The global financial crisis changed a lot of things for funds managers, but one of the least-well publicised affects has been a resurgence in the comparative fortunes of top-down managers. This is happening at a time when there is talk of “deglobalisation”, also in the wake of the crisis.
Eaton Vance and one of its associate managers, Hexavest, based in Montreal, have produced a white paper on “Investing in the new era of ‘deglobalisation’”, in which they argue that the co-operation between countries which had occurred for decades and aided cross-border investing and trade, outsourcing of various processes and the development of new markets is giving way to competition.
“It is much easier to collaborate in times of prosperity than in times of austerity,” the paper says. Such an environment, with increasing regional differences, is more suited to top-down management.
Jean-Rene Adam, the assistant CIO of Hexavest, says that prior to 2008 there was always a “head wind” for top-down managers when presenting their capabilities to potential clients. “But everything changed in 2008,” he says. “Macroeconomic factors have become major drivers of market returns.”
Eaton Vance acquired its 49 per cent interest in Hexavest last year. Most of the senior staff have retained shares. The Canadian global equities manager has about A$17 billion under management, A$3.5 billion of which is Australian sourced. Adam points out that not one senior employee has left the firm in more than 20 years.
The white paper says: “In the deglobalisation era, we believe that the value of the top-down approach will likely increase, as will the challenges to managers, with market dynamics shifting in a fiercely competitive landscape.
“Generating alpha will require recognizing and managing events such as trade wars, currency devaluations and wider disparities between winning and losing countries. Japan’s aggressive devaluation of its currency in recent months is a notable example of this kind of event.
“The ability to identify relative value within and among all levels of alpha sources – regions, countries, currencies, sectors, industries and stocks – has always been a key to success in top-down investing. Without a global economic tide lifting all boats, it becomes even more vital.”
Since inception, in 1999, Hexavest’s main global equities composite strategy (including discrete mandates) has added an annualized 3.6 per cent value above the MSCI World index. While its average success rate, in terms of value-add, is 73 per cent, it tends to perform exceptionally well in down markets (98 per cent).
Adam says that there tends to be about 50 separate active bets in the typical Hexavest global portfolio of about 320 names.
The white paper says: “As the world enters a period of deleveraging and loses the shock absorbers provided by conventional monetary policy, economic growth in developed economies will likely be much more muted and volatile than we experienced in the last decades.
“We believe that the weakness of developed countries will also affect emerging nations, which more than ever are integrated in the global economy. To compensate for weak external demand, developing economies are increasingly relying on credit to support domestic growth. China and Brazil, the two largest emerging economies, now have quite alarming debt levels, at 187 per cent and 69 per cent of GDP respectively. Their margin of action is narrowing.”