Nick Mottram, head of global equities, has revamped the investment process at Investec. Mottram base...
Nick Mottram, head of global equities, has revamped the investment process at Investec. Mottram bases the organisation of his desk around six global industries: resources, industrial companies, consumer stocks, service companies, financials, and technology and telecommunications. Geography remains important in terms of monitoring portfolios.
Mottram and his team have generated a universe of around 290 global stocks and monitor them using a multi-disciplinary approach.
He said: "Different forces can be at work in a stock market. Sometimes the market moves are violent and erratic or dominated by powerful themes. At other times the economic and business fundamentals allow for gently trending stock returns. We aim to capture the main drivers of stock performance and then to identify at any point in time which is the most important."
That approach is by nature pragmatic, aimed at identifying market drivers in all conditions. Mottram said that each stock in the universe is graded and then ranked, both quantitatively using pure data, and then subjectively by a specialist responsible for that stock.
Each stock, he said, is graded in four ways: on the basis of its strategic position and strategic dynamics; on a static valuation basis; from an earnings perspective; and using technical analysis to assess likely price action.
Over different time horizons, Mottram said a share price can rise or fall relative to the market for one of three reasons.
First, it might be mispriced and should eventually see its share price adjust, without its operating fundamentals changing. Focusing on comparable valuation metrics allows Mottram's team a judgement to be made on the size of this valuation gap.
Second, the firm might be efficiently priced but deliver better or worse profits than have been expected. The share price is likely to move to reflect this, as investors factor in a near-term change in the fundamentals.
Third, through changes in sentiment. Mottram said: "The powerful grip of other investors' opinions can drive stock prices either up or down significantly relative to the market and it is therefore important to know what 'the market' thinks about the stock. This can best be done by examining changes in the pattern of the performance of the share price itself, to observe where trends may be forming and performance accelerating.
"Overarching these is something else that affects each of the other three but is worth considering in its own right. This is strategy or more exactly, both the current strategic position of the company and the prospective change in this position. Its strategic dynamic. This factor drives the operational performance of the business. It impacts valuation and the probability that value gaps will be closed. It certainly drives relative earnings trends and revision, and it influences market perception and sentiment."
Guinness Flight's reputation for fixed interest management, something that has made it harder for Investec to get its equities message over to IFAs, has been built upon by the shaping of the fixed interest investment process by Paul Griffiths, Investec's head of fixed interest.
Griffiths said: "Given our emphasis on macro-economic developments, the fixed income investment process begins with an analysis of the key global economies, from which a range of probable scenarios is generated.
"This analysis uses both quantitative modelling and a qualitative assessment of the likely direction of the big components of GDP, inflation and monetary and fiscal policy relative to consensus forecasts."
Understanding the pull between the forces driving markets away from fair value, and the triggers causing markets eventually to revert to fair value, is the key to successful investing, he added.
"Each month at the monthly macroeconomic meeting the probable economic scenarios for the key economies are reviewed by the fixed income team and amended as appropriate. This macroeconomic meeting is used to provide the economic platform from which to generate a fair value range for the bond yield forecasts."
Overlaid upon this economic analysis is a qualitative process designed to identify the factors, which Investec term 'compelling forces', that, Griffiths said, can cause a deviation away from Investec's estimate of fair value.
He said: "Typically these compelling forces are made up of a combination of market sentiment indicators, competing asset classes, short-term interest rates and fiscal budgets. The changes in these compelling forces, in conjunction with the valuation analysis, is used to forecast the interest rate and currency movements and the implied expected returns over the next six and 12 months."
The 20-strong fixed income team, which is made up of 11 portfolio managers, three analysts and six dedicated dealers based in London and Cape Town, is divided into a series of small, specialised groups focused on specific product areas such as global and regional bond products, currency overlays, cash plus products, credit products and emerging markets.
The teams meet weekly to review the economic assumptions and the forecasts made in the light of any developments subsequent to the macroeconomic meeting.
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