Page 28 - DIY Magazine September 2018

WHAT ENABLES A FUND TO OUTPERFORM IN DIFFICULT MARKETS AS WELL AS FAVOURABLE ONES?
By Dr Ian Heslop
Old Mutual North American Equity Fund
What enables a fund to outperform in difficult markets as well as favourable ones? Part of the answer is in adapting to the market environment -particularly the ability to tilt or flex investment styles when needed. This helps to avoid the pitfalls commonly associated with static or concentrated style exposure, which are typically embedded in some established investment processes.
In the case of the Old Mutual North American Equity Fund, we aren’t constrained by a single investment style - be it value, growth, quality or momentum. Following a forensic, unbiased and flexible approach to selecting stocks, our robust investment process can rely on multiple style exposures, based on their relevance to the current market environment.
North American equities have become characterised by the perennial challenge of value stocks (those trading
at a discount to peers) and growth stocks (companies with the best prospect for business growth) vying for the attention of the market. This has led to investors experiencing prolonged periods of underperformance while one style remains prevalent over another. In recent years, for example, many growth-oriented managers have outperformed those with a preference for value stocks.
The disruptive nature of the market rotating between value and growth may also result in more pronounced drawdowns suffered by holders of style-focused or concentrated funds.
Our objective in managing the fund is to build long-term capital growth. The portfolio’s construction is driven by structured analyses of companies, including stock-price valuation, balance-sheet quality, growth characteristics, capital efficiency, analyst sentiment and market trends.
We believe that the North American equities universe
is broad and sufficiently diverse to continuously offer opportunities for active stock selection, independent of the state of the market. The diverse nature of the stock selection used in our investment process has allowed us to navigate the impact of style rotations. It has also enabled our fund to offer returns that are less correlated with peers that have a more static style exposure - specifically value- or growth-orientated funds.
Some investors choose to access the US equity market via an exchange-traded fund (ETF) or index tracker, based on the perception that it’s difficult for active managers to outperform the S&P 500, or for reasons of cost.
While that view may resonate following nine years of a bull market, it may prove less compelling following a period of enhanced volatility. Most passive funds track market capitalisation-weighted stock indices such as the S&P 500 or the MSCI North America Index.
DIY Investor Magazine | Sep 2018 28