James Smith provides an overview of the day"s main speeches, which covered a diverse range of topics from ethical investment to hedge funds
One of the main topics of the International Investment Nordic Forum in Stockholm was on growth prospects in Asia as well as corporate governance. Other topics included investing in high-dividend yielding securities, hedge funds their current appeal and strategies, and the shaping of the EU savings tax directive.
Chris Lees, global equity investment manager at Barings Asset Management (BAM), talked about global equities and feels the best opportunities are to be had in Asia and the emerging markets.
With the valuation extremities of the bull market eliminated by subsequent bearish conditions, companies with discernible growth differentials are at a premium. BAM is currently overweight in emerging markets and Asia, including Japan, where Lees said the best growth opportunities can now be found. With Japan, for example, he feels the country is beginning to show signs of recovery, with genuinely global companies on western P/E ratios for the first time in around 15 years.
Lees believes that after the choice between equities and bonds, the eastern/w estern decision is becoming the most important asset allocation call, with the former offering growth opportunities, rising dividend yields and coming to rely less on exports. Last year, Korea exported more to China than the US for the first time in its history, for example.
Although neutral on the US, Lees acknowledges that the primary reason for the ascendancy of growth on a global scale is George Bush"s aggressive fiscal policy as he attempts to improve on his father"s record by securing a second term in next year"s election. And with his tax cuts boosting the domestic economy, it looks as though Bush may do just that, meaning the world is in for a strong period of growth.
Lees is confident the US will not suffer a decade-long slump following the bubble at the end of the 1990s - as Japan did - because the boom was in productive, rather than non-productive, assets.
"The US boom was in Capex, which remained in the economy when the bubble deflated, as opposed to the Japanese real estate bubble," he said. "In addition, the Japanese bubble was financed by banks, which collapsed when it did, while the US boom was funded by capital markets, with banks not subsequently suffering on the way to the bottom."
In terms of the growth stocks to lead the market, Lees points to the survivors of the technology bubble as the most likely candidates. Now on much more reasonable valuations than at the height of the boom, players such as Amazon and ebay have actually been outperforming old economy stocks such as Wal-Mart since the end of 2001.
According to Dave Whitten, head of global resources at First State Investments, much of the growth in global resources will depend on China. Growth of the global resources market is set to continue, with the commodity supply tightening and the subsequent demand environment more resource intensive.
Much also depends on China, however, now the third-largest metals consumer with 15% of global demand. While the country only makes up around 4% of the world in GDP terms, Whitten says it punches far above its weight in commodity consumption, approaching 15%-20%. It is also a huge energy consumer, with an ever-widening gap between the oil it uses and the amount it can produce.
Global resources are a viable separate asset class with a low correlation to equities and bonds, delivering strong relative absolute and relative returns over three and five years during bear market conditions.
Relative to the MSCI World Index for example, global resources has a correlation of 0.61 to one, decreasing to 0.49 to one in relation to the Europe ex-UK market and 0.30 to one to the global bond sector.
Whitten said this area of the market is not as cyclical as it is often perceived, offering strong returns throughout different cycles, although it is unwise to treat any one part of the sector as a proxy for the whole thing.
In light of this, he believes a diversified portfolio investing across countries and the various types of resource stocks is the best method of getting access to the returns of offer.
When picking commodity stocks, Whitten said it is important to focus on companies whose balance sheet can withstand tight margins, as cyclical commodity price downturns will precipitate margin squeeze.
He also advises investors to look for stocks with real earnings per share growth over three years of over 5% per annum and a net debt to equity ratio less than 50%, as these will be the most sustainable operations in all market environments.
Peter Hames, investment director, head of Asia Pacific Equities at Aberdeen also focused on Asia in his speech and the changing face of investment.
He pointed out many of the most compelling reasons for not investing in Asia are beginning to recede, with improved returns expected in the future despite lower economic growth rates.
Hames said that while the region has traditionally beaten the US in terms of year-on-year GDP growth, it has been a poor place to invest for a variety of reasons.
The foremost among these has been pegged currencies, which saw export-led countries linking their currency to the dollar, eventually creating serious imbalances and leading to the collapse in the late 1990s. The majority of currencies have moved away from this system now, with the Chinese renminbi the major exception, allowing the currency to fluctuate and take any economic strain if necessary.
Other problem areas beginning to see improvement are the poor accounting and banking systems, now making progress in terms of transparency, corporate governance and local problems, with many of the governments given to intrusive leadership replaced with a new generation of politicians in countries such as Indonesia for example.
At company level, while many stocks were previously run without much consideration for shareholders and diversified into areas in which they had no expertise, Hames said corporate reform is now widespread in the region.
"Many family-orientated businesses have begun to bring external managers in and a clearing mechanism is now in place whereby poor management teams will be replaced if necessary to improve the business," he said.
In broader terms, the region is also becoming more self-sufficient, with domestic consumption becoming the key driver rather than exports. China remains key to this, taking over from the US as the largest importer of Korean goods.
Despite this improving picture, valuations in Asia remain attractive relative to other major markets, on an average P/E of around 15 times 2003 earnings compared to somewhere around 23 for the S&P 500 index.
Steve Waygood, associate director, investor responsibility at Insight Investment talked about socially responsible investments and corporate governance.
