Andrew Yeadon*, Head of Investments in London for Nedgroup Investments, takes us through his current favourites – and sectors he’s avoiding. Taster: He is building up the cash holdings to take advantage of probable opportunities from some areas that he reckons are overheated, but is still keen on opportunities in European equities. – Alec Hogg
This special podcast is brought to you by Nedgroup Investments. Andrew Yeadon is the Head of Investments of Nedgroup Investments in London. Andrew, it’s a little different, what you do over there to the ‘best of breed’ approach that Nedgroup tends to follow in South Africa.
Indeed. We have an international team over in London. We have a team of five, based in London and our primary responsibility is to put together international investment solutions, which are distributed to investors who want a global solution. They’re Dublin-listed funds and the client base is partly South African, but partly international.
Why listed in Dublin?
Well, Dublin’s a very good regulatory environment to work in. Typically, international investors look for funds that are regulated under a UCITS environment and there are three main places that offer this. Dublin, Luxembourg, and the U.K. Dublin happens to be the place that we’ve chosen. It works very well for our clients.
Are they Unit Trust funds?
Yes, they are. They’re day-traded. Of course, investors that invest in them are protected by the regulations that come with UCITS so there are requirements in terms of liquidity and investor protections as well, which I think is the main reason why UCITS have become the vehicle of choice for international investors looking for this kind of thing.
You’re then outperforming (or trying to outperform) people running other portfolios. Just from a more specific point, this is the week when the quarterly results start in the United States. Would something like that keep you occupied?
Yes, of course. We run essentially three strategies. We have an Income Fund, a Balanced Fund and a Growth Fund and all of them are mixed asset solutions, so any one of them will appeal to different types of clients. Some of them are portfolios that potentially offer low growth, but have less risk. With others, the growth end of things will offer more growth but come with more risk, and they’re very global in that respect if we are looking to add value by asset allocation. We’ll vary the mix in terms of how much we have in equities, property, fixed income, what types of biases we have. In addition, we manage the currency as well, so we have to think about all of the macro side. As well as that, we do a lot of manager research. For example, a Multi Manager, which means that in the various different specialised areas that we’re investing in, we’re reviewing lots and lots of high quality managers and picking those managers that we think can do the best job for our clients. We do both manager research as well as macro asset allocation work.
You wouldn’t specifically look at underlying Equities, though.
We don’t buy the individual stocks. We go out and find people that we think can do a much better job than us at that. We’re essentially outsourcing that part of the job but of course, we monitor them. We make sure that we select very high quality managers and then we bring them together with other managers that they’d compliment and managing the asset allocation and the currency with putting the whole solution together for our clients.
Let’s just start with the Balanced Fund. It’s a good, safe, conservative type but with some equity exposure. Which are the managers have you given most of your funding to there?
Well, I should just say that in terms of the Balanced Fund … If I could just start with what the asset allocation would normally be, we’d normally have about 40 percent in Equities and 40 percent in bonds with the balance in cash and property. Right now, within Equities, we have a blend of managers. We typically have a bias towards value. We have managers like Veritas in the portfolio. In fact, we’re accessing Global Equity through the Nedgroup, but the underlying manager is Veritas. We also have another smart beta-type product, a more quantitatively driven product managed by a firm called Toban. We also have Morgan Stanley Global Brands, which typically has a bias towards quality. We have some Tracker Funds. We’re always keen to keep our costs as low as possible and we can get access to very low cost Tracker Funds, which keep our expense ratio in check. It’s a blend of both Passive and Active and typically, a bias towards value. We have about seven Equity Funds. We have some Emerging Market Funds as well. Locally, in South Africa, there’s a very good group of Emerging Markets, called Coronation – Coronation Global Emerging Markets – which sits alongside a tracker that we have in Emerging Markets.
What is typically your split between tracker and the allocations to these Active Managers? In other words, how much might be Passive versus Active?
Well, it can go up to 50 percent in Passive. Right now, I’d say that within the Equity component, it’s sitting at around about 35 percent in Passive and 65 percent in Active Funds. Typically, when we look for Active Managers, we’re looking for managers that set themselves ambitious goals that have proven track records, have the resources we think, and the ability to continue to deliver to the clients. We’re look for managers that we can get access to without too much expense for our clients as well. Obviously, we’re very cost conscious. The other side of the equation in terms of including Passive of course is something we can use to bring down our total expense ratio and make sure that we’re competitive. We like to blend. We think the two can complement each other very well.
You’ve mentioned costs a couple of times. What is your total expense ratio?
