The Viewpoint: Investing in global equities

There have been some changes to Royal London Asset Management’s Global Equities team in recent months. One of the new arrivals in the team is Francois de Bruin, who takes charge of the Global Equity Select strategy. We asked him a few questions about his first months in the role and running global equities portfolios.

You’ve had three months in your new role at Royal London Asset Management. How have you found it?

My first few months here have been terrific. The people are highly talented and are investors through and through. The process is impressive both in its sheer scale and breadth, but also in its clarity and focus. And the Global Equity Select strategy still allows for the creative expression of our best ideas. So, it’s been even better than I hoped for.

Could you elaborate on some of the key individuals you’re working with and how you all interact?

The investment function is led by our Chief Investment Officer, Piers Hillier. I’ve just been out in Australia meeting clients with him and far from just playing the role of diplomatic statesman as per many modern CIOs, Piers can take the macro view across asset classes and distil it right down to the implications for individual companies. He does this at a level of detail which makes you wonder if he’s been moonlighting as a sector analyst. Having leadership who ‘gets’ what we do is liberating. Equally, Mike Fox, who leads the broader Equity team and has been managing equities for over two decades, brings that surprisingly rare but invaluable quality of common-sense thinking and the fortitude to apply it.

Turning to my direct Global Equity team, Paul Schofield heads us up. Paul wears many hats, from making sure our 12-person team cuts through the noise and focuses on idea generation (or rock turning as we like to call it) to leading the Global Equity Diversified strategy, which essentially leverages our research engine, but as the name suggests diversifies all unwanted systematic risks. Paul is also my co-portfolio manager on Global Equity Select, which means he ensures consistency of our process is applied to that strategy. But equally, with over two decades of managing active equities, highly successfully I might add, he supports me with decision-making.

Beyond that my role is really shared with all the team members. I’ve been so impressed by the intellectual curiosity of our analysts and their work ethic. Our industry tends to self-select for individuals who see our line of work as a vocation given its demanding nature. We all view ourselves as analysts first and foremost, turning rocks, testing and grading companies by wealth creation, and ultimately looking for the asymmetry which drives our investment outcomes. Finding mispriced value creation is our bread and butter and the part of the job which excites me most.

How differentiated is the process and the corporate Life Cycle compared to how you’ve managed portfolios in the past?

In some ways it’s completely different, but in many ways it’s not. The Corporate Life Cycle philosophy is built on the premise that it’s something all companies exist within and progress through. Professor Aswath Damodaran from NYU Stern School of Business and Michael Mauboussin of the Columbia Business School have both written on the topic extensively. However, our interpretation is quite unique in the way we frame companies by their cash-based returns over their cost of capital to assess economic value added.

This is not a new concept, but again the way we apply it is quite differentiated. Instead of focussing on one part of the Corporate Life Cycle, like the early Life Cycle where most growth companies reside, or the late Life Cycle where value investors typically go looking for ideas, we invest across the entire Corporate Life Cycle. This has the dual benefit of 1) expanding the opportunity set as we don’t screen or exclude large parts of the universe, and 2) allowing us to create style-neutral portfolios which aren’t reliant on any one style or factor being in vogue to drive returns.

Because we have an approach which allows us to minimise systematic risks, we can focus on the fundamentals of each business and allow wealth creation to drive returns over time. This means we can spend more time understanding our companies as opposed to thinking about macro factors – where we have no edge.

The final thought I’d add is the Life Cycle approach not only expands our investment universe, but it also informs our understanding of the fundamental drivers of wealth creation. The factors we look for in assessing wealth creation in a mature, cyclical business are very different to those we look for when a company is accelerating or even in the compounding phase.

This sounds very intuitive. In your view, why aren’t more fund managers adopting this approach?

It’s not very easy to do, and that’s down to the sheer scale of what’s required. There are over 6,500 companies for which we have data that needs to be converted to cash-based metrics, then classified into Life Cycle stages and sorted quantitatively through our proprietary wealth creation test algorithm. Through two decades of experience, and more recently a very significant effort to embed these workloads into a cloud-native environment, we have this information in a live, dynamic platform. This is integral if you want to implement a process in a robust, repeatable manner.

As I’ve got to know the inner workings of our process, I’ve also realised the framework isn’t static. We’re working with our quantitative team right now to test the relevance of each input to our algorithms and this iterative process requires a firmwide commitment to continuous improvement.

When it comes to the individual companies, what exactly are you looking for?

We’re really looking for two things. The first is value creation. The second is asymmetry.

As I mentioned, the Life Cycle approach helps us to ask the relevant questions depending on where a company sits on the Corporate Life Cycle. We qualitatively assess and test the most attractive opportunities by applying a wealth creation grade to each company. We assess the internal, external and management factors to get to an overall grade. These questions are consistent for each stage of the Life Cycle, regardless of the sector or industry of any company.

Once we apply the grade, we then look for asymmetry in valuation. Again, our approach is quite differentiated. Instead of anchoring our valuations to a single point in time or target price, we first aim to infer what the market is currently implying at current prices. From there we develop bull and bear case scenarios and relevant probabilities of these outcomes. We’re looking for pay-off structures which tilt the odds in our favour of at least 2:1 or better.

How do you bring all of this together for the Global Equity Select strategy?

As a portfolio manager, the decision making is firstly in selecting the securities which we believe to have the highest combination of wealth creation and asymmetry. Our weights reflect both our desire to diversify systematic risks away, but also our level of conviction in the probabilities assigned during the wealth creation grading process.

Behaviourally, we are also looking to embed the asymmetry in our decision-making. Having the humility to cut losers when the market tells us we are wrong, but also to allow our winners to ‘breathe’ and run. The behavioural bias to ‘bank’ profits is strong, but we have structures in place to check and, where possible, avoid these biases.

The Global Equity Select strategy targets a 2.5% outperformance of the MSCI World Index over rolling-seven-year periods, an objective which will be significantly value creating to our clients should we achieve it. But I’m confident our differentiated, proven and repeatable process tilts the odds of us achieving our goal in our favour.

For professional investors only.  This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.