If a manager tries to match the market during a period of rapidly increasing volatility, ‘you are going to be wrong all of the time’. That is what Citywire A-rated Merian Global Equities fund manager Ian Heslop (pictured) calls ‘whipsawing’: as the market goes one way, the manager is going the other. To put it another way ‘you zig while the market zags.’
Taking a hit
Heslop, head of global equities at Merian Global Investors, leads an eight-person team of three fellow managers and analysts, plus a quantitative specialist. An overall global equities strategy is applied to different regions to create 13 funds, including North America, Asia Pacific and Global Equity funds, plus absolute return and income strategies.
He has been one of the strongest performing managers over the past five years, ranked 112 out of 1,098 in the Citywire Equity - Global sector, returning 45% to 31 January 2019. But he could not immunise himself from the savagery of late 2018. His relative outperformance was lost, ending up bottom quartile over one year.
This has been reflected in him slipping from a Citywire AA rating, which he had held from early 2017 until July 2018, to a + rating in November 2018. Since then he has risen back to A-rated status in January.
Did Heslop’s ‘aggressive’ positioning, his exposure to structural growth that worked so well from 2015 to 2017, leave him exposed when volatility returned to the market?
Interest rates have been low since 2010. Low rates make equities worth more, or to use the jargon: future cashflows are ‘discounted’ back to today’s price. As rates rise, the discount rate rises and cuts the value of future earnings.
‘A real negative performer for us has been the repricing of structural growth stories that have run for a long time,’ Heslop says. ‘You can understand why that might happen as interest rate expectations go up. These shares are all-long duration prospects, priced off lots and lots of earnings into many years’ time. You have to discount them back to today’s price.’
Were the managers too slow to react to changing market conditions? Heslop says the team deliberately stayed its hand, and on most occasions this strategy pays off.
‘The number of times you see a change in the market’s state is dwarfed by the number of times you see it oscillate, and you will lose money by trading it,’ he says. ‘There is a four-to-six-week wind-down when the market changes materially.’
Former cover star Stefan Fura, senior partner of Leicester-based Furnley House told us last year his portfolio’s best performing fund in 2017 was the Merian North American Equity fund, and he liked its ‘quant-based approach’. But how accurate is this description?
Amadeo Alentorn, co-manager and head of research, explains: ‘We like to call ourselves systematic rather than quant.’ Quant, he says, ‘uses even more obscure’ models, such as ‘artificial intelligent and neural networks’. In other words, very sophisticated algorithms and machine learning.
The Merian team covers ‘the 7,000 largest companies in the world’ analysed across ‘a number of stock selection criteria’. Is it cheap? Is it expensive? What is the expected future growth compared with the historic growth trajectory?
What is the sentiment coming from the analysis community? How good is the management team based on historic decisions?
All this process clearly has its advantages, but makes the strategy less maneuverable. ‘From October to December, we were up 2.5%. But we cannot turn the portfolio on a dime. The positioning was entirely correct for the type of market we saw, but it was an extreme unwinding.’
Heslop is not one of those managers who likes to talk about individual stocks. But, as if to bear this out, the team has avoided attention-grabbing names. A good example is the absence of the so-called ‘Faang’ stocks (Facebook, Amazon etc) and their ilk.
Instead, the strategy took a long position in IT over the last two years, investing in companies at lower levels of the food chain who are the suppliers, such as chipmakers.