1 CONNECTIONS www.kl-communicaons.com - February 2015 The aggressive oil price decline has sent shockwaves through the energy-heavy US high yield market Ardevora wins A$200m Aussie super mandate Ardevora Asset Management has been awarded a A$200m global equity mandate from Australia’s Commonwealth Bank. The superannuaon fund man- date is managed by Ardevora’s highly-regarded team of Jeremy Lang, William Passon, Gianluca Monaco and Ben Fitchew. Ardevora’s investment process is grounded in cognive psycholo- gy and aims to exploit biases inherent in three equity market parcipants: company manage- ment, analysts and investors. Formed in 2011, Ardevora has AUM of US$1.7bn and runs four specialist equity strategies. “We are extremely proud to be working with the CBA and it is a strong validaon of the process we follow,” Lang says. “We view people as error prone and see investment as a process of recognising where others involved in the market are most likely to be wrong. Our edge comes from viewing markets in this way – how and why people are wrong – rather than fixang on why we, as investors, are correct.” US high yield (HY) has come under pressure in recent months as the energy-heavy market sold off sharp- ly on the plummeng oil price. Spreads for the US HY energy sector more than doubled during the sec- ond half of 2014, rising from an average of about 400bp over the first eight months of the year to 877bp in November. It has since stabilised somewhat, but spreads sll stand above 700bp. The energy exodus also led to some indiscriminate selling across the enre US HY universe, which is now at a mul-year valuaon discount to the European HY market. “About 18% of issuance into US HY last year was energy. There is an old rule of thumb in HY, do not buy the sector issuing the most,” Henderson Strategic Bond Fund manager John Paullo says. Paullo and co- manager Jenna Barnard have no energy exposure. “Lower oil has not washed through the numbers yet,” Paullo adds. “It is probably beer the lending has gone via the bond market, rather than the banks, as the risk should be dispersed.” The Hermes Credit team is more bullish, however, moving to a mod- est overweight posion in energy. “Despite the slide in oil, the US shale boom is definitely not over,” senior analyst Ron Daigle says. CONTINUED ON PAGE 2 Plummeng oil pressures HY P2 EUROPEAN QE AND THE ONGOING CRISIS IN GREECE Three top managers give their outlook on Europe as the ECB unveils QE and Greece changes leadership. P3 OPPORTUNITIES IN UNLOVED GLOBAL EQUITIES T. Rowe Price’s Sco Berg believes the current investor cauon has created opportu- nies in quality cyclicals. P3 ALKEN’S WALEWSKI SNAPS UP STAKE IN APPLE Alken Asset Management founder Nicolas Walewski iniates a large posion in tech giant Apple. P4 Q&A: REDINGTON’S PETE DREWIENKIEWICZ Redington’s head of manager research discusses changes to the consultant’s manager selecon framework. “Credit is trading at close to all-me ght yields and all- me high prices, but the quality is deteriorang and the structure of the market is less stable than in the past” – Stenham’s Tim Beck
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CONNECTIONS www.kl-communications.com - February 2015
The aggressive oil price decline has sent shockwaves through the energy-heavy US high yield market
Ardevora wins A$200m Aussie super mandate
Ardevora Asset Management
has been awarded a A$200m
global equity mandate from
Australia’s Commonwealth Bank.
The superannuation fund man-
date is managed by Ardevora’s
highly-regarded team of Jeremy
Lang, William Pattisson, Gianluca
Monaco and Ben Fitchew.
Ardevora’s investment process is
grounded in cognitive psycholo-
gy and aims to exploit biases
inherent in three equity market
participants: company manage-
ment, analysts and investors.
Formed in 2011, Ardevora has
AUM of US$1.7bn and runs four
specialist equity strategies.
“We are extremely proud to be
working with the CBA and it is a
strong validation of the process
we follow,” Lang says.
“We view people as error prone
and see investment as a process
of recognising where others
involved in the market are most
likely to be wrong. Our edge
comes from viewing markets in
this way – how and why people
are wrong – rather than fixating
on why we, as investors, are
correct.”
US high yield (HY) has come under
pressure in recent months as the
energy-heavy market sold off sharp-
ly on the plummeting oil price.
Spreads for the US HY energy sector
more than doubled during the sec-
ond half of 2014, rising from an
average of about 400bp over the
first eight months of the year to
877bp in November. It has since
stabilised somewhat, but spreads
still stand above 700bp.
The energy exodus also led to some
indiscriminate selling across the
entire US HY universe, which is now
at a multi-year valuation discount to
the European HY market.
“About 18% of issuance into US HY
last year was energy. There is an old
rule of thumb in HY, do not buy the
sector issuing the most,” Henderson
Strategic Bond Fund manager John
Pattullo says. Pattullo and co-
manager Jenna Barnard have no
energy exposure.
“Lower oil has not washed through
the numbers yet,” Pattullo adds. “It
is probably better the lending has
gone via the bond market, rather
than the banks, as the risk should
be dispersed.”
The Hermes Credit team is more
bullish, however, moving to a mod-
est overweight position in energy.
