Active management helps investors weather 2024 global equity storms

With index returns dependent on a few expensively valued companies, active asset managers can add value with careful stock selection in 2024 writes Pieter Fourie, Head of Global Equities at Sanlam Investments UK.

In 2024, global equity markets present a complex mix of challenges and opportunities for investors. The concentration of recent returns from a relatively small number of expensively valued companies, together with ongoing economic uncertainty highlight the need for skilled active management.

Pieter Fourie, Head of Global Equities at Sanlam Investments UK, says navigating this environment requires partnering with experienced active managers who can look beyond short-term market sentiment, identify high-quality businesses with attractive valuations and strong growth prospects, and construct well-diversified portfolios built for long-term resilience.

Fourie manages the multi-award-winning Sanlam Global High Quality Equity strategy, a focused portfolio of 25-35 high-quality global companies with strong growth prospects. The fund aims to deliver higher returns over the MSCI World Index and provide South African investors with exposure to attractively-valued options across developed markets.

This year, Fourie has retained his Alpha Manager Rating for the fifth time in the past six years. The Alpha Manager Rating is a quantitative rating that distinguishes the top UK fund managers based on alpha generation and outperformance across their career history, allowing investors to instantly identify those managers who have consistently outperformed their peer group over time.

The 2023 US Product Development report reveals that most surveyed asset managers (73%) believe that geopolitical shocks and recession (69%) will increase demand for active management in 2024. For this reason, Fourie explains how active managers can generate alpha through disciplined stock selection and a patient, long-term approach.

“By partnering with skilled fund managers who can navigate uncertainty, maintain a long-term perspective, and identify attractive opportunities, investors can position their portfolios for success in 2024 and beyond. A disciplined investment approach, rigorous fundamental analysis and an active risk management framework have consistently delivered strong performance. That’s why we’re confident that active management will only continue to strengthen as we tackle the challenges and opportunities that lie ahead in global equity markets,” says Fourie.

A global perspective on economic opportunities and challenges

Fourie highlights the continued outperformance of the US stock market over the past decade. He says while regions like Europe and Asia have lagged, a handful of mega-cap companies have propelled US equities, resulting in concentrated returns and potentially inflated valuations. This presents a dilemma for investors: should they follow the benchmark and invest a significant portion of their global fund in these expensive US giants, or seek undervalued opportunities elsewhere?

He advocates a pragmatic approach as he argues that active managers can unlock significant value by focusing on high-quality businesses with growth potential mostly outside the mega-cap realm. Fourie has invested in Microsoft and Alphabet for more than a decade but companies like UnitedHealth is also a top position added recently. He points to companies like General Dynamics, which has outperformed the US and global markets and delivered impressive returns while maintaining a reasonable valuation and exhibiting further growth potential. The company’s market cap is still only $82bn and the ability to grow high single digits on a compounded basis for the medium term as it has done over the five year holding period seems achievable.

“Active managers have a good opportunity to generate alpha for clients by looking beyond the mega-cap stocks dominating the market. While these giants may struggle to grow sales, there is a wealth of high-quality companies with more compelling growth prospects trading at reasonable valuations. By identifying winners like Mastercard, Visa, Oracle, Alphabet, Yum! Brands, InterContinental Hotels Group, SAP, Samsung Electronics, and General Dynamics, we’ve delivered strong returns and finished in the top 15% of funds over the past decade measured until the end of February this year. Simply hugging the benchmark and chasing mega-caps is likely to disappoint. The real potential lies in finding those gems that offer sustainable growth at attractive valuations.”

Weathering economic storms for sustained portfolio performance

The past two years have presented significant market volatility, driven by factors such as the ongoing impact of the Covid-19 pandemic, geopolitical tensions, and shifting monetary policies. Active management has proven valuable, allowing investors to capitalise on market dislocations and generate alpha through careful stock selection.

Fourie says active managers who remained disciplined and focused on their investment philosophy were able to identify attractive opportunities during periods of market stress.

