VALUE AS
A VIRTUE
Presenting the Macquarie ValueInvest Global Equity Strategy
Sponsored and paid for by
OCTOBER 2019
INTRODUCTION
Welcome to another edition of SOURCE, a publication that shines the spotlight on selected funds, portfolios, and their managers. This time it’s the turn of Macquarie’s ValueInvest Global Equities Team with an in-depth profile and Q&A with Portfolio Managers Jens Hansen and Klaus Petersen, plus supporting analysis from Citywire.
INTRODUCTION
Welcome to another edition of SOURCE, a publication that shines the spotlight on selected funds, portfolios, and their managers. This time it’s the turn of Macquarie’s ValueInvest Global Equities Team with an in-depth profile and Q&A with Portfolio Managers Jens Hansen and Klaus Petersen, plus supporting analysis from Citywire.
Jens Hansen
& Klaus
Petersen
PROFILE
Jens Hansen
& Klaus
Petersen
PROFILE
How to stay invested:
go global and play defensive
How to stay invested:
go global and play defensive
tocks may have enjoyed a strong first half of 2019, but there is no shortage of risks on the horizon and equity investors are understandably becoming more cautious. Yet without any clear signs of a major recession, and with central banks turning more accommodative of late, divesting completely from stocks seems premature. So, what is an investor to do?
Stocks may have enjoyed a strong first half of 2019, but there is no shortage of risks on the horizon and equity investors are understandably becoming more cautious. Yet without any clear signs of a major recession, and with central banks turning more accommodative of late, divesting completely from stocks seems premature. So, what is an investor to do?
One solution might be to invest in a defensively-minded global fund, such as the Macquarie ValueInvest Global Equity Fund (the Fund), which was launched in 2001 and seeks to capture significant upside while simultaneously reducing downside risk. The Macquarie ValueInvest Global Equity Strategy (the Strategy) has a strong long-term track record having been launched in 1998, and seeks to balance valuation and quality to reduce its exposure to risks.
‘At this point in the cycle, it makes sense to have a sharper focus on valuation,’ explained portfolio manager Jens Hansen, who has spent over 17 years with the Luxembourg-based ValueInvest team and also serves as CIO. ‘Investors continue to pile into passives at the expense of active, often paying little attention to valuation or quality. This isn’t a wise strategy in the long-term.’
VALUE AND PATIENCE – THE ADVANTAGES OF A ‘BORING’ APPROACH
With central banks adding unprecedented levels of liquidity and global yield curves flattening, value investing – the most tried and tested of all investment philosophies – has struggled in recent years. The Morgan Stanley Capital International (MSCI) World Value Index (the Index), for example, has largely been left for dead by its growth counterpart over one, three, five and 10-years, with investors shunning financials, energy and industrials for trendy tech and consumer names.
But this does not mean that value can’t outperform, said Hansen, who insists that a modern value approach shouldn’t simply entail focusing on metrics such as price-to-earnings or price-to-book, which have dragged down the aforementioned value Index.
‘We call ourselves value investors, but we don’t just focus on buying cheap companies. These companies can often be cheap for a reason, and typically struggle to earn a decent return on investment,’ he noted. ‘Instead, we’re patient long-term investors, looking for businesses that we believe can compound value over time. As such, closely examining their quality and understanding how they create value are just as important as paying below what we think is fair value.’
‘We’re patient long-term investors, looking for businesses that we believe can compound value over time’
JENS HANSEN
And the team are happy to explain that a ‘boring’ approach focused on discipline, consistency and simplicity has been the main driver of their results.
‘We don’t believe we have a major informational edge when it comes to stock selection,’ Hansen’s colleague and long-time co-portfolio manager, Klaus Petersen, admitted. ‘What we do have is a disciplined and consistent investment process that we’ve used successfully for 20 years. Our approach enables us to take a long-term view on the value of a business, and our embedded investment rules help to reduce the risk of mistakes – which is paramount in compounding wealth.’
‘Investing is not necessarily exciting, and rather akin to running a marathon. We aim to benefit from short-term bias and volatility, which simply means that companies – especially less fashionable names – can be bought for less than their fair value at times based on near-term mispricings. From there, it’s difficult to be patient and wait – sometimes years – for those companies to grow into their fair value. They can have a high return on capital, but long-term value creation does require perseverance.’