“Despite the slide in oil, the US
shale boom is definitely not over,”
senior analyst Ron Daigle says.
CONTINUED ON PAGE 2
Plummeting oil pressures HY
P2 EUROPEAN QE AND THE
ONGOING CRISIS IN GREECE
Three top managers give
their outlook on Europe as
the ECB unveils QE and
Greece changes leadership.
P3 OPPORTUNITIES IN
UNLOVED GLOBAL EQUITIES
T. Rowe Price’s Scott Berg
believes the current investor
caution has created opportu-
nities in quality cyclicals.
P3 ALKEN’S WALEWSKI
SNAPS UP STAKE IN APPLE
Alken Asset Management
founder Nicolas Walewski
initiates a large position in
tech giant Apple.
P4 Q&A: REDINGTON’S
PETE DREWIENKIEWICZ
Redington’s head of manager
research discusses changes
to the consultant’s manager
selection framework.
“Credit is trading at close to all-time tight yields and all-
time high prices, but the quality is deteriorating and the
structure of the market is less stable than in the past”
European volatility: Views on QE & ongoing Greek drama
CONNECTIONS
Plummeting oil price pressures high yield (cont.) Daigle adds: “In the HY space, we
prefer low-cost producers with
substantial existing and untapped
reserves, with a sustainable drilling
program supported by price hedg-
ing of expected production.
“This provides clear visibility of
expected cash flows. We also prefer
companies with a relatively bal-
anced production profile of natural
gas and liquid resources. The most
highly levered balance sheets with
the poorest asset quality will likely
end up defaulting, but we believe
most companies will not.”
The sharp oil price slide is a good
reminder for investors to diversify
globally, T. Rowe Price European
High Yield Bond Fund manager
Michael Della Vedova says.
“While energy companies account
for around 14% of issuance in US
HY, it only represents 1% of a typi-
cal European HY index,” he says.
“The ability to allocate to the Euro-
pean HY market at a time when we
saw heightened volatility in the US
was a stabilising performance tool
at our disposal in Q4 of 2014 for
most of our HY portfolios.”
While HY spreads have widened in
recent months, Stenham Credit
Opportunities Fund manager Tim
Beck says it still does not adequate-
ly compensate investors for the
inherent structural risks in the
crowded credit market.
“Much of credit is trading at close
to all-time tight yields and all-time
high prices, but the quality of issu-
ance is deteriorating and the struc-
ture of the market is inherently less
stable than in the past,” he says.
“If we experienced any shock, be it
credit or interest rate related, there
is no marginal buyer until yields are
substantially higher and prices con-
comitantly lower.
“For traditional investors in credit,
potential returns are constrained
and risks elevated. By contrast, this
creates a compelling case to invest
in specialist hedge funds, which can
short credit and also be a provider
of liquidity at much lower prices.”
Michael Della Vedova - T. Rowe Price
Stuart Mitchell – S. W. Mitchell Capital Most Anglo-Saxon investors have failed to appreciate the will in Europe to make the euro project work. Even in Greece, over
seventy percent of the population want to stay within the eurozone. The arrival of QE is an acknowledgement by core Eu-
rope that the periphery has reformed sufficiently and that the underwriting of peripheral debt can at long last be contem-
plated. It shows just how much the challenged peripheral countries have done to bring their houses into order. We may well
now be approaching a lasting resolution to the eurozone crisis. This all creates an extraordinary opportunity for investing in
the eurozone. Consensus expectations remain framed by fears of a ‘euro crisis’, and valuations are low. In fact, on one cal-
culation, current share prices can be justified only if you accept the notion that half of European companies will suffer de-
clining returns on capital employed into perpetuity. This is a clearly absurd assumption.
Sandro Näf – Nordea (Capital Four) Greece no longer poses the same systemic risks as a few years ago. Firstly, eurozone bank exposures to Greece are now
small. Should the market start to price in broader sovereign debt restructurings (or a ‘Grexit’ of the euro) it would primarily
hurt domestic banks in Greece, Spain and Italy – areas we are not exposed to. In addition, the ECB’s programme of Quanti-
tative Easing and Outright Monetary Transactions of sovereign bonds in the secondary market is now in place. Also, the
banking crisis in Cyprus showed that a deposit run in one eurozone country does not automatically trigger runs in other
countries. That said, Greek voters reflect a general discontent across the eurozone regarding austerity. Eurosceptic parties
are gaining in popularity across the peripheral countries and we believe investors should be prepared for idiosyncratic politi-
cal risks in 2015. We retain a large underweight in the peripheral countries – Greece, Italy, Spain and Portugal.
Neil Williams – Hermes Greece’s election was an untimely curve ball, but reminds us that, while QE may address one of the symptoms of the euro-
zone crisis – deflation – it is more reform that will be needed to solve the underlying problem. That problem is still a mone-
tary union devoid of economic union, which will take years of hard work. Our base case remains that Greece will stay in the
euro – partly, but not wholly, because of the incentive of QE. But, there could be political spill-over. With Spain and Portu-
gal’s own elections coming in 2015, the more Eurosceptic parties there will be watching Greece closely. The wider challenge
is to make sure the eurozone does not follow Japan and let deflation take root. QE has been running for 16 years in Japan,
with little inflation impulse. The ECB’s ‘tap’ may be finally on, but as Japan found out, QE acts like a drug: the more you use
it; the more you need it. Eurozone QE could thus be with us for many years to come – with or without Greece.
