wealtharticles-whats_new_in_global_equity

What's new in global equity investing?
by Russell Investments

Russell has researched global equity managers for over 40 years.How have managers changed over the years and what new trends do we see emerging?

Why use global equity managers?
International markets provide opportunities for increased sources of return and lower risk through diversification. Regional specialists can provide a reliable source of added value over the long term through their deep local market knowledge. However, global equity managers can bring some additional benefits:

Higher Returns
Better ideas from a broader opportunity set. Global equity managers can pick the most attractive stocks in an industry from anywhere in the world, while regional managers are restricted to picking ideas from a narrower, regional opportunity set. For skilled global managers, this extra choice offers them the potential to achieve higher returns than their regional peers.

Global themes. Many important investment themes are global in nature and the best investments may exist in, say, emerging rather than developed markets. Global managers enjoy much greater freedom than regional managers to roam across markets to seek out these opportunities.

Country allocation. Although markets have become increasingly driven by global sector themes, opportunities to exploit country mis-pricings still exist and global managers have more freedom to take advantage of such opportunities than regional managers.

Aggressive. Global equity managers are typically running less constrained and more concentrated mandates now, designed to increase the potential added value.

Lower risk
Diversification. The excess returns from global equity managers have a low correlation to those from regional managers, providing more consistent returns if you combine these two types of managers.

The past - regions bolted together
Managers have offered global products for many years, but historically many simply combined their regional products to offer a "bolt-together" global product. It's only been over the last decade, due to the globalisation of markets and the accompanying shift by the investment firms away from region-centred research to global sector research, that managers' strategies have evolved to become truly global.

The present - the dramatic rise in compelling products
Over the last decade we have seen huge growth in the number of compelling truly global equity teams and products. Improvements in the breadth, quality and affordability of financial information on companies and advances in investment techniques have made global investing much more feasible than it used to be. At the same time, the clamour from clients for high return products has encouraged many more entrants into the space.

The growth in products has been characterised by a number of interesting themes:

More global specialists and 'boutiques'. In 1996, only a third of the 40 managers we researched focused 'purely' or 'predominantly' on global products. We now research over 100 global equity managers and over 80% of these are boutique managers focusing on global investing alone. Managers have been attracted by the greater investment freedom this asset class offers.

Higher returns from global specialists. Russell's own research shows that in recent years, managers offering 'purely' or 'predominantly' global products have significantly outperformed those that offered 'purely' or 'mostly' regional mandates. While much of this outperformance has come from stock selection, global managers have better exploited opportunities such as the underperformance of US equities and the outperformance of emerging markets.

Rise of aggressive managers and absolute return strategies. Clients are looking to make their money work harder within active management. This has led to a rise in the proportion of managers that are allowed to run mandates that are less sensitive to the benchmark, take more risk and invest more in non-index companies. In recent years this had led to significantly higher returns than more conservative global equity managers. These are the types of managers that Russell is employing within our global equity funds.

The future - what trends do we see?
While many of the trends we have described have been in existence for a while now, we expect them to continue and in some cases to accelerate over the next few years. Two key themes we identify are:

More concentrated, unconstrained strategies. The appetite for aggressive products remains strong. We expect to see a growth in concentrated products, limited long/short (130/30) strategies, absolute return driven approaches and managers investing in a wider variety of markets such as up-and-coming emerging markets (known as Frontier Emerging) and even convertible bonds.

Themed global equity products. As investors are looking for more niche strategies, we are seeing managers willing to run specialist mandates, example, Shariah mandates, Socially Responsible Investment funds, strategies focusing on the environment and climate change, as well as more attention given to small companies and high yield.

Conclusion
As investment themes and opportunities become increasingly global in nature, the dramatic rise in skilled global equity managers provides a natural and attractive option for clients. However, with the potential for higher returns also come greater risks. A multi-manager approach provides clients with an ideal solution in such an environment: it offers investors the potential to participate in the higher returns offered by global managers without the volatility which normally accompanies such strategies. This means higher return opportunities with greater consistency.