Hello, and welcome to the Morningstar Series, 'Why Should I Invest with You'. I'm Emma Wall
and here with me today is Ian Heslop, manager of the Old Mutual North American Equity Fund.
Hello, Ian.
Hello, Emma.
So first off, congratulations, because your fund won Best Fund Manager in its section
at the Morningstar Awards.
Thank you very much.
It's been a fantastic performance over the last couple of years, but I believe now you
are looking to take some risk off the table. Is this because you think there is going to
be a correction?
I think, with the way we run the money, it's very much more to do with the market environment,
how the market is reacting to macro news. We know that the U.S. market rerated quite
significantly last year. So 10% earnings growth led to 30% growth in price. So rerating is
probably not on the table this year. So we are expecting and requiring to see some measure
of earnings growth this year, and we would expect to see sort of high single, low double
digit earnings growth this year. So the expectation is still there and that’s
not unreasonable. Good employment growth. GDP in the first quarter was difficult, but
GDP in the second quarter kind of caught up, which we were expecting. And we have one or
two kind of slight niggles, slight worries. Basically: the housing market, and also the
worries about the long bond yield and how that long bond yield will reprice as the emergency
economic policy is taken out of the U.S. economy.
I think we're all quite familiar with what's going on in the headlines with that huge weather
event that did knock GDP significantly. How does that impact the stock market and how
you run the fund? Because there is all well and good all this economic macro stuff going
on, but what does it mean for investors?
That’s really interesting thing, because what we try and do is recognise that macro
is just one impact. Macro is important, but really what you really need to understand
is what is the market doing, because that has a very large impact on the types of stocks
that investors will buy and sell. So not only do we do a lot of work on the
underlying companies, we try and understand supply and demand at the share level, because
we don't buy companies - we are not in private equity. But really the big thing is to try
and understand how the market looks, what is the market really telling us about the
types of stocks that investors will buy and sell.
The types of things that we look at, is volatility low or high. We know it's very low at the
moment. Is there dispersion in returns, are markets moving up or down or kind of sideways
and risk appetite, investor risk appetite very important. I'd point to the idea that
macro does tell you some things, but doesn’t tell you everything. Volatility is very important
one there. Volatility is very low. So low volatility
realised and the implied volatility is also showing very low levels relative to, you know,
30 years, very, very low. But what we're seeing in the market is quite significant rotation.
There is lots and lots going on underneath the surface of the market, which tells us
a lot about investors are uncertain. There is not this complacency that people often
talk about within markets. Although markets are moving up. These are very uncertain times,
I believe.
I think that’s quite an interesting example to use because you would think considering
how significantly the market has rallied but investor confidence would be high. But you're
right, there's still a lot of uncertainty there. So where does that create opportunities
then – those sort of inputs?
Well, I think the major thing that we really try to do with this portfolio is to understand
that it is very important not to concentrate your style positions in the portfolio. So
we look to build a portfolio that's very diversified, not just at the stock level but also at a
theme level. So the types of stocks that we buy and sell are very broad, different types.
So not only will we include things that we believe are cheap relative to fundamentals,
but we also look for good quality stocks. We look for stocks that are showing good earnings
growth. We are looking for stocks that are showing good price momentum. So they have
moved up in certain periods. But we try to adjust that, amend it based on the environment.
The classic example of that is low volatility, because what you find in low volatility environments
is the stocks that have performed well will continue to perform well. So, a low volatility
environment is very good for trending type stocks. It's less good for other types of
stock selection components we use. We look very hard at kind of how management
teams are making decisions and actually the market looks less at that in benign, quiet
markets. But when volatility rises, trends tend to break down and management quality
tends to be much more interesting for investors.
So then if that's where the opportunities are, where are you taking risk off? In what
sectors are you trimming the position?
Well, actually what we found is, for instance, the consumer discretionary sector, where we've
been overweight for a considerable period of time, we're now bringing that down on to
underweight. We're overweight in healthcare. We've gone overweight in utilities for the
first time in a long time, where we tended to be underweight.
So you could class these kind of sectoral exposures that we have in the portfolio as
somewhat more defensive than they used to be. But the more important thing I think is
that actually within sectors what we're tending to do is bring off the kind of very highly
exposed stocks, remove those types of stocks from the sectors.
So stocks that will tend to perform well in good markets, we're just blending in some
kind of more safety first stocks into the portfolio. So not necessarily aggressively
moving towards kind of a risk-off stance, but just blending to have a quite an equal
portion of both the stocks that will perform well in good markets but also stocks that
will perform well if the markets become more choppy.
So hedging your bets for this interim period.
Very much, yeah.
Ian, thank you very much.
Thank you.
This is Emma Wall for Morningstar. Thank you for watching.