> Specialist Outlook> Global Equity Investment
I believe now is an opportune time to invest in global equities, and while markets may remain volatile in the short-term, investor fear is driving extreme levels of market myopia that is creating an attractive opportunity for longer-term investors.
Earlier in the year we saw an improvement in economic data, particularly from the US, and while this has softened somewhat recently, the world's biggest economy the U.S.A., continues to grow. Unfortunately investor sentiment has been damaged by continued turmoil in the eurozone. Whilst there have been some attempts at solving the crisis, investors have increased the discount rate that they apply to their investments to account for the perceived increased risk of a political policy error that could derail the global economy.
All that said, equities, in my opinion, offer a much more attractive proposition than say, 'safe haven' sovereign bonds - where real yields are negative - as investors have become very nervous about risk assets and are seeking to preserve their capital.
However, unlike indebted governments, the non-financial corporate sector is in pretty good shape, with many companies having rebuilt their balance sheets post the global financial crisis. Plenty are highly cash generative and are creating wealth for their shareholders in the process.
Levels of fear in the market at the moment are so high that nobody wants to take risk. This is setting up a very attractive opportunity for those with long-term investment horizons. Many companies having felt the pain of 'The Great Recession' are a lot leaner today and have good operating leverage.
My approach to investing is very much 'bottom-up' and is to identify companies that are improving their businesses in order to create greater wealth for shareholders. My primary focus is on company fundamentals and the starting point is always to understand the company's business model. I use a database of over 20,000 businesses which contains financial history going back as far as 1950. Importantly, I only invest in companies where these improvements are not recognised in their current valuation.
In the M&G Global Leaders Fund, my aim is to identify the best investments from all sectors and market capitalisations, internationally. The fund holds between 50 and 80 stocks and the active weighting of each investment is typically between 1% and 2% relative to the benchmark. All holdings are expected to contribute positively to performance, and a strong focus on risk management is employed to ensure that the portfolio remains appropriately diversified.
Examples of companies I am currently invested in include Ebay and Hitachi. Ebay has gone through something of a transformation. The management has done a good job nurturing Paypal, its payment service provider, which is becoming an ever more important part of Ebay's future growth prospects, while continuing to make its Marketplace an increasingly attractive sales platform for traditional retailers. The shares have performed well over the three years or so since we have been invested in the company and we continue to believe they are undervalued.
Japanese technology conglomerate Hitachi, is involved in several sectors from IT services to consumer electronics and even industrial products. However, many of these branches have been loss making, but management is now embarking on a turnaround programme of 'pruning these branches' to focus on its most profitable business opportunities.
Market volatility has seen the share prices of many companies dislocate from their fundamental value. In my opinion, today's market is about having conviction in companies that continue to act in the best interest of their shareholders, despite what can be can quite extreme share price swings. In practice, this means that you have to be prepared to support management teams through short-term difficulties as long as they continue to execute an appropriate strategy and ensuring that you have sufficient capital behind the companies that you believe in.
I continue to be confident that company fundamentals drive share prices over the long term. Despite what can seem like deafening market noise, having a long-term perspective has never been more important.
Aled Smith, Fund manager
Prices may fluctuate and you may not get back your original investment. For Financial Advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776
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