Global equities - facing headwind

08.02.2018

The return on Global Equities was rather solid in the past year (6% in 2017) – but not high enough to match the benchmark return. The boost to the value and momentum style paved the way for good chances of outperforming the equity market. So, what went wrong? And what is the future strategy?

The target of our global equity strategies Global Equities and Favourite Equities is to offer our investors a return which is above the return in the global equity market. The excess return is generated through exposure against value and momentum (factor exposure) and through the selection of the best equities within this category (selection). We do not necessarily expect a positive contribution from both sources of return in all years but on average over time.

If we take a look at the historical performance of Global Equities, an excess return has on average been generated from our factor exposure in seven out of the past eight years. The positive contribution has been 0.86 percentage point per year on average. During the same period of time we have seen a positive contribution from selection in five out of eight years of 0.76 percentage point per year on average. So, both sources of return have contributed positively.
 

  Relative return exclusive of costs Contribution
Factor exposure
Contribuion
Selection
2010 4.04% 0.74% 3.29%
2011 4.20% 2.72% 1.48%
2012 -0.33% 0.95% -1.28%
2013 3.96% 1.43% 2.52%
2014 0.42% 0.98% -0.56%
2015 5.17% 2.84% 2.33%
2016 -3.66% -4.36% 0.70%
2017 -0.90% 1.54% -2.44%
Average 1.61% 0.86% 0.76%

Source: Bloomberg

Performance in 2016 and 2017 was disappointing with underperformance of 3.66% and 0.90%, respectively before costs. As appears from the table, there are various reasons behind the underperformance in these two years. In 2016, the value and momentum investment style was challenged. On the other hand, our share selection compensated for part of these negative trends. In 2017, we saw tailwinds from the investment style, but unfortunately a negative contribution from selection. It was particularly our share selection within the consumer discretionary sector that pulled down the return.

Pandora, Footlocker and Autozone were among the largest negative contributors – and a common feature of these companies is a turbulent price development where concern about disruption was a costly affair. The scope of the shares' de-rating in the market took us by surprise and resulted in an element of incorrect timing in our sales decisions.

We do not change our approach to share selection because of the results generated in 2017. We continuously endeavour to refine our way of selecting shares, and on an ongoing basis we also develop the other parts of our investment process – focusing on both excess return and risk. We believe - backed by history - that the combination of value and momentum truly is a superior investment strategy - despite occasional headwinds.