FondsAnbieter- GAM: Weekly Manager Views.

28. Mai 2014 von um 10:30 Uhr
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unabhaengigkeitFondsAnbieter-GAM: Both of our funds, GAM Global Diversified and GAM UK Diversified, have struggled so far this year and are around 2% behind their respective benchmarks (to 19 May in GBP terms). To put this lacklustre performance into context, both funds are ahead of their benchmarks since the start of 2013.

The funds’ performance is somewhat frustrating given the amount of pre-positioning over the past years, for example into large-cap names and away from small and mids caps, which we see as overvalued. The rotation into larger caps seems to be occurring, but is yet to prove fruitful for our portfolios. In terms of Japan, we are still positive on the equity market. Our holdings there are very cheaply valued and offer the potential for a re-rating.

We are still content to hold on to our sizeable cash positions. From a contrarian perspective, cash is appealing as everyone seems to have wanted to get rid of it, as it loses value in real terms. However, our top-down concerns warrant holding on to this safety net for now.

Looking at the current bull market, it is worth taking a step back and considering where we are in the cycle. Our concern is that in terms of duration and size it is past the median duration and scale for bull markets overall, therefore assuming that it will simply continue ad infinitum is complacent, in our view.

A more important point to consider is valuation. Our view is that US valuations remain highly elevated, both on simple multiples, but also on more predictive measures, such as Q-ratio and the cyclically-adjusted price-to-earnings ratio (CAPE). Both these measures are around 1.5–2 standard deviations above their mean. What makes this a particular worry is that these ratios are coupled with record profitability. We see it as complacency that these levels are seen as the ‘new normal’ for company profits. Elsewhere, valuations are typically more modest.

The poor macro data in the US in the first quarter is a warning sign for us, as we do not see it just as weather-related. Looking at the bond market tells us differently. For example, we are concerned about the renewed decline in the personal savings ratio in the US. Its low was around 2.5%, it is now at 3.8%. However, it was as high a 7.5% in early 2010, which shows that consumers are going back to their old ways.

Markets are currently happy to ignore geopolitical risks, but we believe that they matter, and are mindful of them. We are moving towards a multi-polar world, with China and Russia flexing their muscles. While we are not too worried about any current conflicts, including Ukraine, turning into anything larger, this development

should not be ignored entirely. In the UK, we have elections and the Scottish referendum looming, which are both top-down risks that could become influential.

For the moment, the UK has the moniker of a ‘bright spot’, boasting the highest expected GDP growth ratio among the G7. The housing market is strong, helped by government policy. We are fortunately not seeing the return of the worrisome habit where home owners would routinely re-mortgage for consumption purposes. Instead, home owners are repaying their loans, which is a healthy development.

Chinese valuations are appealing from a value investor’s point of view, but we have decided to remain on the sidelines there, following a recent visit to the country. Profit margins are very low, but companies invest nevertheless on the belief that demand will pick at some point. The government itself is stuck between a rock and a hard place, trying to manage an orderly slowdown before it becomes an unmanageable one.

To summarise, we are most concerned about the complacency that comes with the belief that central banks will bail us out again like they did in 2007, and about the notion that we have entered a new paradigm regarding profit margins. Current levels of profit margins can only be seen as sustainable if one believes that ‘this time it’s different’. We do not believe that things are different this time, and instead believe in mean reversion. This does not mean that we are seeing an imminent catalyst, but our longer-term contrarian standpoint tells us to treat the current euphoria with caution.

At the headline level equity markets appear to be quite calm; markets have been gently ticking up, realised and implied volatility are low and it would appear that there have been ‘no dramas’. However, this masks what has been a highly significant and quite violent rotation underneath the surface of the market; indeed based on the relative performance figures of long-only managers and absolute performance figures of long / short managers this has been one of the toughest environments for active managers in many years.

The market dislocation was captured and summarised in an excellent research note from one of our senior advisors – James Aitken of Aitken Advisors. In that note, James highlighted how factor volatility and in particular the relative volatility between growth and value factors had blown out to exceptional levels at a point in time when both realised and implied volatility were very low. Furthermore, correlations had also been falling.

