How this fund manager consistently beats the market

It's hard outperforming the index year after year, but IanHeslop, head of global equities at Old Mutual, does. Here, he reveals the secret of his success.

Can you outline your investment approach to running global equity strategies?

I think the big problem running active strategies in any area really is consistency of return.  And for consistency of return for us, we need to generate returns across multiple different types of stocks.  So the style exposures that we have, whether the stocks add value or growth or quality or momentum type stocks, diversification across those stocks in our view leads to that level of consistency, and hence we can generate positive returns across multiple time periods.

How does your approach differ from the way most equity funds are run?

 So I think the big problem with outperformance of Global Equities, or actually any regional equity index, is consistency of return.  And it's very hard to get that level of consistency that you need to beat an index over the longer term, if you have only one type of stock in the portfolio.  

So what we try and do with the portfolio is diversify across these types of stocks, so we have stocks that are there because they're cheap, stocks that are good growth stories, etc., etc.  And that diversification leads to a level of consistency and return that is generating returns where over a three and five-year period we outperform the index on the peer group.

How have your funds performed over the last few years relative to their benchmarks and peer groups?

So they've been very strong, both the North American fund, the Asia Pacific fund, and the Global Fund, have all outperformed their peer group and their index over the that period of time.  And that again is to do with the fact that there’s a level of consistency in the return series, and it's a consistent return driven by diversification across these styles.

Could you talk us through some of the criteria by which you select stocks?  Which of these criteria have made the largest contributions to your funds' returns recently?

Stock selection is the vast majority of our returns.  We don't take big country bets, we don't take big sector bets.  When we’re looking at stocks, we look at many different things that other fund managers would look at.  So things like is a stock cheap or is it expensive, what’s it’s growth look like?  Do analysts like it?  Does it have management teams that are sensible in the way they make decisions?  But we do recognise explicitly that nothing works all the time, so you have to be very nimble about how you use each of these types of stock selection within a portfolio.  And adjust the portfolio and adjust the way you think about markets to reflect market change.

We've been very good at being able to do that over the last five to seven years where markets have been very changeable, and our ability to pick the right tool for the right environment has led to that consistent outperformance that you can see.

What is your current analysis of the market environment and how do you adjust your stock selection criteria to reflect that?

So at the moment I think we're going through a big change in market environment, the type of market that we're in.  Central banks have been really active over the past six or seven years, and we've seen the Fed starting to pull back.  That's having a big change in how the markets are behaving, in particular how stocks behave relative to one another, the returns of stock, one stock versus another has become very unstable.  How stocks move relative to one another is a very good predictor of certain types of markets as we move forward.

So the portfolio is changing to reflect that, and very much becoming more defensive really.  The defensive nature of the portfolio can be seen in many different areas, and we diversify across lots of themes as we talked about earlier on.  So diversification is there, but certainly more defensive than perhaps we were at the beginning of 2017 for instance.

This is the transcript of a video filmed on 5 June 2018. To watch the original video, please click here.

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