Going global on absolute terms

By Maike Currie, 01 September 2010

Global income is a bandwagon at the start of its journey. There is only a limited choice of funds, and many of those have only a short track record to assess. One of the more established - with funds in place since the start of 2006 - is Veritas, whose Global Focus, Global Equity Income and Global Real Return funds are all managed by Andy Headley.

Mr Headley has a different remit to many fund managers. For a start, he's relatively unconcerned with quarterly window-dressing.

"Everything we do is based on generating absolute or real returns over a sensible time frame, which we see as a three to five year horizon. We are not trying to prevent a negative quarter or a negative six months and we're clear about this with our investors. Short-term trading is not our skill set. We aim to deliver good returns over the long term," he says.

Many managers make similar claims, especially in the absolute return space, but don't live up to them. So far at least, Veritas' funds have brought home the bacon; the Veritas Global Equity Income Fund has returned 40 per cent since inception - equivalent to a compound annual return of around 8.7 per cent - and boasts a running yield over five per cent.

However, Mr Headley freely admits that times won't always be so rosy. The focus on absolute returns means that any outperformance of equity benchmarks will be most marked in modest markets. When shares are roaring ahead, there will be periods when the funds will lag. He is relaxed about this - and says his fundholders are too - because he is confident that over the three- to five-year investment horizon, the funds will deliver a consistent performance.

Despite their roaming-the-globe mandate, all three funds have a surprisingly concentrated portfolio, sometimes containing as few as 25 holdings and rarely more than 40. Mr Headley is unrepentant about the risk such concentration potentially brings, saying simply that "good quality companies at attractive valuations don't come around that often."

Investment process

The process that leads to these holdings is similarly focused. It starts from the bottom, with quantitative screening for valuations and other metrics. The company also relies quite heavily on qualitative and informed external opinion to assess companies.

All these techniques produce a potential universe of investments which is then narrowed down using a thematic approach. "We use themes to narrow down our universe, and therefore we don't want 15 plus themes - that is not going to narrow down things at all. What we want to focus on are the very high conviction themes which will come to fruition and give significant benefits to the investor," he explains.

What themes might these be? Mr Headley is keen to differentiate between slow-burning ideas and ones that could deliver a more rapid payback. He cites demographics as a classic slow-moving theme. "It is very important in investment to understand the dynamics of demographics, but over a three to five year investment horizon, demographics is going to make a very tiny difference to the profits of any given company," he explains.

The final requirement for an investment theme is that it needs to be possible to populate it with investable ideas, which Mr Headley says is often more challenging than one might expect. He uses the example of renewable energy. "Renewable energy is very interesting and governments are going to spend a lot of money on it. So yes, we are very confident that it will come to fruition and we are very confident that the companies that are beneficiaries will see a substantial benefit. But we can't say at this stage who is going to benefit."

"It is very difficult to assess – will it be solar or wind power? These companies also rely on government support and governments have a tendency of waxing and waning on where they will give support. We try and avoid themes where we can't establish who the winner is going to be at the end of the day."

The approach has some things in common with the one used at Newton, another asset manager with a taste for thematic investing, and Mr Headley's employer for some five years. Newton is now owned by US giant BNY Mellon. But there are differences, too, since Veritas' approach starts at the bottom. "Themes are part of our narrowing down process only. If a company does not fit into a specific theme, we might still add it to the portfolio. We invest in companies based on bottom-up investment process.

"Thematic investing runs the risk of becoming momentum investing if you are only invested based on themes," he explains, using the example of emerging market consumer stocks. The theme might be solid, but high valuations here are already discounting a good future.

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