This is a very unusual set of circumstances, and it matters because it in-violates the core working assumptions of many of the factor models that more sophisticated managers rely on. For long-only managers this can lead to performance outcomes way outside of predicted tracking errors, while for long / short managers it can mean that hedging strategies do not work. Those with shorter time horizons or low performance risk tolerance are therefore forced back towards the benchmark or into deleveraging, selling what they own or buying what they do not own (or are short). We have seen some evidence of this type of behaviour in evidence in recent weeks.

Putting a fundamental interpretation on this, what we saw in the early parts of this year was a rotation out of high ROE / high price-to-book stocks into low ROE / low price-to-book stocks – or in the common vernacular a ‘trash rally’. As many of the stocks with the highest levels of absolute stock price return year-to-date (Telecom Italia, Peugeot, Fiat, Air France, Commerzbank etc) are businesses that not only fail to make their cost of capital over the cycle but have failed to do so in any year over the past 10 years, many active fundamental managers struggle to own these stocks.

More recently over the last three weeks we have seen the rotation mutate into a more ‘risk-off’ mode, with small and mid-cap stocks facing an indiscriminate sell-off, and defensive and liquid large-cap stocks experiencing indiscriminate rallies. A good example of the latter is the valuation of the Swiss food giant Nestle. We like the company from a fundamental perspective, but we have struggled with its valuation for a long time. In our view, it has offered poor value compared to what we could find elsewhere. Last week, its share price rose to trading at 21x earnings, versus a 10-year median value of 14.3x, according to Bloomberg. This was despite the fact that the structural growth rate of Nestle has slowed over the past few years (to 4% per annum), return on capital employed has come down by 400 bps and the company (like many in the food and beverage sector) faces some serious long-term challenges from the forthcoming ‘war on sugar’. We find it difficult to rationalise the valuation of Nestle from a fundamental perspective, but we can see how it got there by considering factor and behavioural characteristics of the market.

The flip side of the strong price appreciation of Nestle in the second leg of the rotation has been the indiscriminate sell-off in a whole range of mid-cap (and some larger) peripheral European stocks. Numerous holdings in GAM Star European Equity and GAM Star Continental European Equity, where we have high conviction that there has been a fundamental improvement in operating conditions, have seen a brutal sell-off in the stock price quarter-to-date. What such stocks may have had in common is a degree of consensus ownership, perhaps from non-traditional (non-European) investors, and as such they may have been liquidated in the market rotation as such investors headed for the exit. Such stocks performed well in the second half of 2013 and early 2014 and may thus have been vulnerable to some profit-taking, although not as intense as has been experienced, and not in such direct conflict with the operating fundamentals.

We have identified several potential causes of this market rotation: First, an extreme positioning unwind following a high degree of consensus in markets, perhaps accentuated by non-traditional investors entering and exiting European equities quickly. There is some evidence to support this hypothesis given the very rapid US inflows into European equities. Some of our market contacts have suggested that a lot of that flow entered and exited via baskets (eg European domestic value, peripheral small / mid cap etc). If a position unwind explains much of the market’s movements then it is hard to know whether this has fully run its course, but it does feel as if a lot has already occurred given the market’s price action and performance damage. The fact that so much of the ‘in and out’ has been in baskets suggests thematic investing at work. Second, large-scale quantitative easing has led to volatility suppression and correlation disturbance such that the ending of QE, and more importantly the market’s anticipation of the ending of QE, has and will continue to lead to a period of movement as proper clearing mechanisms re-set. This may lead to factor volatility and correlations to continue to move around, causing some short-term mayhem. If this is the explanation then it is hard to know whether it continues, but it is not unrealistic to suggest that the ending of QE may lead to some strange market impacts.

The third cause may lie in comparing sovereign bond yields (which have fallen significantly this year) to equity markets, with the former signifying a fall in nominal economic growth that the latter has only just begun to catch up with. If this is the case, the equity market was perhaps guilty of some level of exuberance, which is now in the process of being corrected (or has been corrected). However, this argument does not correlate with what we are seeing from the ground up, and it also contradicts what most fixed income investors we talk to believe – namely that the level of sovereign bond yields are hard to explain, tapering is likely to happen, and that the era of extraordinary monetary policy is entering the end game. However, were this explanation to prove to be the case in time it would not be good news for European equities; the valuation of many defensive stocks, such as Nestle are already very elevated and the forward progression of the market requires an improvement in the earnings of many cyclical stocks.

