About three years ago AMP Capital handed Simon Steele a blank piece of paper along with loose instructions to ‘design the perfect fund’.
The London-based Steele, who joined AMP Capital as head of global equities in June 2016, quickly sketched out a vision based on a few core investment tenets that have since been enshrined in a 28-page ‘manifesto’.
According to the manifesto, the Steele-led global equities team was “given a blank canvas to build a capability from scratch, allowing us to create solutions and outcomes unencumbered by historical norms”.
And the first free-hand product to emerge out of the reinvigorated AMP Capital investment team was the Global Companies Fund (GCF), which arrived in NZ in portfolio investment entity (PIE) packaging last year.
On tour in NZ earlier this month, Steele said the GCF was built around the AMP Capital’s investment beliefs, including the core observation that long-term share performance depends on compounding corporate cashflows rather than market valuations.
“Over the short term, equity prices are determined by about half on valuation and half on earnings,” he said. ‘But over 10 years between 80 to 100 per cent of share prices are explained by cash flows.”
Most investors today don’t have the patience to capture that long-term premium, Steele said, especially as automated trading (including from the growing pool of passive and rules-based exchange-traded funds) usurps fundamental research-centric methodologies.
The manifesto says current market practices have created “an investment environment where time horizons have become compressed, increasing the incidence of speculative trading around second-guessing consensus earnings estimates, sentiment indicators, or taking minor tactical bets against technically-constructed benchmarks”.
For example, Steele said the average stock-holding period has reduced to days from months while very few analyst forecasts reach out beyond two years.
At the same time, he said investors have access to more data and increasingly sophisticated analytical tools.
“But it’s all backwards-looking,” Steele said.
Which opens up opportunities for investors facing the future, he said.
Indeed, the GCF was designed to capitalise on the short-sighted behaviour of the average market participants with a blend of modern analysis and old-school fundamental research.
As the AMP Capital manifesto puts it: “Long-term fundamental investing is more connected with the real world than the world on our screens. It is focused on aligning with the longer-term trend rather than speculating on the deviations around it.”
In practice, the GCF winnows down a potential global investment universe of 2,400 stocks to a pool of between 150-200 contenders after screening out those with a free-float valuation of under US$3 billion.
Out of the maybe-list, the GCF constructs a portfolio of between 25-35 stocks with very limited annual turnover.
“We can be incredibly fussy about what to include,” Steele said.
However, he said the tight focus and long holding periods bring a research advantage.
“Say our average holding period is five years so we might have four to six new entrants into the portfolio in any year,” Steele said. “That means we can put a lot of capacity behind our due diligence.”
While the GCF is not a thematic fund per se, he said the AMP Capital team backs itself to uncover companies capable of growing earnings year-on-year supported by secular trends and high-quality management.
“Themes can’t create value,” Steele said. “Only companies do.”
He cites the example of robotic surgery, which has now entered the medical mainstream.
“The growth opportunity is real but how do you value that growth?”
For AMP Capital, the answer was to identify a market leader – Intuitive – in the robotic surgery space with a ‘moat’ protecting its long-term earnings capabilities.
Similarly, the GCF is investing in the growing global trend of pet ‘humanisation’ that has thrown up all manner of companies playing in the animal cuisine and health markets.
“People around the world are showing greater willingness to spend more on pets, which has led to new medical and diagnostic procedures,” Steele said. “There’s a big move now to preventative diagnostics for pets.”
Zoetis, the world’s biggest producer of animal medicines, features among the top 10 in the GCF portfolio.
The PIE version of the GCF has yet to report a full-year result but the original UK-based fund, released in March 2017, has returned an annualised 22 per cent to the end of this September – about double the MSCI World All Countries Index.
Despite the relatively short performance period to date for a long-term investment strategy, Steele said the underlying return drivers have supported the AMP Capital manifesto theory.
He said since inception the earnings component of the GCF portfolio has increased 75 per cent compared to just 35 per cent for the market average.
“We’ve created value in aggregate versus the index so we can take some comfort from that,” Steele said.
Admittedly, the strategy has yet to weather a perfect storm but he said in a recent AMP Capital research paper that “our analysis of performance through downturns finds stable and rising cashflows are the most crucial line of defense during a market downturn”.