PLAYING DEFENSIVE – WHY EARNINGS STABILITY IS KEY
What does the portfolio look like, then? And how does the team go about managing risks through the cycle?
‘The portfolio reflects our systematic, bottom-up investment process,’ said Hansen. ‘We take a deep dive into a company’s earnings stability, return on invested capital, growth potential, and financial leverage,’ he added. ‘It’s by focusing on these key pillars – earnings stability in particular – that allow us to evaluate companies depending on their risk premium.’
‘What makes our investment process unique is the way we assign risk premiums,’ explained Petersen. ‘We see ourselves as business owners, concerned with the volatility of operating earnings rather than swings in the stock price. Our proprietary investment system divides the global investment universe into five different risk categories (A – E); with category ‘A’ having the highest historic earnings stability, and category ‘E’ the lowest. High earnings stability translates to a low risk premium, and vice versa for low earnings stability.’
Industries like household products or industrial gases, for example, have historically exhibited highly visible and stable earnings, and as such have received an ‘A’ risk category rating, according to their system. By contrast, industries such as airlines and automobile manufacturers are extremely cyclical, and have historically scored an ‘E’ rating because they follow a boom-or-bust like cycle. High operational leverage, meanwhile, means these businesses typically do well in good times, while are generally loss-makers during economic slowdowns or recessions.
‘In our view,’ Petersen added, ‘highly cyclical businesses are not well suited for a long-term buy and hold strategy, and rather require strong skills in timing the business cycle and trading. This is extremely hard to do, and very few people can do it on a consistent basis.’
As investing is about improving the odds of being right, the Fund has historically had a large allocation toward defensive stocks, holding around 30-50 stocks at any time with strong allocations to US, French, Japanese and Swiss companies. Meanwhile, consumer staples has been the largest allocation by sector at around 50%, along with strong names in healthcare, communications services and industrials.
‘These are businesses with a high degree of repeat sales, low capital intensity and steady earnings, which can help protect investors from downside risks if or when they emerge,’ Petersen remarked. ‘If there’s a slowdown, we know these companies can continue to do well throughout the business cycle.
It is important to note, however, that solid downside protection can only be achieved by not overpaying for earnings stability ’
‘High earnings stability translates to a low risk premium, and vice-versa for low earnings stability’
Klaus Petersen
This focus on defensive stocks, risk management, and ‘winning by losing less’ has been consistent over time too. Since inception of the Strategy around two decades ago, it has achieved an upside capture of 84% and a downside capture of 50% (in Euros, as at 31 July 2019), and has also performed strongly during difficult years including after the dot-com crash and the Global Financial Crisis. More recently in the fourth quarter of 2018, strong downside protection enabled the Strategy to end the year up, even as the broad market (MSCI World) finished down in Euros, further highlighting the utility of the team’s proprietary view on risk.
‘It’s not about stock price volatility,’ Hansen added. ‘It’s really all about earnings stability – that’s what’s important over the long-term. We are constantly searching the market to identify opportunities, and oftentimes it is the behaviour of myopic investors that presents us with the greatest opportunities. If we like a business and believe it has strong fundamentals but it misses an earnings quarter or two and gets downgraded, we view that as an opportunity. Overall, accurate analysis really requires a very strong understanding of the business and industry, and success is closely connected to the willingness of investing for the long-term.’
ESG – AN INTEGRATED PART OF RISK MANAGEMENT
Meanwhile, environmental, social and governance (ESG) has been, and continues to be, a focus for the team who pay close attention to any ESG risks the Fund’s holdings are likely to face – a process that’s becoming more and more important as ESG becomes mainstream.
‘In today’s social media world, where information can very quickly become public knowledge, companies’ top-line can be impacted almost instantly,’ Hansen explained.’
He added: ‘That’s why we have such a big focus on ESG, and employ a specialist in-house analyst. We were early signatories of the UNPRI principles back in 2010, when it was still in its infancy, but to us it’s about risk management. We don’t specifically exclude companies based on their ESG score, though a lower score could certainly lead to a higher risk premium when we value a company.’
THE DEMONSTRATED VALUE OF PATIENCE AND DISCIPLINE
This tried and tested approach, which involves over 20 years’ experience of being patient and disciplined, has certainly paid off for the team. Not only has the Strategy delivered strong performance, it has also outperformed the MSCI World Index over five, 10 and 20-years, and the Fund has been a top quartile Citywire performer over five years – a period where investors have piled into in-favour growth and momentum stocks [1].
