The three key questions for all investors: Why this strategy? Why now? Why pick it over its peers?
In uncertain times such as these, global value can offer investors two important benefits, believes M&G Investments fund manager Shane Kelly. “The first thing is in the label – it is global,” he says in the above WealthWhys video.
“Markets today are very concentrated and the sources of returns are quite narrow. So having an investment approach that is quite different to a lot of the rest of the market provides diversification – not just in terms of the stocks we are owning, but in terms of the sectors and the regions investors have access to.”
At the same time, uncertainty brings volatility and, with it, extreme price movements. “Pessimism comes into markets, we see sharp declines and opportunities come from that,” Kelly elaborates. “And as a value investor – somebody who is prepared to look through the short-term noise and distraction and consider the fundamentals of a company over the medium to long term – it provides a lot of really positive opportunities that can be picked up through that uncertainty and through that volatility.”
‘Fundamental lens’
Asked how he and his team set about uncovering undervalued opportunities on a global basis, Kelly replies: “We want to buy cheap, fundamentally sound companies that provide what we think is a very attractive risk/reward profile. We start by using a quantitative screen – but what we don’t do is screen the market from top to bottom and end up with a consolidated group of stocks that are only in one or two sectors. We screen the market by sector – so what we start with is a very broad range of cheap stocks.”
When we are looking at whether something is fundamentally sound, we are not looking for a reason to buy a stock – we are looking for a reason not to buy a stock.”
The team then puts these stocks through what Kelly calls “our fundamental lens”. “We work slightly differently to many other managers there,” he continues. “We think, if a stock is cheap and fundamentally sound, then that is a candidate to go into our final portfolio. When we are looking at whether something is fundamentally sound, we are not looking for a reason to buy a stock – we are looking for a reason not to buy a stock.
“So, our process, in terms of fundamental analysis, is sort of tipped on its head. We spend a lot of time understanding whether this is a company that we would consider a ‘value trap’ and should therefore be excluded as a potential candidate to go into our portfolio.”
Shane Kelly, fund manager, M&G Investments
A full transcript of this interview can be found after this box while you can view the whole video by clicking on the picture above. To jump to a specific question, just click on the relevant timecode:
00.00: Why should investors be considering global value investing during times of uncertainty?
01.38: How do you set about uncovering undervalued opportunities globally?
03.02: How do you manage sectoral and regional allocations within the portfolio?
Why should investors be considering global value investing during times of uncertainty?
We have been living through a period of uncertainty over the last few years – and we possibly would expect that to continue going forward as well – and one of the elements of global value is that it provides a couple of benefits to investors during those times of uncertainty.
The first thing is in the label – it is global. Markets today are very concentrated and the sources of returns are quite narrow. So having an investment approach that is quite different to a lot of the rest of the market provides diversification – not just in terms of the stocks we are owning, but in terms of the sectors and the regions that investors have access to. And that diversification is a very key benefit in times of uncertainty.
The other thing is that uncertainty brings with it volatility and often what we experience in times of volatility is we have excess price movements – pessimism comes into markets, we see sharp declines and opportunities come from that.
And as a value investor – somebody who is prepared to look through the short-term noise and distraction that is going on and look at the fundamentals of the company over the medium to long term – it provides a lot of really positive opportunities that can be picked up through that uncertainty and through that volatility.
How do you set about uncovering undervalued opportunities globally?
Our framework is that we want to buy cheap, fundamentally sound companies that provide what we think is a very attractive risk/reward profile. How do we go about that? We start by using a quantitative screen – but what we don’t do is screen the market from top to bottom and end up with a consolidated group of stocks that are only in one or two sectors.
We screen the market by sector. We look for the cheapest stocks in every sector of the market – whether it is technology, financials, healthcare and so on and so forth. So what we start with is a very broad range of cheap stocks. From there, what we do is we put them through our ‘fundamental lens’ – and we think we work slightly differently to many other managers there.
We think, if a stock is cheap and fundamentally sound, then that is a candidate to go into our final portfolio. When we are looking at whether something is fundamentally sound, we are not looking for a reason to buy a stock – we are looking for a reason not to buy a stock.
So, our process, in terms of fundamental analysis, is sort of tipped on its head. We spend a lot of time understanding whether this is a company that we would consider a ‘value trap’ and should therefore be excluded as a potential candidate to go into our portfolio.
How do you manage sectoral and regional allocations within the portfolio?
Portfolio construction is a core focus for us – and obviously sector and regional allocations are a key consideration within that. In saying that, we take a bottom-up approach to investing and so sector and regional allocations are really a function of where we see the underlying stock opportunities at any one time.
Now, overlaying that is what we want in terms of the alpha that we generate from the portfolio – and what we want is an alpha stream that is not just delivered by one or two large stock calls or one or two sector or regional calls.
What we are looking for is a balanced approach and so, when we are looking at our overall portfolio, where we can add diversification – where we think the market is providing us with that opportunity from a risk and return perspective – we will add diversification within the portfolio.
