(Pictured: Ken McAtamney)
It is a particularly difficult time being an asset allocator at a super fund. Just about the only place where growth is mispriced, according to global manager William Blair, is Japan. Everywhere else is in balance.
In Australia, at least, there is the prospect that interest rates might edge down a little, making it slightly easier for fixed income managers. But most equity markets are at fair or full value – except, perhaps, Japan – and high-yield stocks are arguably overvalued.
Ken McAtamney a principal, portfolio manager and co-director of research at William Blair Investment Management, says that Japan, however, is “not a low-risk situation”. All three of the Government’s so-called ‘three arrows’ need to work. The third ‘arrow’ – that of corporate reform – is the most contentious, McAtamney says. But William Blair believes it is taking root and that government and corporate leaders are united in trying to reflate and growth the economy. The other two ‘arrows’ refer to fiscal stimulus and monetary easing.
“There will be a lot of mixed and anecdotal evidence as to whether the reforms will take hold,” McAtamney says. “It takes a long for government-driven reforms to take hold in a democratic society. The issue will probably be a disconnect of time horizons.”
As an example, the value of share buybacks by Japanese companies was by fare the greatest is history during 2014. But you don’t have to change a company to do a buyback, McAtamney says. Changing business practices takes a long time. The launch of the new JPX 400 index, with a tacit encouragement for companies to be part of the index, has also created interest because assessment includes ROE targets and corporate governance-related factors.
“With the [US] dollar strengthening and a weaker yen, Japanese exporters benefit,” he says. “There are also a lot of domestically oriented companies also showing improved performance. It will take a while to play out but we are very optimistic and we are overweight japan in the portfolios where we can be.”
William Blair’s global growth portfolios look for quality companies with a tilt towards leaders either globally or in their home markets. The manager believes such companies can best navigate macro turbulence, provide better returns in up markets and also protection in down markets. William Blair also incorporates ESG assessments within its analyses of quality growth stocks.
“Our definition of ‘quality’ is not just a technical one,” McAtamney says. “It’s more growth oriented. It includes intrinsic strategies, personnel policies, strong ESG and strong relations with customers. We see these attributes as being at least as important as the financials. The financials are more a bond holder’s view of quality. We use quality to predict future growth. And we believe we can find quality across the corporate development continuum.”
The risk at the large end of the spectrum is that the company is entering a period of ex-growth. The risk at the small end is a high failure rate, which William Blair tries to de-risk. It also believes there are lots of opportunities between the two ends.
Large quality companies can be innovative, McAtamney says. But they need to have a competitive advantage which can be maintained.