Whether a market is being shaped by fresh central bank liquidity or by banks taking liquidity out of an economy will shape the broad direction of asset prices. That seems obvious, but what is less obvious is how it forms a driving theme for a portfolio strategy.
Many investment fund managers use a blend of “top-down” themes
and “bottom-up” analysis of specific firms to drive returns. It’s
unusual to find a manager who is totally on one side or the
other.
As investment styles evolve, the themes or “overlays” a manager
applies will vary. NS Partners, a boutique equities fund manager
that works with Nedgroup
Investments, has a specific theme that it spends time on: the
liquidity cycle. This relates to whether central banks are
pumping money into the economy or taking it out.
Governments in the US, UK, eurozone and other select areas are
reversing the monetary expansion that has gone on for more than a
decade. (China is still in expansion mode.)
“We look at a country and what its liquidity phase is. If you
have excess liquidity, then that is going to wash into markets
and you will find a bull market somewhere,” Michael Mortimore,
client portfolio manager of the Nedgroup Investments Global
Emerging Markets Equity Fund, told WealthBriefing in a
call.
“We have a red-hot global economy but really sharp contraction in
money supply in most major markets around the world, apart from
China. ”This can help asset allocators decide where to be bullish
and where to be bearish,” Mortimore said.
“Emerging markets are so diverse…there are different countries
with different gearing to the liquidity cycle,” he
continued.
One of the benefits of the liquidity mindset is that it injects
an element of discipline into stock selection and asset
allocation.
“Having this liquidity approach makes you a bit more self-aware,”
Mortimore said.
Performance
The fund, founded in April 2019, has $112 million of assets (as
of 30 June) and, like much of the market, has been dragged
down by falls in global markets. Over one year, it is down
26.5 per cent, broadly matching wider results in the sector.
Chinese investments are the largest share of the fund (26 per
cent); “other regions” (23.5 per cent); India is in third place
(14.6 per cent), and Taiwan in fourth (12.6 per cent). The fund
carries an annual management fee of 1.5 per cent. Its largest
single holding is Taiwan Semiconductor Manufacturing Company,
followed by Alibaba and Tencent.
There are other tendencies that can pull in favour or push
against a sector.
Southeast Asia has a positive gearing to rising commodity prices,
for example. On the other hand, South Korea is more geared to the
shape of the consumer semiconductor cycle, he said.
“We have favoured things that have been a bit more defensive
up until now,” he said.