Looking at valuations, our view is that European equities are still cheap – on the condition that there is an earnings recovery. The cyclically-adjusted price-to-earnings (CAPE) ratio for Europe as well as company earnings are significantly below the 30-year median. In this context, it is interesting that much of the public commentary on equity markets refers to equity markets being either fully valued on CAPE or at peak profit margins. But this is only true for the US equity market – it is not true for Europe, where profit margins are below trend and where normalised valuations are cheap.

We have prepared a more detailed analysis, including the implications for our portfolios, which we are happy to make available to interested parties.

Sharp geographic and sector rotations have impacted our performance year-to-date, leaving GAM Star (Lux) – Financials Alpha down 3.4% to 19 May. Our long exposures to US insurance companies have detracted from returns this year (StanCorp Financials, Principal Financial, Lincoln National), alongside short

emerging market banks, particularly during April. Positive contributors to performance year-to-date include long Italian financials (Intesa Sanpaolo, UniCredit) and short exposures to US regional banks.

We believe one of the primary drivers of the rotation to be the sharp reversal of interest rates. For example, yields on 10-year Treasuries have fallen by 0.5% since the beginning of the year, triggering a sharp rotation out of the US market into the emerging markets, as well as a sector shift from life insurance companies into real estate. The correlation between US interest rates and US life insurance companies over the past six months has been close to 1.0, marking an anomaly, with the market focusing on top-down macro factors rather than bottom-up fundamentals.

We anticipate that the Fed will likely continue with tapering. The trifecta of the weak dollar, the downward trajectory of interest rates and improving employments levels all support its continuation. Based on this, we would predict US rates are likely to reverse and increase over the next six to nine months to somewhere around the 3% level, which would be beneficial to some of our US exposures, such as life insurance companies. However, if rates continue to decline the overall impact would be negative for equity markets, which we are prepared for via our conservative positioning, with the fund having less than 10% net exposure.

Looking more closely at our long US life insurance exposures, which represent a significant theme within the fund, companies generally reported better-than-expected first-quarter numbers, both in terms of volumes and margins, and consensus earnings are moving up. Additionally, valuations are currently quite attractive, with the typical company trading at less than 10x 2015 earnings and below book value. The sector has been neglected by the market but we remain confident in our investment thesis, supported by recent management visits in the US and UK, and will look to increase our exposure when the timing is most supportive.

Our European insurance companies are offering on average a 5% dividend yield in addition to very attractive special dividend payments and compelling share buyback programmes. In some cases, total cash back to shareholders is reaching 10% per annum.

In regard to our longs in Italian banks, we see huge upside for the sector via improvements in fundamentals as well as cheaper valuations. The banks we favour are trading below their book value, with the potential for significant bottom-line improvement should we see the cost of funding decrease.

On the short side, we plan to maintain some of our emerging market bank positions, but have been reducing / closed out of our shorts on Turkish and South African banks. Overall, we are still seeing weak fundamentals in the region, specifically in Brazil, South Africa and Mexico. We also remain positioned short non-life insurance companies around the world. The reporting session for this sector has been generally weak, with companies missing consensus earnings and reporting declining insurance rates. As such, we would anticipate the fundamentals of the sector to deteriorate further. Finally, we plan to retain our short on US regional banks as earnings continue to be missed both on volumes and margins, while valuations are high at an average of 15x earnings.

We have brought down the fund’s gross exposure slightly, from around 180% to 160%, in order to manage volatility levels, but otherwise our positioning remains largely stable, and we are pleased that the recent earnings season has proved supportive to our main investment themes.






Über GAM

GAM wurde 1983 als FondsTochter der UBS gegründet. Von 1999 bis 2005 gehörte die Gesellschaft zum Bankhaus Julius Bär. Seit September 2009 ist GAM selbständig. Fonds: 450. Verwaltetes Vermögen: 36,9 Mrd. Euro. Anzahl der Mitarbeiter: 760. Geschäftsführer: David M. Solo.


Kategorien: Anbieter. Berichten.

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