Allianz Global Investors’ CIO equities Steven Berexa delivers an insight into his outperforming ‘best ideas’ Global Equity Insights fund
WELCOME
Allianz Global Investors’ presents the Allianz Global Equity Insights strategy: a high conviction, active, global fund that has delivered returns significantly ahead of the benchmark and peer group average since launch. In this eBook, global CIO of equities and lead manager on the fund, Steven Berexa, explains how the fund’s philosophy is based on numerous layers of research that are used to gain an ‘information advantage’ on global businesses which help the team identify mispriced stocks for inclusion in the portfolio. Berexa also reveals those stocks unearthed by the fund’s deep research methods that have actively added fund alpha in recent months and how key macro challenges over the past year have impacted positioning.
THE INTERVIEW
Allianz Global Equity Insights is genuinely research-driven; original analysis is common to everything we do
Steven Berexa,
Global CIO equities
JAPAN 3.7%
UK 4.7%
GERMANY 6.9%
FRANCE 5.7%
US 66%
5
4
3
2
1
Allianz Global Equity Insights TOP FIVE HOLDINGS
GAMESTOP
MOBILEYE
CITIGROUP
BANK OF AMERICA
JP MORGAN CHASE & CO
Allianz Global Equity Insights TOP FIVE REGIONS
Grassroots research
Company research
Multi-asset research
Marcoeconomic research
FUND'S RESEARCH PLATFORM
As the global CIO of equities at funds giant Allianz Global Investors, Steven Berexa is in a good position to identify high conviction stocks from around the world with the best upside potential in the current market environment.
Berexa is in charge of AllianzGI’s equity portfolio managers, who run some £120bn in funds across 25 markets worldwide. In his role as CIO, his discussions with them at a stock level are used to create a portfolio of ‘best ideas’ that help form the Allianz Global Equity Insights fund. Any stock owned by any AllianzGI portfolio manager around the world is a candidate for the fund regardless of any regional or growth/value biases. “Global Equity Insights is a focused, bottom-up, global equity fund that invests across the full market cap spectrum,” explains Berexa. “The fund’s philosophy was born from the idea that a big firm like AllianzGI has excellent ideas that can be captured to create a special portfolio of high conviction opportunities. We are offering investors a portfolio of special ideas from across the equity universe.” By targeting an unconstrained opportunity set that has so few restrictions, the Global Insights fund aims to deliver 3%-4% alpha per annum over rolling three-year periods. To date the fund has consistently outperformed, returning 125% over five years to 11 May 2017 versus the MSCI AC World’s return of 80%.
Research spotlight
Berexa notes the key to the strategy’s outperformance lies in the 315 people within AllianzGI’s equity business who are part of the “layers of resources” that form the fund’s research-driven investment strategy. “AllianzGI’s wide reach across the investment universe means that just about anything happening in the firm at a portfolio management level is potentially relevant to me as I consider how to construct my own portfolio of 50-70 stocks,” says Berexa, whose investment style echoes his previous title as global head of research at AllianzGI. Investment professionals at AllianzGI predominantly share research and investment ideas via a highly customised version of Salesforce.com’s cloud-based collaboration software. This promotes debate and discussion between portfolio managers, analysts and traders, allowing them share, explain and challenge each other’s ideas through ‘global collaboration’. However, Berexa additionally identifies stocks not owned in other portfolios at AllianzGI by using a proprietary and captive market research tool called Grassroots Research.
Inflation exposure
Grassroots is an investigative research arm that complements the research provided by AllianzGI analysts at a company level to identify undiscovered opportunities. The resource utilises traditional field research methods and speaks directly to the source to identify core information about a stock’s potential. This in turn helps Berexa crystallise potential new investment ideas. Berexa uses the example of AeroVironment, a small-cap defence contractor and leading manufacturer of military drones to explain the benefits of using Grassroots. “AeroVironment recently announced it had entered the agricultural drone market to assist farmers. The company has built a prototype and is working with three different universities to test the product. However, nobody has any idea of whether it is going to work. “If I put this question to Grassroots it is able to use external sources, such as journalists working on a per diem and research basis, to interview those people who are experts in the field, for example university researchers, who help us comprehend how good the offering is, what the return on investment is likely to be, and how important this technology is to farmers. ”Grassroots provides an ‘extra level’ of information Berexa would never have access to through traditional research means: “It is a real research-orientated capability that allows us to understand more about the true potential of stocks. And it is candid - I could not call the fund ‘Global Insights’ if I was working off information published for 100,000 other investors.”
Forward-looking scenarios
Meanwhile, AllianzGI’s own team of 60 specialist analysts look at how stocks might perform in a range of fundamentally-based scenarios. “The true currency of our centralised research process is these scenarios,” says Berexa. “We look at what may happen to a company in scenarios ‘A’, ‘B’ and ‘C’ and discover more about how sensitive the company is to specific drivers. So an analyst may express a scenario where AeroVironment has a successful launch of a drone business and what both the annual earnings and the price-to-earnings multiple may be for the stock.” This analysis prepares Berexa to act on his sell discipline; if a situation changes, he can often acknowledge the scenario has been discussed internally and it is problematic for the company.