‘We haven’t found the holy grail,’ Petersen conceded. ‘But we have built a solid low-risk strategy. Investors compare us to a minimum volatility strategy; we’ve actually had similar downside protection, but far more upside capture. This demonstrates that our focus on value and quality – and not just on volatility – can be successful over the long-term. And particularly during periods of uncertainty. Ultimately we don’t think of ourselves as being necessarily smarter, but certainly more patient and disciplined.’
‘If there’s a slowdown, we know these companies can continue to do well throughout the business cycle’
Klaus Petersen
GLOBAL EQUITY
Over Jens Hansen’s career in global equities he has comfortably outperformed the Index and the average manager. He was particularly impressive during the credit crisis. Over three years until the end of March ’09 he was 75/704 managers worldwide, helped by the fact that he had a maximum drawdown in the 96th percentile.
The Macquarie ValueInvest Global Equity Strategy is managed via a collaborative team-based approach by four experienced portfolio managers: Jens Hansen (2001), Claus Juul (2004), Klaus Petersen (2006), and Åsa Annerstedt (2013).
SOURCE: Citywire Discovery/Lipper, as at 31.07.2019. Performance is based on total return in USD calculated gross of tax, net of fees, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Average manager is based upon the managers tracked Globally in Citywire’s Equity – Global sector.
Past performance does not guarantee future results.
The post credit crisis has not been an easy time to be a global equity manager, with the sustained rise of the US and technology in indices hampering investors’ ability to add value. Macquarie’s Hansen has managed to stay towards the top of the peer group during this time, with upper fourth decile returns over 10 years and upper third decile gains over the past three years, as can be seen by his position in the upper right hand quadrant of the graphic.
SOURCE: Citywire Discovery, as at 31.07.2019. Total Return percentiles are calculated in USD gross of tax, net of fees, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date. Peer group rankings are based on managers tracked by Citywire globally. Market share data based on total assets under management by managers tracked by Citywire.
FUND MANAGER HOT-SEAT
Q&A with Jens Hansen and Klaus Petersen
FUND MANAGER HOT-SEAT
Q&A with Jens Hansen and Klaus Petersen
Can you describe your investment approach, and explain why you believe patience is underrated?
Jens Hansen: We approach investing with patience and discipline. Our main belief is that long-term capital preservation and wealth accumulation are best achieved through buying quality businesses at attractive valuations, and then waiting until the fundamentals and earnings assert themselves.
The hallmarks of quality include profitability, earnings stability, low debt, and efficient use of assets – return on capital is a great indicator of how well a business is managed. Typically, this means we invest in very strong and stable businesses that can reinvest earnings at attractive returns and grow their potential over time. They might not dominate the headlines, but their returns are often very strong over time, and so we’re happy to avoid the noise.
In order to really compound wealth and maintain conviction in an approach, patience is key. This is something most investors lack; it’s often said that the hardest part of investing is doing nothing, and we agree. So while we monitor and track hundreds of companies, and particularly those in our portfolio, if we have high conviction in a stock, we don’t tend to get too swayed by short-term swings.
It’s incredibly hard to find an ‘edge’ in investing. What we’ve found over time though, is that a tried and tested approach of being patient and disciplined can help outperform the market over time. Fortunately, the approach has worked for us over the past 20 years.
What are the benefits of investing in ‘boring’ companies?
Klaus Petersen: I don’t know why people get the impression that investing should be exciting – it takes years, and a lot of patience. I think the stunning run of some companies, such as the FAANGs (Facebook, Amazon, Apple, Netflix, Google), has tempted some investors into thinking they can quickly grow wealth by trading or investing in just a few companies, but that’s not generally what happens.
It is an intriguing investment strategy; trying to accelerate wealth creation by picking the next Amazon or Google. Bear in mind that before the IT bubble burst we talked about finding the next Nokia. In hindsight, picking the winners is easy, but in practice it is like finding the proverbial needle in the haystack, and the attempt will undoubtedly lead to many failed investments and potentially large losses. In our view, it is better to invest when businesses are more mature and stable, and less of a lottery ticket.
Growth is good, and is the engine of an economy. We don´t deny that some of today´s fastest-growing companies, many of them within the technology sector, are great businesses, but in our experience investors tend to extrapolate high growth for too long which leads to overshooting.
