Investors can expect to see more volatility in equity markets in coming months, and when they do the pattern of “sector dispersion” that occurred in October is likely to be repeated, a leading fund manager says.
Mike LaBella, the head of equity strategy at QS Investors, says that when volatility struck in February “everything sold off”. But in October the sell-off was marked by sector dispersion, with value stocks doing better while growth stocks fell back.
In most equity markets values indices outperformed growth indices for the month. Defensive sectors held up best in the US, with consumer staples, utilities and real estate posting positive returns.
LaBella says this sector dispersion presents an active manager like QS Investors with buying opportunities. QS, which is a quant manager affiliated with Legg Mason, sells one retail fund in Australia – the Legg Mason QS Investors Global Equity Fund.
The fund has a good long-term record. Over the past five years it has produced an average return of 16.1 per cent a year (net of fees), compared with the MSCI World Index (ex-Australia) return of 13.4 per cent a year over the same period.
Over the three months to the end of October, the fund was down 57 basis points, compared with a 94 basis point fall in the index. “We were well positioned for October,” LaBella says.
“We will see more volatility, and October gave us a view into what it will look like. It is an opportunity for active management. Index investing is not bad but index portfolios are not diversified; global passive equity funds are full of US FANG stocks and other IT stocks.
“Ten years ago, the US equity market was 45 per cent of the MSCI World Index. Today it is 60 per cent. If there is a reversion, those index portfolios are going to be penalised.”
LaBella says that at the end of October, the fund was attractively valued with a lower 12-month forward price earnings multiple than the benchmark. The fund was well diversified across regions and sectors. The largest region overweight was the US, while the biggest underweight was the resource-based New Zealand and Canadian markets. The fund was most overweight in consumer discretionary and most underweight in industrials.
LaBella argues that the global equity market will suit managers that have a diversified rather than a concentrated approach. “High concentration can give you big returns but also big losses,” he says.
The fund has a value tilt, targeting companies with attractive valuations, positive sentiment, above-average earnings per share and a record of faster than expected growth.