Typically, it does vary a bit, depending on asset allocation. Some access to some types of products may come at a lower cost than others but typically, the underlying funds will cost 60 basis points to access the best in breed of each asset class as we see it. Of course, on top of that, you have the other charges for asset allocation and delivering the package solution, which again, varies depending on our clients and what share classes clients are using to access us.
How are you seeing the markets at the moment? Could you give us a feel of where you would be overweight, and in which parts of the world?
Well, I think it’s a very difficult time for investors, to be fair. When we look around the world, obviously, Central Banks are doing some very unusual things and I think it’s particularly difficult for clients that are looking to get returns. Now, they’re a bit more cautious because the actions of Central Banks in the advanced economies have led to zero interest rates for a very long time. If not zero, then very close to zero. Of course, they’ve also distorted the bond markets. The U.S. has stopped quantitative easing, but no sooner have they stopped, than the ECB started in Europe and that’s affecting the whole global bond market. Typically, investors that are more cautious would have included higher allocations of bonds. Since we can obviously see cash is virtually zero and bonds are very limited (we’re underweight bonds), but within bonds we’re choosing to buy into the high-yield sector and corporate bond sector because there, you can get enough yield to compensate you for the extra risk that you take on when you buy corporate bonds rather than government bonds.
We’re focusing within bonds, on having exposure to corporate bonds. We also have some Emerging Market bonds, which, because they haven’t performed so well over the last couple of years, have started to look interesting on the valuation case, so we do have some exposure there. We’re also looking in another asset class at overweight property. We have exposure to a global refund. We think refunds did extremely well last year, but we think they still have some legs to the story. They don’t look overvalued to us. They haven’t been a popular area for investors. They haven’t performed well, but when we looked at some of the other investment opportunities available to investors, we think they stack up pretty well. We have a U.K. commercial property fund – S.N.C. Property Trust -, which invests directly into commercial property in the U.K.
Again, the U.K. commercial property market is having another strong year this year and it yielded five-point-seven percent at the end of last month. That’s the yield of the average Property Fund. We think that commercial property, relative again to cash in bonds, is attractive so we’re overweight there. As I said, we have exposure to both Reeds as well as the U.K. commercial Property bond. On Equities, we’ve been overweight for a few years based on valuation. We thought equity valuations, in an absolute sense, looked good a couple of years ago. We certainly thought they looked very good on a relative basis when we compare them to cash and bonds. Equities have performed very well and I think we’re starting to get to the point where the U.S. market is a bit ahead of itself. We think that the non-U.S. markets, Europe, and Emerging Markets are more attractive so we’ve actually been reducing Equities a bit.
From our longstanding position of being overweight, we’ve moved back more towards neutral but within Equities, we have a very strong bias towards the cheap and non-U.S. market – places like the U.K., Europe, and Emerging Markets. Not only are they the places where you have the markets on lower PE ratios, but they’re also the markets where, for various reasons, I think there are more recovery prospects. The European economy has been in the doldrums for quite a long while. It’s starting to pick up. If you look at profit margins in Europe, they’re much lower than in the U.S. so there’s quite a lot of potential for European earnings to start to grow quite rapidly off a low base. What will really help that is the fact that the Euro, of course, is much lower than it was a year ago and the ECB starting its QE was very keen to get the Euro down to a more competitive rate.
Those companies operating in Europe are going to benefit a lot from that much lower Euro rate when they start to report their results this season. We like Europe. We like the U.K. We like the Emerging Markets and we much prefer them to the U.S. But it’s important to remember that when you invest in Global Markets, half of the world’s equity markets are the U.S. The fact that the U.S. is probably getting a bit ahead of itself is one of the reasons why we’re currently just being a little bit more cautious in our equity allocation. Neutral Equities … underweight bonds … Within bonds, we focus on the short-dated sector. Overweight corporate bonds … underweight government bonds … a bias towards Emerging Markets. We have overweight property, both global and in the U.K. and then we have some cash reserve that we’re starting to build up just in case there is some kind of correction.
That will give us room for manoeuvring, perhaps – some cash that we can put back into the markets at the lower levels.
*Andrew joined Nedgroup Investments in January 2012 as Head of Investments – London, following 11 years with Schroders Investment Management. During his time at Schroders he formed their Multi-Manager Team which saw the GBP130m of seed capital provided in 2003 grow to GBP1.6bn by 2011. Prior to joining Schroders Andrew spent 12 years at Brinson Partners (now part of UBS) where he progressed from being a graduate trainee to Head of European Equity Strategy and Portfolio Construction. At Nedgroup Investments, in addition to his responsibilities heading the London based Multi-Management team; he chairs both the International StratCom and the Global Investment Committee. Andrew is a member of the Board of Directors of Nedgroup Investment Advisors (UK) Limited.