So, the main benefit of investing in a broad portfolio of defensive companies, typically rated A and B according to our risk classification is that, although they tend to be mature and might not be growing at a high rate, they are still growing, and their earnings are predictable. In our experience, business models that are inherently more stable, generating solid returns on capital and producing excess cash after investing that can be returned to shareholders, are more likely to be good long-term investments.
And while these companies can often be neglected in big bull markets, such as that over the last few years, they tend to fare very well in more challenging environments or recessions because they aren’t so sensitive to the business cycle. That means they tend to do better over the entire cycle – and consequentially so has the Fund. The Strategy has outperformed the MSCI World Index since inception, and it’s also done very well in down years such as 2008. [2]
Where do you see the best opportunities?
Jens Hansen: Historically we have always had a large allocation to defensive stocks. We like businesses with low capital intensity and a steady earnings stream which can protect on the downside, particularly as they are less exposed to turns in the business cycle.
In the fourth quarter of 2018 these stocks became more popular, especially amongst investors wanting to stay invested, so that’s certainly been a tailwind for some of our holdings.
In terms of the sectors we’re invested in, it’s almost entirely driven by our fundamental bottom-up research. We don’t take macroeconomic views, because we believe trying to time the market is incredibly tough; we’d rather invest in companies that are less exposed to the business cycle in the first place.
So, what does the portfolio look like? Currently, we don’t have any investments in five of the 11 main sectors, including information technology, energy, utilities, real estate and financials. Simply from a bottom-up perspective we haven’t been able to find any tech companies; we identify a lot of quality, and these businesses can be very stable, but valuations are rich or fair given their strong businesses models.
Typically therefore we invest in a lot of consumer staples and healthcare companies in the US, France, Switzerland, Japan, and the United Kingdom.
These are companies in areas like packaged foods and meats, pharmaceuticals, food retail, and household products. What we like about them is they’re mature companies with excellent business models, strong earnings pipelines, sustainable competitive advantages, and proven resilience. Almost all of our top holdings for instance, are rated A or B – those with the highest earnings stability.
Ultimately what this means is that we have built a very robust portfolio with an ability to capture most of the upside in equities rallies, while simultaneously minimising a lot of the downside.
Can you provide some insight into your team?
Klaus Petersen: We’re a highly experienced and tightknit team working out of Luxembourg. Our four portfolio managers, including Jens and myself, have long track records in investing. I have over 34 years of industry experience, including 21 years as a portfolio manager, while Jens has slightly more overall experience. Meanwhile, we’ve both been managing this Fund together for the past 13 years, over which time it has achieved strong performance.
Aside from our experience and team stability, our collaborative approach has certainly helped too. All of the portfolio managers work as generalists and analysts, and we share the responsibility for company research – which is a very different approach compared to many other firms.
We’re always talking about different ideas and questioning each other’s calls or convictions. The team use a comprehensive and proprietary screening tool as the primary idea generator, and when we come across investment opportunities that meet our quality and value hurdles, one of our portfolio managers will conduct thorough research and number crunching to write the investment thesis.
Before discussing the investment case, we assign a second portfolio manager as devil´s advocate to identify weaknesses and risks in the case. Diversity of thought is important and it’s key to hear as many different viewpoints as possible, and not become biased in your own individual research or thinking. So having a small, cooperative group has been highly beneficial.
To find out more visit the Macquarie Investment Management website at macquarieIM.com.
[1] The Strategy refers to the Macquarie ValueInvest Global Equity Strategy and has delivered 13.2%pa, 13.4%pa and 9.9%pa (gross of fees) over the 5, 10 and 20 years to 31 July 2019 (Euros) with the MSCI World Index delivering 11.2%pa, 12.7%pa and 4.6%pa over the same periods. The Fund refers to the Macquarie ValueInvest Global Equity Fund and was a top quartile Citywire performer for 5 years from July 2014 to July 2019 according to Citywire Discovery/Lipper data as at 31st July 2019.
[2] The Macquarie ValueInvest Global Equity Strategy has delivered 10.72%pa (gross of fees) since inception on 31 July 1998.
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Healthcare companies risk. Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors. Healthcare companies are subject to extensive government regulation and their profitability can be affected by restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, and malpractice or other litigation.
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