Driving returns can be all about style

Super fund trustees may worry about some of the contradictory signals being received about global equities and particular regions, but managers are seeing value in a company by company approach. 

Just because international equities are unlikely to be the driver for superannuation fund returns they were in 2013 and 2014 does not mean allocations should be significantly diminished as funds position themselves for 2016. 

There are those who believe that returns can still be generated, but that they will be achieved by identifying particular countries and particular companies with a view to extracting both yield and growth. 

Ibbotson Associates portfolio manager, Bianca Rose believes that while there has certainly been some serious change over recent months, opportunities still exist in the context of countries such as Japan and companies within Japan. 

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“Change is happening,” she said. “There is merger and acquisition activity both in Japan and globally and so the search is on for both yield and growth.” 

Maple-Brown Abbott head of Asia Pacific Equities, Geoff Bazzan, takes a similar view with respect to the outlook in terms of the Asia Pacific excluding Japan noting that it is the company’s style to form views about individual companies rather than countries and regions. 

He said that just because a company was located in a region which was deemed to be suffering economically, this did not mean the company itself would not remain profitable and capable of generating solid returns. 

Thus, Bazzan pointed to recent Maple-Brown Abbott analysis which pointed to the fact that while Asian equities may have underperformed the World benchmark, this gave rise to opportunities in the region. 

“We believe that this period of relatively weak investment returns and growing business value overall (higher earnings and net worth) has laid a sound foundation for more attractive prospective returns than has been delivered over the recent past,” the analysis said. 

Importantly, a recent analysis released by Frontier Advisor reflects a similar view about Asia, but in the context of emerging markets. 

The review, released early this month, concluded that consumers would lead emerging markets economic growth over the longer term. 

There is merger and acquisition activity both in Japan and globally and so the search is on for both yield and growth.

– Bianca Rose

Discussing the views of managers in the region, the Frontier analysis said it was very much a consensus view. 

“It was felt that capital investment would be a lesser component on GDP than historically and exports would be less significant than the domestic emerging markets consumer,” the analysis said. 

It noted, however, that developed markets would remain important to the equation. 

“Developed markets consumers remain a key customer for emerging market manufacturing output, which is increasingly making its way into high-end products aimed at developed markets consumers,” it said. “Examples of this include components assembly of high-end cars, and other consumer products like iPhones, iPads and fashion apparel.” 

Reflecting some of the style of Maple-Brown Abbott, the Frontier analysis noted that across the managers its analysts ahd met, there was a preference to identify the most compelling sub-industries that were indirect beneficiaries of the emerging consumer theme, yet still appeared likely to follow the pattern of S-cuves.  

It said several market segments/themes had been discussed including: 

1. Health: rising incomes are correlated with improving life expectancy through higher quality food consumption and better healthcare facilities/services. As consumer expectations for life expectancy increases, consumers tend to in increase their focus on preserving quality of life in its later stages. Individuals gain a focus on health and fitness and seek healthier lifestyles supported by health supplements and more sports and fitness activities. From an investment perspective, this theme can be accessed via hospital operators, pharmaceuticals, health supplements, sports/active living apparel and other associated industries. 
2. Financials: as economies develop, markets for more sophisticated financial services become more pervasive. This is not unexpected as increased household income results in increased demand for investments and products aimed at preservation and improvement of lifestyle for individuals and family members. In addition, consumers become more comfortable with debt and the potential to realise aspirational endeavours including pursuing business ventures or seeking to acquire luxury items via credit card debt, auto loans etc. From an investment perspective, this theme can be accessed via many parts of the financial services industry including banks, brokers, insurance providers and increasingly technology oriented financial services like mobile payments, mobile money transfers etc. 
3. Leisure: As consumers’ income increases, they often experience an increase in leisure time by cutting down on hours worked. Part of this excess free-time tends to be consumed with entertainment oriented leisure activities like cinemas, tourism, and increasingly, online social networks and gaming. From an investment perspective, this theme can be accessed via investing in cinema operators, theme parks, travel agencies, hotels, airlines, infrastructure, social networking service providers, mobile gaming companies, casinos as well as enablers like device manufacturers, component manufacturers and telecommunication companies.