3
CONNECTIONS
Caution creates opportunities in unloved equities There are clear concerns in the
market that beyond QE, there is no
fundamental improving 'bull' case
for global equities. However, this
aggregate top-down perspective on
the world belies the ongoing
breadth of meaningful stock spe-
cific opportunities.
While it is common for sentiment to
soften in the mid-stages of the eq-
uity market cycle, we believe the
drivers remain in place for econom-
ic stability and improvement.
As growth fears dampen return-
seeking behaviour, we believe stock
specific opportunities are once
again emerging in high-quality cycli-
cal businesses. When comparing
industrials and consumer discre-
tionary stocks to more defensive
peers, valuations are favourable.
The poor performance of many
emerging markets has also led to
EM indices looking optically cheap
versus DM indices. It has certainly
been unusual in the context of his-
tory to see EM stocks perform so
badly in what has been a strong
period for global equities. We be-
lieve the unusually defensive
pattern of this market rally speaks
in part to elevated conservatism
post the shock of 2008. One ques-
tion over the longer term is wheth-
er risk appetites will return.
Perhaps more important than in-
vestor sentiment, we are waiting
for evidence of normalised risk
appetites at corporate level. Man-
agement teams remain cautious of
investing in a period where return-
ing capital to investors has been so
rewarded via stock prices. A return
to risk seeking behaviour by corpo-
rates is necessary to assume a nor-
malisation of global demand trends.
In the meantime, we believe the
caution has created opportunities
within unloved areas of the market,
including cyclical growth stocks in
both the developed and emerging
world. To evidence this caution,
European cyclical stocks have been
weak for much of the last year,
even when European stocks as a
whole were rising. This led us to
add to our overweight in quality
European-listed industrials, as well
as selective consumer discretionary
stocks as the market reached a
point of elevated fear last autumn.
We have also maintained an over-
weight position in emerging Asian
stocks, in economies and industries
that remain fertile with respect to
year-on-year compounded profits
delivery. Such growth may merit a
larger premium, as investors
acknowledge the end of the multi-
ple expansion stage of the equity
cycle and look to other drivers to
stock returns.
Elsewhere, we remain selective and
underweight the most defensive
segments of the market, believing
valuations for the most defensive
businesses will continue to normal-
ise versus the market over the next
stage of the cycle.
Scott Berg is the portfolio manager
of T. Rowe Price Global Growth
Equity Fund
Walewski adds Apple to Alken AR Europe Fund Alken Asset Management founder
Nicolas Walewski has taken a stake
in tech behemoth Apple.
Walewski says Apple will be a major
beneficiary of the falling oil price,
which will undoubtedly boost con-
sumer spending. Earlier this month
Apple became the first company to
close with a market capitalisation
above $700bn.
Walewski took a position in Apple
in the group’s €2.2bn Alken Abso-
lute Return Europe Fund in October
and has steadily built the position
to 5%. Apple’s share price has
climbed sharply over this period.
“Apple is a pure play on discretion-
ary spending, which has received a
massive boost on the plummeting
oil price,” Walewski says.
“Not only has Apple beaten consen-
sus, it destroyed expectations. Its
iPhone sales are incredibly strong
and it is taking share from Android.
It also achieved a better than ex-
pected average sale price, while
exceeding profitability forecasts.
“There is not a similar story to Ap-
ple to play in Europe. However,
Apple’s revenues are now global.”
Scott Berg - T. Rowe Price
Analyst added to the Evenlode investment team
Evenlode, the Oxfordshire-
based young and independent
fund manager, has further
strengthened its team with the
addition of analyst Chris Elliott.
Elliott will join Evenlode in
March from the Oxford Univer-
sity Press, where he has been a
software engineer for the past
five years.
A Cambridge graduate, Elliott
studied economics and mathe-
matics and holds all three lev-
els of the CFA.
He will work alongside manag-
ers Hugh Yarrow and Ben Pe-
ters on the top-performing
Evenlode Income Fund.
Launched in October 2009,
Evenlode Income has delivered
a 105.9% return since its incep-
tion to end January 2015,
against just 73.1% for the IA
UK Equity Income sector.
“After more than five years
since the launch of Evenlode
Income, the time is right to
add some further resource to
the team,” Peters says.
“Chris, with his strong analyti-
cal background, will be a great
addition to the team.”
Apple - ‘destroying expectations’
-20
-10
0
10
20
30
USA Asia Aus Jap UK EU LatAm EMEA
2013 2014
Source: Factset, MSCI
MSCI World regional performance (USD)
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CONNECTIONS
Q&A: Redington’s Pete Drewienkiewicz In this month’s Q&A, KL Connec-