Traditionally, the managers of internationally-invested funds have looked first at the opportunities ...
This approach prevailed until just a few years ago but more recently the increasing globalisation of world stock markets has called for a sea change in the management approach to international investment.
We have been quick to recognise that the performance of an internationally-invested fund would become increasingly reliant on identifying successful investment themes on a global basis, and by overweighting or underweighting the individual sectors accordingly. In our view, the older, more traditional method of focusing on single market weightings is becoming far less important.
As long ago as 1996 we established 12 global sector teams to research the key world sectors in depth and to analyse trends across national boundaries. The team members comprise the relevant specialists from each of the regional desks and together they discuss global influences on the sector for which they are responsible.
The teams focus particularly on the relative valuations of stocks within the sector they follow. This enables them to identify any stocks that are undervalued relative to their global peer group. Taking an international approach to sector research can provide a valuable insight into new opportunities and quickly highlight areas where it is possible to add value.
The use of a global sector overlay enables our international fund - Global Select Growth - to leverage the most promising investment themes. Sectors favoured by the specialist global teams are not only overweighted in the portfolios of our regional growth funds but these ideas are further leveraged in the management of the Global Select Growth Fund.
This approach has enabled us to capitalise swiftly on the opportunities afforded by the new economy stocks - namely, the telecoms, technology and media companies which have recently been the driving force behind world equity markets.
Conversely, we have been underweight in the old economy stocks, such as the industrials and consumer cyclicals, which have underperformed.
Our global teams research these new economy stocks in depth to identify the potential winners and losers in the future world economy. Their conclusions are then discussed at our monthly 'Investment Themes' meeting. Here the top-down influences on individual sectors are discussed in detail, such as the likely impact of future interest rate rises and changes in the pace of economic activity.
The ability to discuss factors influencing sectors globally within a structured framework has proved invaluable. One area where this approach has been particularly beneficial has been technology where for some time we have been firm believers in the benefits of the internet.
Drawing on the expertise of our US technology specialists, and evidence that the internet is already a powerful driver of growth and efficiency within the US economy, we felt confident in maintaining an overweight position in technology.
This early overweighting proved particularly helpful in the fourth quarter of 1999 when technology stocks saw a dramatic surge.
Another area where our global sector research identified a major opportunity at an early stage has been the media sector. We recognised that the internet did not pose a universal threat but rather it presented several outstanding opportunities and, in particular, we felt that the market was underestimating the value of content.
As a result of this approach, our funds were overweight the sector when this view gained credence in early December last year with the announcement of the Telewest/Flextech takeover, which highlighted the value of internet content. This was reinforced in January this year with the AOL/Time Warner merger, which again brought the value of internet content into sharp focus.
A further example of where our sector-based approach has proved extremely useful is within the telecoms sector, where the Global Select Growth Fund has again benefited from an overweight position.
By drawing on the experience of our global specialists we perceived that the rapid growth in mobile phone subscriptions was a secular trend and one that would be relatively impervious to changes in the underlying health of global economies. Aggressive new pricing packages have led to subscriber growth which has easily surpassed market expectations. Even in Japan, where the economy was in a parlous state for some time, sales of mobile phones have been a notable pocket of strength.
Despite the problems in the Japanese economy at the tail end of 1998, we felt able to buy the Japanese cellular company DoCoMo with a large degree of confidence. This company has been highly successful and is currently leading the world in the development of the 'I-mode' phone - one that incorporates a browser enabling the user to access the internet.
Telecom stocks have recently been strong on a global basis so that by correctly positioning the fund at an early stage we have been able to take full advantage of the momentum in this sector.
Looking to the future, we have already initiated steps to enhance our global investment process. Currently, we are developing preferred lists of recommended companies for each of the major global sectors. This will enable the Global Select Growth Fund to remain highly focused on the most promising companies in each sector and will enhance the stock selection process.
Given that the market capitalisation of several companies has become extremely large, we felt it would be useful to formalise our views on the largest 20 stocks worldwide.
Consequently, we will also be developing recommended weight
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