Category Winner: Best Global Equity Fund - Schroder ISF Global Equity Yield A USD
Key Stats
Inception Date: 2005-07-29
Total Net Assets (Mil) (2017-02-28): USD 424.10
Manager: Ian Kelly
M: Morningstar G: Global Equity Yield – Global Value Investment Team, Schroders
M: Could you highlight any major changes you made to the portfolio over the course of 2016? Were there any particular holding that drove the fund’s performance for the year?
G: A disciplined adherence to our value approach is imperative in order to deliver its long-term performance advantage. One hundred and thirty years of equity market data show that the price you pay is the key determinant of whether or not you will make money with an investment. This is the crux of value investing, and the key driver behind the fund’s success.
During 2016, our underweight positioning in over-valued so-called ‘bond proxy’ sectors, such as consumer staples and healthcare helped our relative performance. The fund’s positioning in the Information Technology and Financials sectors contributed to positive returns.
M: What is your outlook for 2017 specific to the markets you cover, and how are you positioned to take advantage of opportunities and/or mitigate potential risks?
G: We have no market view for the year; equity valuations are the only thing that we are confident talking about. This is a great predictor of long-term returns and is a terrible predictor of returns over periods less than about five years.
We are invested across a diverse range of sectors and regions. Our invesent approach is long term and low turnover and we build or reduce positions gradually over time. Whilst the portfolio aims to outperform the MSCI World index over the longer term, portfolio construction is not based around the index weight of stocks. Sector weightings are shaped by individual stock positions. Financials, information technology and consumer discretionary are areas where we have high levels of conviction in certain businesses, which is reflected in the fund’s sector positioning.
In terms of mitigating potential risks, we view risk as the probability of permanent financial loss. To achieve superior long term returns capital losses need to be minimized, and it follows that we consider at risk in absolute terms, focusing on three main sources of risk:
- Valuation: the risk of paying more for a share than is warranted by the intrinsic value of the underlying business
- Earnings: the risk that the earnings of the company are in structural decline over time
- Financial: the risk that the company becomes insolvent
We attempt to minimise absolute risk by concentrating on companies with low valuations, resilient earnings and strong balance sheets. We conservatively analyse the financial information of each company we research and demand a sizeable discount between the price we are willing to pay and what we believe to be its true worth. This margin of safety is designed to protect capital in event of an unexpected but adverse outcome.
M: Can you comment on the macro risks in the global economy, such as the change in leadership in the US, and the significant headwinds faced by emerging markets? How do these risks affect your investment decisions?
G: No one has a crystal ball to predict the future which is why in our view, it is vital to explicitly avoid taking economic views that might influence portfolio decisions. We are mindful of the impact of factors like interest rates, inflation or thematic trends. However, our style of value investing’s record of outperformance shows that an unemotional, valuation-based recovery approach delivers – regardless of these prevailing economic or thematic factors – over the long run. We do not take macroeconomic bets as we believe identifying mis-priced individual securities is a more repeatable skill than that required to forecast the complex interrelated variables in a macro based strategy.
M: How is your investment team organized? Have there been any changes to the investment team or structure over the past year? Do you anticipate adding to the team in the near future?
G: Ian Kelly manages the fund and is a member of the Schroder Global Value Team. The team consists of six fund managers who manage both deep-value and income-oriented portfolios across UK, European and Global equity. An experienced analyst joined the team at the beginning of 2017 to support the fund managers’ research efforts. A dedicated product manager also supports the team.
The Schroder Global Value Team has over 80 years’ combined investment experience. Ian has managed assets in a value style for five years and has managed the Schroder ISF Global Equity Yield since November 2013. The Global Value Team’s distinctive total return valuation-based approach to managing income differentiates Schroder ISF Global Equity Yield.
M: Can you highlight any areas where you feel that the investment team or the investment process can be improved upon?
G: An investment process must be rigorous and repeatable. The reason value investing is such a powerful strategy is that it has more than 100 years’ worth of history to show that it’s a process that outperforms. This long-term track record is what makes it so compelling. Obviously, value can underperform over shorter time periods, and this is what makes it a difficult approach for many to adopt, but such periods are simply too short for the strength of the process to outweigh the impact of pure chance. We invest on a five-year time horizon, and it is over these longer periods that value investing can really demonstrate its power.
One of the reasons we avoid commenting on short-term performance is that it gives the false impression that our results over such periods can be definitively explained. The performance of a skilful investor is likely to look very similar to that of a lucky investor in any given quarter – the difference between the two only emerges over the longer term. If 40% of our investments are mistakes and the other 60% go on to outperform over the long-term, we stand a very good chance of delivering strong relative and absolute returns. Reducing our mistakes by just 5% would generate enormous value and that’s why we strive to be better fund managers tomorrow than we were yesterday.
View all Morningstar Singapore Fund Awards 2017 articles here.
