(pictured: Rupal Bhansali)
Australian investors are concerned about when and how they should apply extra risk again to their equity portfolios but, perhaps, they should be focusing more attention on their fixed income exposures, according to Rupal Bhansali, the visiting CIO of global manager Ariel Investments.
After several client meetings in Australia last week, Bhansali, who was promoting her Ariel Global concentrated strategy, said that one of the challenges for Australian super funds was that many active managers, especially value managers, had underperformed their benchmarks in the past couple of years.
Australian funds also tended to be overweight emerging markets ahead of the latest slide, either directly or indirectly through the local market’s bias towards resources. “The question is whether now is the time to go back in,” she said.
“But a question which did not come up, but I think it should have, is that people seem quite complacent abut their fixed income exposures and are mostly concerned about equity exposures. I think the debate may have been around the desire to find stability…
“But perhaps this is looking at asset allocation through the rear-view mirror. We expect volatility to increase in fixed income. We have already seen it in the high-yield market and it will probably extend up to the corporate bond market. We think that corporate profitability is likely to decline over the next few years.”
Bhansali said current market volatility represented attractive contrarian investment opportunities for patient investors. Today’s “obsession” with volatility was a phenomenon that was triggered by the global financial crisis. “People were so shaken during that period that they never want to feel that kind of pain again,” she said. “As a result, they are now convinced that the best way to avoid pain is to lower the volatility and downside risk in their portfolio. But just as greed should not drive a portfolio, neither should fear.”
“A contrarian approach, in our view, demands a willingness to embrace volatility when you are paid for it and a similar discipline to shun stability when you are asked to overpay for it.”
Bhansali says that Ariel, a US-based firm which opened an office in Australia run by Ian Webber in March last year, has managed to avoid two of the extremes of style investing by finding steady growth, rather than ‘heady’ growth of overshooting stocks, and avoiding value traps of cheap stocks which are cheap for a reason and remain that way.
She believes that the FANGs which have been the best performers globally until towards the end of last year (Facebook, Amazon, Netflix and Google) had only just begun to unwind. Other big internet stocks, like Linkedin, have suffered even bigger falls in the past two months. The challenge for many growth managers is that they overpaid for their growth stocks.
While Ariel is a long-only manager, Bhansali began her career in the late 1980s in the risky world of international commodities and currencies at Soros Fund Management. She joined Ariel in 2011 after 10 years running international equities at McKay Shields, a US-based boutique.
She says Ariel is one of the few active global managers to have outperformed in recent years. In the year to December last the Ariel Global equity composite outperformed the MSCI All Country World Index benchmark by 4.2 per cent, gross of fees, and 3.3 per cent net of fees for one year and 5.4 per cent gross (4.3 per cent net) a year over 3 three years.