“Leaning against the trend and investing in high-quality companies at reasonable valuations meant these managers positioned their portfolios for solid performance in the subsequent market recovery. By carefully analysing company fundamentals and valuations, active managers could construct portfolios that were well-positioned to navigate potential market turbulence and deliver superior risk-adjusted returns over the long term.”

Navigating a concentrated market

One of the key challenges facing investors in 2024 is the high level of market concentration. In 2023, a handful of mega-cap technology stocks, the “magnificent seven”, dominated the market and accounted for a disproportionate share of returns. This concentration poses risks for passive investors heavily exposed to these stocks, as negative developments could impact their portfolios. However, active managers are able to diversify their holdings and seek opportunities beyond the more established names.

Fourie emphasises how crucial it is that investors remain focused on business quality and valuations. Diversification will be essential in a very concentrated equity market. He says active managers realise the benefits of looking beyond where a company is listed and focusing on its global operations when evaluating investment opportunities.

“Investing in Western-listed businesses with significant exposure to emerging markets, such as Intercontinental Hotels, Hilton Group, SAP, and Yum! Brands, allows us to tap into their respective regional growth potential. The key is to identify high-quality companies with strong returns on capital, growing free cash flow, and smart asset allocation decisions. This global perspective allows active managers to find diversification and attractive growth opportunities that may be overlooked by those focusing solely on a company’s listing location.”

Fourie says partnering with a top-tier fund management team allows investors to benefit from a disciplined investment approach, rigorous fundamental analysis, and active risk management. These qualities and the ability to identify attractive opportunities and maintain a long-term perspective are essential for delivering superior returns in the years ahead.

“As we look forward to the rest of the year, the case for active management in global equity markets has never been stronger. With valuations at elevated levels and the potential for continued market volatility, investors need the guidance and expertise of skilled fund managers who can navigate this challenging environment. By embracing this approach and partnering with the right team of skilled fund managers, investors can position themselves for success in 2024 and beyond,” adds Fourie.

Disclaimer

Sanlam Investments UK Limited (FRN 459237) having the registered office at 27 Clements Lane, London, EC4N 7AE. Sanlam is a full member of ASISA. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/collective investment units/unit trusts may go down as well as up.

The information in this article does not constitute financial advice.  While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

Issued and approved by Sanlam Investments UK Limited which is authorised and regulated by the Financial Conduct Authority (FRN 459237), having its registered office at 27 Clements Lane, London, EC4N 7AE. This is a Section 65 approved fund under the Collective Investment Schemes Control Act 45, 2002 (CISCA). Sanlam Collective Investments (RF) (Pty) Ltd is the South African Representative Office for this fund. The Fund is a sub-fund of the Sanlam Universal Funds plc, a company incorporated with limited liability as an open-ended umbrella investment company with variable capital and segregated liability between sub-funds under the laws of Ireland and authorised by the Central Bank. The Fund is managed by Sanlam Asset Management (Ireland) Limited, Beech House, Beech Hill Road, Dublin 4, Ireland, Tel + 353 1 205 3510, Fax + 353 1 205 3521 which is authorised by the Central Bank of Ireland, as a UCITS Management Company and Alternative Investment Fund Manager, and is licensed as a Financial Service Provider in terms of Section 8 of the South African FAIS Act of 2002. Sanlam Asset Management is a registered business name of Sanlam Asset Management (Ireland) Limited. Sanlam Asset Management has appointed Sanlam Investments UK Ltd as Investment Manager to this fund.

Collective investment schemes are traded at ruling prices and can engage in borrowing and scrip lending. Collective investment schemes are generally medium to long-term investments. The management company does not provide any guarantee either with respect to the capital or the return of a portfolio. The management company has a right to close the portfolio to new investors in order to manage it more efficiently in accordance with its mandate. A schedule of fees and charges and maximum commissions is available on request from the manager.