“There is a sea of scenarios we analyse to make a decision to buy and sell. We synthesize each scenario and think about the way the probabilities are skewed.” Berexa admits his research is “common to almost everything we do” within the Global Equity Insights fund, with the group’s deep research methods helping them to be the best at understanding any market disruptions: “It is when all of this research is used together that we find a way to really drive the fund’s long-term performance.”
Source: PureGroup; As at 31 March 2017
FUND OUTLOOK
How is the Allianz Global Equity Insights fund positioned against key macro factors?
In association with
Allianz Global Equity Insights: Performance
The Allianz Global Equity Insights fund has been run by lead manager Steven Berexa since its launch on 1 June 2010. The fund has outperformed its benchmark MSCI World in all major market periods, returning 14.6% on an annualised basis versus the index’s 9.3% over five years. The fund saw one of its most successful periods of outperformance in 2016, when key bottom-up stock selection helped Berexa navigate turbulent global politics. During this period, the fund returned 18.4% (annualised), significantly ahead of the global equity index. Over five years, the fund is first quartile, at number nine out of a global equity universe of 298 funds*.
Allianz Global Equity Insights: Future outlook
While much concern around European political risks has abated, there is still considerable geopolitical stress across global markets. Europe and the UK still need to resolve its ‘conscious uncoupling’, President Trump needs to ease domestic concerns around his relationship with Russia, while long-term Middle Eastern troubles seem no closer to a resolution. There is much conjecture about the positive or negative impacts of geopolitical and economic challenges on investments and often it is used to fit a specific argument. However, focusing on data from leading indicators can help us to understand the impact these changes may have on funds. Though the Allianz Global Equity Insights fund is run on a bottom-up focus, with an emphasis on research at an individual stock level, looking at the fund through a macroeconomic factor lens can help investors understand the relationship between stocks that make up the portfolio and wider movement in business cycles. Importantly, it helps fund selectors understand the different scenarios and outcomes likely to impact the fund in the coming six to 12 months.
PureGroup analysis:
While global growth persists, we expect both business and investor confidence to remain high. This business cycle will be positive for the Allianz Global Insights fund as it has a negative sensitivity to both global default spreads and volatility risk premium, (defined as the extra return an investor demands to hold a volatile security, above the expected returns).
Peer group AVG
Allianz Global Equity Insights
Arrows indicate factors’ anticipated direction of movement
Despite global growth increasing and the potential for further US rate hikes, it is widely expected that central banks (in particular the European Central Bank and Bank of Japan) will continue to follow an expansionist monetary policy. The Allianz Global Equity Insights fund has a negative sensitivity to global term spreads and therefore is expected to benefit from this policy.
We expect there to be continued pressure on the strength of US dollar against its major trading partners, which has generally appreciated over the past five years. More recently however, we have seen downward pressure on the dollar. As such, we would expect the Allianz Global Equity Insights fund to perform well in market cycles with reducing US dollar strength, illustrated by its negative sensitivity to USD trade weighted index.
Analysis suggests the Allianz Global Equity Insights fund has missed the global reflationary trade as it is neutral to global inflation. As inflation picks up, it will not cause a headwind to the funds expected performance, but neither will it benefit from inflationary pressure.
Patrick Murphy is the founder of PureGroup, an independent company that works with management groups to provide them with a range of fund data, macroanalysis and insights that help to enhance client engagement. The PureGroup Forward Perspective Model, has been built with leading US based academics, providing asset managers with macro-economic factor analysis to explain their position against the wider business cycle and against their peers.
14.3%
10.4%
9.3%
5.4%
6.9%
18.4%
MSCI World Index / MSCI Linked
AllianzGI Global Equity Insights
12.7%
14.6%
8.3%
Since inception
5 Year
3 Year
1 Year
1st quarter
Source: *Quartile performance – FE. Annualised performance – AllianzGI. As at 31 March 2017. Composite performance inception date: 1 June 2010. Performance of less than one year has not been annualised. The performance shown above is gross and does not reflect the deduction of investment advisory fees. Past performance is not indicative of future results.
Allianz Global Equity Insights performance
Versus peer group over five years
Steven Berexa, lead manager on the Allianz Global Equity Insights fund, discusses stock turnover, key outperformers and macro challenges he has battled over the past year.
Can you name a key contributor to fund performance over the past 12 months?
We found in the public domain a promotional video from Volvo about its vision for a self-driving highway convenience and we used Grassroots to show it to 1,000 consumers. This helped us form an idea of how much they would pay for this convenience and whether they would trust it. It gave us a clear idea of where the market was heading. The stock price itself has been on a rollercoaster but it has ended up being a big gain for us, providing an active contribution of over 180bps over the year to 31 March 2017.
