Attendees of the SFM Group International Investment Conference for Institutional Investors at the Hilton Hotel were introduced to a range of investment styles and strategies from leading European investment managers last Thursday.
In an earlier exclusive interview with the Financial Mirror, one of the event’s speakers, Dr Orun Palit, head of Equity at AIG Global Investment Group (Switzerland), explained the investment philosophy behind the AIG Equity Fund Europe.
This fund is mirrored as the European Equity sub-fund in the World Investment Opportunities Fund (WIOF), which the SFM Group has just launched in Cyprus.
WIOF is a Luxembourg-domiciled SICAV with some EUR 100 mln under management, including the Greece-Cyprus Opportunities Fund managed by Laiki EDAK and Asset Management.
Not just blue chips
One of the key features of the AIG Equity Fund Europe/WIOF European Equity is that it does not just invest in blue-chips: around 30% of the CHF 1.5 bln fund is invested in small and mid-cap stocks.
Investing in smaller-cap stocks brings several advantages.
First, it raises the chances of beating the index, since a blue-chip fund is by its very nature more likely just to follow the index, or the fund’s benchmark.
“There is a bigger potential to play different kinds of themes,” said Palit, including companies with high earnings growth, niche players, or those with a dominant market position and therefore strong pricing power.
“There are also more turnaround stories,” he said.
Second, by focusing on small and mid-cap companies within German-speaking Europe, the small Swiss-based team of portfolio managers can investigate very closely the companies in which it chooses to invest.
This is important for an investment strategy that is both qualitative and quantitative and “80% bottom-up driven”.
Qualitative research means “meeting the management, analysing products, markets, the competitive environment and the news flow,” said Palit.
The importance of language
Palit and his team have found that focusing on German-speaking small and mid caps allows them to specialise and also brings other advantages.
“A lot of these CEOs and CFOs do not speak English so well. They can more eloquenty express what their strategy is about in their own language,” said Palit.
Portfolio managers therefore gain a much deeper understanding of the company.
Another advantage of small and mid-cap stocks is that they are not covered by many analysts, which means they could be under-invested.
“Some may be covered by only one broker house,” said Palit, compared with over 50 people covering blue-chips like Novartis on both the buy and sell side.
“That means you can make some good stock-picking choices by visiting the managers.”
However, if a stock is under-invested, it also means that portfolio managers have to be careful to build up positions slowly, so that there is a liquid market for the stock if they want to exit.
From 900 to 20-40
From an initial “universe” of 900 companies with a market cap of 10 mln to 5 bln Swiss france (CHF), AIG Global Investment Group does quantitative liquidity and earnings screening on 250.
From this list, it picks around 50-70 companies on which it will carry out in-depth qualitative analysis, including meeting the management, visiting production sites, conducting internal and external valuations and so on. From that list it will finally pick between 20 and 40 stocks to include as actively managed stocks in the portfolio.
This investment style–of close evaluation of companies via company visits–is why Palit and his team focus neither on pure value nor pure growth styles.
“We are active managers who believe that over time neither growth nor value investment styles will prevail,” he said,
Indeed, analysis conducted by AIG Global Investment Corp shows that focusing exclusively on one or the other can produce under-performance for several years.
Investing regularly is best
Palit says that the best way to invest in equities is regularly and over the long term: at least five years.
“If investors invest in equities–it doesn’t matter if they started three years ago or now–then the horizon always needs to be around five years in order to bear the ups and downs of the stock market.”
For similar reasons, it is better to invest regularly than in big chunks, hoping to catch the bottom of the market.
“The wiser investment strategy is to invest on a regular basis and not care about swings. Even we as professionals find it hard to time the market,” he said.
As of March 31, 2006, Feri Trust ranked the one-year performance of the AIG Equity Fund Europe at number 5 out of a total of 202 European equity funds, with growth of 44.95%.
The European Equity fund has a tracking error of 4-6%.
“That means that there is a two-thirds probability that you will outperform the benchmark by 2-6%”, said Palit, while noting that the probability also works the other way round.
European Equity’s benchmark is the MSCI Europe Total Return in euros and as of April 30, had outperformed the index by 8.85% over the previous year.
Fiona Mullen
