Summary: The Templeton Global Equity Fund looks for undervalued stocks, such as a number of global banks and companies in Europe. About a third of the portfolio is in the US, although it’s getting harder to find value there, and a little under 10 per cent of the portfolio is in oil stocks.
Key take-out: Over the five years to July, the fund is 70 basis points ahead of its benchmark after fees. The fund is quite different to its index and better suited to investors who are more patient.
Key beneficiaries: General investors. Category: Shares.
Five years ago fund manager Peter Wilmshurst positioned the Templeton Global Equity Fund to be underweight the US and overweight Europe relative to its benchmark, the MSCI World Index.
As the US market soared, it was a much steadier pace across the Atlantic. While Wilmshurst acknowledges he was too early to move on Europe, the fund has still managed to deliver returns just ahead of the benchmark – an impressive 15 per cent every year for five years – which all comes down to stock selection.
So where does Peter see value in the future? He says it is getting harder to find any in the US and Europe still stands out as the most undervalued region. He’s banking on a European earnings recovery and says some significant companies are currently offering 20 to 40 per cent discounts. Time will tell whether this position will deliver outperformance. Wilmshurst just asks investors to be patient.
Templeton performance, past five years. Source: Templeton
Templeton Global Equity Fund manager Peter Wilmshurst. Source: Templeton
DD: The fund invests in undervalued global equities. What do your investments look like?
PW: We take a completely unconstrained view of the world so they can really be in any sector and almost any country. We try to buy stocks on single digit multiples of earnings five years out. So we try to think about where a company’s earnings, cash flow and balance sheet will go over that timeframe. We have quite a diversified portfolio, so on average we own around a hundred stocks.
What stock really excites you just now?
We think there are a number of banks around the world are very undervalued – and HSBC is a standout. Obviously they’re closely linked to China so that’s going to be an interesting thing they have to deal with over the next six months, but it’s one of the best global franchises that we can find. They’ve had to move their way out of the US market where they bought the wrong asset at the wrong time and that’s caused them no end of headaches, but they have a new management team which has made very substantial changes to that business. They’ve got substantial excess deposits and today you can buy it on just over one times tangible book value.
What’s your view on the eurozone stocks?
At current prices, we think Europe stands out as the most significantly undervalued region. I think we’re still relatively early in the recovery. It had back-to-back recessions prompted by various factors, but when you look at the issues that had been causing problems for Europe we’ve really seen a number of those start to fade away. We’ve got a significantly lower currency which is providing a support for the region. We’ve now got a bank channel which is again working with more demand from borrowers and more supply from the banks and we have support from a lower oil price. And then, Greece aside, you’ve got less fiscal austerity as they’ve already made some pretty significant strides in tightening up their budget accounts. Compared to similar companies in the US, we think there’s a 20 to 40 per cent discount because they are European. Now, we’ve really got to focus on whether they can start to deliver some of that earnings catch up versus the US because European margins are far from their peak.
About a third of the portfolio is in the US. Is there much value to be found?
We still continue to find some new names coming on our bargain list, but it’s getting harder and harder. You’ve got a market which – when you look back over the last 35 years – is trading at a more expensive valuation than the average history. Whether it be on price to book or price to trend earnings, you’ve got margins which are already at their peak.
You mentioned lower oil prices as a positive for some stocks... but does the fund have much exposure to oil?
Yes, it’s a bit under 10 per cent of the portfolio which is a combination of oil services, integrated oil companies and then a bit of exposure to the exploration and production side of things. We don’t have strong convictions on where it’s going in the short term, but when we look at the ultimate supply, what those companies will need to cover their costs and provide a return, we think the right oil price is more in the $US75-$US80 type range which is obviously a long way up from here.
Have you done anything to position the portfolio for an interest rate increase?
Yes we have. Ultimately it’s very hard to know if they will raise rates within our investment time horizon. I guess when you look at the stocks we hold in the US, half of our holdings are either in financials or in healthcare. We’re not too worried about healthcare as it’s generally not a discretionary purchase. What we’ve found with financials is that it’s actually become quite hard for a lot of them to make money off their deposit books because interest rates are so low. So we actually think a slightly higher level of interest rates would be beneficial for the financials and most of them are positioned for that increase.
I think that the bigger question is not the direct impacts from higher interest rates, but potentially the impacts we see more broadly through the global economy. It’s already having an impact on the currencies across the emerging markets more broadly, in Latin America and in a number of Asian currencies – obviously we’ve just had China depreciating the yuan. So the global emerging markets have taken on a reasonable amount of debt, certainly some of it in hard currency. We’ve also had a number of years where some companies have been borrowing inappropriately, so we’re going to have to work through the aftermath of that.
Over five years the fund has returned 15 per cent every year. Do you have an investment goal to beat your benchmark [MSCI All Country World Index]?
We do aim to outperform the index over time, but we do that by taking some significant positions away from the index. There have been some pretty wild swings within the past five years, and one of the positions we’ve had, which has been the wrong one, is to be underweight the US. We’ve certainly been early getting into Europe. If you go back since the start of 2010 the US market is up 80 odd per cent, Europe’s up 14 per cent, the emerging markets are down.
Have you made money in absolute terms after fees for investors over five years?
So the five years to July versus our benchmark we’re – after fees – modestly ahead by 70 basis points, so that’s certainly not what our goal would be. Our goal would be to outperform by more than that, but fundamentally we’ve been facing a very significant headwind in having been underweight the US. Now, that’s a headwind of our own making, but we’ve basically made up for that and more by picking good stocks across a number of sectors; in financials, some of the consumer spaces and then being overweight healthcare.
How confident are you that your current position will help you see some improvement in that figure?
Well, we’d be hoping the Europe versus the US performance swings around and starts to be a support to relative performance and we’re certainly seeing some signs of that in the first six months, but ultimately that’s going to depend on a European earnings recovery coming through.
We think we’re six years into a bull market, but it’s been very concentrated in the US. So it does feel like it’s time to rotate into some of the other markets, whether that be Europe or emerging markets and those are the areas where you’ve got opportunities for both profit growth and a rerating of multiples. So it does feel like the right time to make sure you have a significant portion of your global equity investment outside the US, but with the MSCI All Country World Index at more than 50 per cent in the US, there are plenty of managers who don’t.
What kind of investor does the fund suit?
I think ultimately the way we manage the portfolio provides quite a complement to a number of other global equity portfolios out there. Ultimately the fact that we’re willing to be quite different to the index means that we are patient and therefore better suited to investors who are more patient. We do take ourselves away from the index for what we think are the right reasons. At times that means we’ll lag the index as we have over the last year, but at other times we’ll outperform significantly, so we really need investors who are happy to buy in to that longer term perspective.
Daniella D’Ambrosio is a writer at brightday. The Templeton Global Equity Fund is available on the brightday platform, which allows a minimum investment of $1,000 in managed funds.