it can find the best companies with depressed valuations and strong balance sheets. Consistency of this process is ensured with the team keeping an eye on industry and market risk which can see periodic sector rotations. For example, the portfolio was around 25% exposed to financials at the end of 2017, but this has been reduced through time to 14% as of March 2022. And while there has been much fanfare around the big global tech names, Barrow Hanley are typically underweighted technology, given the team's views of lofty valuations. Ramrakha also highlights that another key piece to quality investment processes is whether this process is actually delivering.
It is also important for investors to understand the perennial investment rule of investing for the long-term. Even medallist fund managers can underperform at times. Indeed, recent analysis from Morningstar has highlighted those global managers with a bias to growth stocks are experiencing pain compared with mangers with a value tilt given rising inflation and interest rates which generally impact growth businesses.
“We have a wealth of data in our hands that allows us to better assess the underlying styles of global managers across our research universe. We assess their performance relative to their peers to ensure we are not penalising a fund manager because their style is out of favour in current market conditions. Again, this goes back to adopting a consistent process.”
“From an investor’s perspective understanding the investment style (growth vs value), is important to help them look beyond the headline return.” Ramrakha says.
Morningstar’s style box on the top right in the fund tab of the website can help investors assess the style of a global equity manager.
Fees have now been included under Morningstar’s enhanced ratings. “The starting point is that fees do matter,” Ramrakha says. “We always think of fees in terms of a net fee performance, that is, did the manager deliver after fees. To some extent, this supports the argument that it is okay for investors to pay a little bit extra for fund managers who do perform well. However, if we find managers whose fees are egregious and well above the market, we do call them out.” Indeed, expensive fees were a key factor in the recent manager downgrades in the global equities review.
Local vs global teams
There are a number of Australian based global equity managers who scour the world looking for great opportunities for their investors and these locally based teams can be just as well-positioned to manage quality portfolio as their global peers despite their teams being based around the world. Platinum and Magellan have demonstrated is that it is possible to successfully run global portfolios out of Australia. However, for Ramrakha, certain areas such as emerging markets can benefit from having teams on the ground. “It comes down to the process being successful executed. The quality of insight from the analyst and portfolio manager is more important than sheer size of the team.”