Developed equity markets provide attractive investment opportunities
Developed equity markets such as the US are attractive due to the low P:E ratios, and in spite of the high quality of company earnings, says Rowan Williams-Short, chief investment officer of Nedgroup Investment Advisors (UK).
Williams-Short, who manages several unit trust funds and hedge fund portfolios on behalf of Nedgroup Investments, said at an investment presentation in Cape Town that stricter accounting standards following the Enron-scandal in the US have largely contributed to this favourable state of affairs. â€œThe quality of earnings of American companies has seldom been so good, which means that developed markets are attractively priced. Stricter reporting standards have given far more transparency to balance sheets,â€ he said.
However, Williams-Short warned that other asset classes such as high-risk bonds (junk bonds) in the US and elsewhere have had an unnaturally low failure rate lately and this is a sign that a â€œveritable wall of junk bond defaults is imminent. This could be bad for holders of corporate bonds, yet perversely promising for distressed debt arbitrageurs.â€
Williams-Short emphasised that a fund of hedge funds is an excellent way of reducing - and avoiding - losses in volatile equity markets such as seen in the last couple of months. â€œFund of hedge funds are also an attractive alternative to bonds and money market funds.â€
â€œWhat investors like about hedge funds is that the percentage of rolling 36-month holding periods (of investments), which have had negative returns is very much lower for these funds than for major indices such as the S&P 500 and the JP Morgan World Government Bond Index.â€
Furthermore, research done over many three-year periods has indicated that the annual returns of â€œconventionalâ€ funds are significantly complemented by hedge funds â€“ pushing the efficient frontier out by several percent, he said.
Walter Aylett, who manages the Nedbank Bravata Worldwide Flexible Fund on behalf of Nedgroup Investments, shared Williams-Short sentiments about overseas developed markets. Aylett said at the presentation that the equity market in Japan is showing signs of recovery and that one of the fundâ€™s single biggest exposures (10%) is to Morant Wright, a small fund manager, who specialises in Japanese small/mid-cap shares.
He said that some US companies, such as Budweiser, offer superior returns to their South African counterparts, in Budweiserâ€™s case South African Breweries. Aylett remained optimistic about the future of Berkshire Hathaway, the company owned by investment guru Warren Buffet. Despite challenges such as Buffetâ€™s age, succession issues, and difficulty in finding large enough acquisitions, the company remains one of the most attractive investment opportunities in the US market. (Aylettâ€™s Nedbank Bravata Worldwide Flexible Fund has a 6% exposure to Berkshire Hathaway.)
Commenting on the South African market outlook, he said that bonds and property should be avoided and that equity markets will only provide modest returns. â€œStockpicking will be key,â€ he said.
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