When buy-side analysts and portfolio managers speak in public, they have a tendency to emphasize their preference for long-term strategies and holdings. In reality, these individuals are often happy to shuffle their portfolios when shares underperform over one or two quarters.
This apparent contradiction was on full display at the CFA Institute’s annual conference in Zurich at the end of May. The doyenne of US equity strategy, Goldman Sachs’ Abby Joseph Cohen, had barely finished her speech on the need to focus on long-term challenges before delegates were slipping out, desperate to nab one of the Bloomberg terminals in the Kongresshaus lobby to check stock prices. It was, after all,45 minutes since their last look.
Most, however, were listening intently when Cohen, one of the most respected investment strategists on Wall Street, expounded on her predictions for the year ahead. Among her expectations was an increase in volatility – and sure enough, on the day she spoke, the Financial Times led with a story about investors shunning risk in the falling global equity markets.
At the first CFA conference to be held outside North America, it was perhaps fitting for Cohen to point out that ‘economic energy is rotating away from the US’ and toward Europe, Japan and the BRIC countries (Brazil, Russia, India and China). Earnings-per-share growth for the S&P 500 fell from 20 percent in 2004 to 13 percent in 2005 – and this figure is forecast to fall further, to 10 percent, in 2006.
But Cohen was keen to stress that while corporate performance is decelerating in the US, it remains outstanding. US companies are in good general health and are cash-rich, as can be seen from increased dividend payouts over the last three years. Speaking ahead of the guilty verdicts handed down to Ken Lay and Jeff Skilling in the Enron trial, Cohen also commented that ‘accounting today in the US is clearer than it has been in the last few years.’
Think global
Even so, there is no doubting the rise of emerging markets in Asia and elsewhere, which, Cohen said, needed to be seen in the light of ‘an increasingly global context for decision-making by corporations as well as investors.’
Other key speakers supported Cohen’s portrayal of an ever more global fund management universe. James Ross, senior portfolio manager at Bernstein Investment Research and Management, called for asset managers to develop ‘portfolios without borders.’ The smooth-voiced Scot asked why so many portfolios are regionally constrained and pointed out that it’s not because they generate better returns.
‘Regional constraints typically reduce overall efficiency and often include home-country bias,’ he explained to a packed workshop. ‘It makes far more sense to move towards portfolios without borders.’
The key to successful asset management is not country-specific but company-specific knowledge, and Ross offered a model for how best to leverage this company intelligence to build a successful global portfolio. Fund managers should concentrate on the strongest stock opportunities worldwide, combine developed and emerging markets, and seek to exploit currency trends fully, he said.
Globalized portfolios also make sense from the risk management perspective, according to Kate Phylaktis, professor of international finance at Cass Business School in London. She pointed out that ‘global industry factors are becoming more important relative to country factors in determining security returns,’ adding: ‘As markets are deregulated and globalized, there is increasing correlation between markets and therefore it makes less sense to diversify by country.’
New challenges
A broad range of speakers – from Stanley Fink, CEO of hedge fund Man Group, to Alan Brown, head of investment at Schroders – stressed the need for increased savings in the face of ever-increasing longevity and worrying pensions shortfalls. Walter Kielholz, chairman of Credit Suisse, pointed out that total pension fund assets in the OECD region had grown from $6 tn to $16 tn over the last ten years. All this new cash is surely good news for fund managers.
But in the increasingly competitive race to secure global capital, companies are going to have to work harder to get their hands on this money. Corporate governance is one potential advantage that companies can seize upon. Apologetically moving on to the subject, which he described as ‘a little bit trampled to death,’ Kielholz argued that good governance could help companies in the competition for investment funds. Corporate governance, he added, should be ‘a source of efficiency and focus on the organization you are managing’ rather than ‘a theoretical nightmare of professorial decision-making or a legal minefield.’
In the globalized financial world, companies and investors could also face a whole host of new regulatory issues. But, Cohen pondered, with investors and companies acting on a global basis, could regulators and accountants keep up?
The new regulatory environment is likely to be influenced by the widespread acceptance of climate change and the fact that socially responsible investment is becoming more and more mainstream. ‘Environmental awareness is taking hold around the world and we’ve seen a large increase in ESG [environmental, social and governance] investing,’ Cohen commented. ‘Investors really are paying attention to who are good corporate citizens not just in words, but in deeds.’
According to Cohen, as more investors become interested in these issues, the ‘eco-efficiency premium’ will have an increasingly significant impact on valuation.‘We need to look at regulatory and environmental issues globally because we’re investing globally now, companies think globally and bad air doesn’t stick to borders,’ she concluded.