Our largest holding, Mobileye (an Israeli autonomous vehicle technology firm) was bought by Intel in a cash merger that paid 15x forward revenues earlier this year. Now, on the face of it, it is a fantastically expensive stock which was our largest detractor in 2016 as the company went through a period of being over-shorted. There was also considerable uncertainty about what self-driving cars might be able to do and who had the right technology to manufacture them. Mobileye has the leading market share in building the algorithms and chips for driverless cars, which is why Intel bought it in March. We undertook multiple Grassroots Research studies on the company in order to understand the stock and the demand for driverless cars. This was in itself interesting because back when we built a position in this company, almost no one had ever travelled in a self-driving car.
What is stock turnover within the portfolio like?
We hold between 50-70 stocks in the fund and currently we are at around 60. Our average annual turnover ranges from 60% to 80%, although we do not target or manage to a turnover range. It can vary. It generally coincides with a shift that is consistent with delivering on our unconstrained approach. We try to keep moving as market conditions require, and we are not afraid to sell and buy as much as we need in order to get ahead of expected moves to meet the overarching goal of achieving attractive returns for investors. Too many managers are stuck in holding a company because of a promise of the ‘style’ box that suits their fund. We do not do that. It is not a perfect, no-excuses portfolio, but if we develop enough conviction for or against a stock, we will switch it up.
The fund has maintained an above-average cash weighting of 8% after the presidential election. Why?
Our allocation to cash is a result of general market complacency and mounting geopolitical risks globally. Prior to the election, I had a significant level of cash which indicated a high degree of certainty that something could go wrong. Our current weighting reflects concerns the VIX has reached a new low and valuations are stretched. I am very aware the 10-year Shiller CAPE model is flashing red and as many investors know: volatility begets volatility. If we continue to have people buying the market dips as rapidly as they are, this complacency could go on for quite a while longer. But, if we do see a recession, it will likely lead to more breaks and downside risk. With all of these concerns in play, 8% in cash feels about right at the moment.
On the macro outlook front, which sectors are you watching following the US presidential election?
We are closely monitoring the big debates centering on healthcare and the possibility of drug pricing controls and reform. We are significantly underweight the sector at 6% versus the benchmark 11%. This is a top-down consideration based on the fact the sector still has a red target on its back. We have also done a lot of work to understand what President Trump could do without the help of Congress in reference to the deregulation of the banking industry. Deregulation, combined with the fact US banks have doubled their equity capital since the financial crisis and are now in a favourable growth environment, makes them a space to watch, particularly if any of President Trump’s changes unleashes the potential for them to raise dividends. For example, Citigroup’s return on equity has been significantly depressed by financial deregulation since the financial crisis. This means it has the potential to benefit the most from any upside created by deregulation.
FUND MANAGER Q&A
Source: FE, total return over five years to 31 March 2017. Past performance is not indicative of future results.
Steven Berexa
Peer group composite
Steven Berexa five year performance versus peer group (%)
CONTACT US
Web: www.allianzgi.co.uk
Focus is an Incisive Media product. © 2017 Incisive Business Media (IP) Limited
For more information contact wmfsmarketing@incisivemedia.com
Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested. Allianz Global Equity Insights Fund is a sub-fund of ALLIANZ UK & EUROPEAN INVESTMENT FUNDS, an open-ended investment company with variable capital with limited liability organised under the laws of England and Wales. The volatility of the fund unit prices may be increased or even strongly increased. Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency. This is for information only and not to be construed as a solicitation or an invitation to make an offer, to conclude a contract, or to buy or sell any securities. The products or securities described herein may not be available for sale in all jurisdictions or to certain categories of investors. This is for distribution only as permitted by applicable law and in particular not available to residents and/or nationals of the USA. The investment opportunities described herein do not take into account the specific investment objectives, financial situation, knowledge, experience or specific needs of any particular person and are not guaranteed. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail. For a free copy of the sales prospectus, incorporation documents, daily fund prices, key investor information, latest annual and semi-annual financial reports contact the authorised corporate director Allianz Global Investors GmbH in the fund’s country of domicile or the issuer which is available from www.allianzgi.com. Please read these documents, which are solely binding, carefully before investing. This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). Allianz Global Investors GmbH has established a branch in the United Kingdom, Allianz Global Investors GmbH, UK branch, 199 Bishopsgate, London, EC2M 3TY, www.allianzglobalinvestors.co.uk, which is subject to limited regulation by the Financial Conduct Authority (www.fca.org.uk). Details about the extent of our regulation by the Financial Conduct Authority are available from us on request. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted. AuM figures as at 31 March 2017. GrassrootsSM Research is a division of Allianz Global Investors that commissions investigative market research for asset-management professionals. Research data used to generate GrassrootsSM Research reports are received from reporters and Field Force investigators, who work as independent, third-party contractors, as well as external research panel providers—all of whom supply research that may be paid for by commissions generated by trades executed on behalf of clients.