Exercising the rights associated with share ownership is a mainstream approach to socially responsible investing that should be applied to all portfolios, according to Waygood.
Rather than the typical perception of ethical investing as simply avoiding certain areas of the market, Insight focuses on the concepts on enlightened shareholder value and responsible ownership to engage with the companies it holds on various issues of social responsibility.
According to a recent report by the European Commission, "well managed companies with strong corporate governance records and sensitive social and environmental performance will outperform their competitors and Europe needs more of them to generate employment and higher long-term sustainable growth."
Waygood added that responsible companies are able to outperform for a number of reasons, including improved efficiency in terms of raw material usage for example, and reduced risks in terms of reputation, litigation and regulation.
However, he acknowledges there is not always a short-term financial case for buying such stocks.
Insight"s engagement approach has no material impact on portfolios, with asset allocation and stock selection remaining the same, apart from potentially identifying relevant information that enhances stock analysis.
This is currently the most popular type of socially responsible investment in the UK, with over £600m in funds under management primarily in institutional portfolios.
For those investors who want to go further down the ethical route, there are portfolios that offer either positive or negative screening, both of which will have an impact on the types of holdings in portfolios and potentially on subsequent performance.
Negative screening identifies a number of companies in which a fund will not invest, typically tipping the bias towards smaller companies away from the larger tobacco and oil stocks in the FTSE 100.
Positive screening identifies criteria that will merit a company"s inclusion in the portfolio, such as a focus on healthcare for example, again biasing the fund towards smaller companies primarily in the technology sector.
Tom Mann, European equities portfolio manager at Credit Suisse, looked at investment strategies that concentrate on capturing returns via high-yielding securities.
Investing in stocks offering high dividend yields can deliver over half of total return in a low inflation environment, according to Mann.
As dividends are a more reliable source of returns than capital appreciation, Mann added that investors are therefore relying on this safer element, in relative terms, for much of their eventual gain.
He also pointed to the long-term outperformance of value stocks, with high-yielding shares beating lower-yield growth companies in all but three years since 1993.
The strong numbers from high-yielding stocks also comes through at sector level. From January 1995 to end August 2003 in the energy sector, for example, the top 20% of dividend yielding assets outperformed the bottom 20% of dividend yielding stocks by 18.8% on an annualised basis.
Looking over the much longer term, from 1802-2002, the return from dividends has provided 5% out of 7.9% total annualised returns from the US equity market.
However, while high-yielding stocks have generally produced strong performance, Mann said active management is important when running such assets, as is tight risk control.
"Focusing exclusively on dividend yield can lead to a fund having large exposure to sectors such as utilities and financials for example, which could obviously lead to underperformance if these areas fall out of favour with the market," he said. "We recommend a more balanced approach to high-yield investing with a wider spread of sectors."
Mann also advises against buying stocks on high-yield alone, which would have led investors into the beleaguered telecoms sector in recent years, for example.
In the case of many telecoms stocks, the high yields were unsustainable as the majority of companies had huge debts that swallowed up any available cashflow that would normally have gone towards dividends. By just looking at headline yields and not examining companies on the sustainability of dividends, investors can easily get into this type of company, added Mann.
Nicklas Fornander, head of the Nordic research team at Skandia Global Funds, outlined in his speech that skilled fund management is the ability to consistently repeat strong past performance.
However, strong returns alone are not indicative of such management skill, with Fornander looking at philosophy, process and people to identify whether returns are repeatable.
He said: "The paramount question is whether strong performance is attributable to skill or luck, and finding managers that are likely to deliver strong long-term returns requires an intensive research focus. Assessing performance is not about how strong it is but when, where and how managers have achieved it and this involves a mixture of qualitative and quantitative research."
Fornander said it is also important to consider the impact of investment style on performance numbers, pointing to the wide divergence between growth and value companies in recent years. Looking at five-year average returns for 100 US equity funds, the top 50 over the bull market period from 1999 to February 2000, with growth of 77%, went on to massively underperform in the subsequent bear market period.
The topic of hedge funds and growth in the marketplace was addressed by Rossen Djounov, chief executive of Forsyth Partners.
The top-performing hedge funds have significantly outperformed the best mutual portfolios in recent years, accor- ding to Djounov.
Looking at five-year net compound annual returns to the end of last year, the top 10% of hedge funds returned 26.2% compared to 8.4% from mutual funds.
Djounov said hedge funds will also lose less in a falling market, with the average portfolio dropping just 11.3% compared to 69.8% from mutual funds during the 15 negative quarters on the S&P 500 from 1988 to 2002.
He added that the hedge fund market almost doubled from 1998 to 2002, from just under $400bn to just under $800bn, with a fund of funds strategy remaining the most popular in what can be a high-risk market.
"Although the hedge fund industry often attracts the best managers because of the performance fees available for strong returns, it is often hard for individual investors to access these funds because of high minimum investment levels," he said. "Hedge funds also suffer from a lack of liquidity, and research and diversification through a fund of funds route is one way to access the strong returns available without having to worry about the potential pitfalls."
The last speaker was Phil Austin of Jersey finance, the promotional agency for Jersey"s financial services industry. He spoke on the impact of the EU Savings Tax Directive and its impact on European financial services. He covered issues of choice between exchange of information and withholding tax, and discussed what those outside the EU, but close enough to be caught in the political machinations of the whole debate, were doing in response.
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