Growing financial risks favour small and mid-sized global companies
Bell Asset Management
Global equities boutique manager Bell Asset Management sees rising geopolitical and macroeconomic risks ahead and expects small and mid-sized quality companies with an international focus to offer the best value in the current market.
According to Ned Bell, Chief Investment Officer, Bell Asset Management (BAM), China's sharp growth slowdown will impact the global economy, especially emerging markets, while there are growing risks the world's central banks could hike interest rates too sharply in the battle against rising inflation.
"The global macroeconomic environment is changing dramatically, with economic growth slowing pretty quickly. And for the first time ever that slowdown is being led by China," said Mr Bell.
"What also worries us is to what extent central banks will be able to get on the right side of managing the inflation surge. The big risk is they do too much as the economy slows," he added.
Taking a more positive perspective, Mr Bell said the uncertain outlook was likely to bring plenty of buying opportunities for actively managed fund managers like BAM.
"As much as there are a lot of things to be worried about in the current market, these risks bring opportunities to the table," Mr Bell said.
BAM's investment approach focuses on companies that meet a high quality threshold, which includes financial strength, consistent profitability as well as a strong focus on Environmental, Social and Governance (ESG) factors. The asset manager then looks to identify mispriced companies within this sector or those stocks that display a disconnect between quality and current value.
SWITCH TO GLOBAL SMALL AND MID-CAP COMPANIES
As a result of the changing macroeconomic environment, Mr Bell said the Bell Global Equities Fund had cut its weighting in large global companies and increased its allocation to smaller and mid-sized (SMID) firms as they offer more attractive valuations.
"We've got 42% (of the fund's assets) in the SMID area. At the same time, we're probably the most underweight in mega caps that we have ever been," Mr Bell said. The benchmark MSCI World SMID Cap Index currently has a forward price/earnings (p/e) ratio of 15 times, compared to 24 times for the MSCI World Large Cap Growth Index.
Mr Bell noted that the Global SMID cap p/e ratio currently stood at a significant discount to the MSCI World Large Cap Growth Index and traded at a discount to the main MSCI World Index compared to an average premium of 12% over the past 10 years.
The COVID pandemic has given many global SMID companies a further boost with many forced to cut costs sharply.
Mr Bell explained, "They had no choice. They cut so much cost out of their businesses that the actual earnings for the SMID asset class is 70% higher this calendar year than the pre-COVID level in 2019. As a result, they are able to absorb what is happening now more than they otherwise would have been able to."
ESG INTEGRATED INTO INVESTMENT PROCESS
Adrian Martuccio, Co-portfolio manager at BAM, said the fund manager's focus on its global SMID strategy had also led to a lower carbon footprint for the Bell Global Equities Fund.
"Fundamentally we believe that if you have a portfolio with great ESG characteristics as well as meeting other quality metrics, then it's going to help you outperform. There is a very tight correlation between quality companies and good ESG outcomes," Mr Martuccio said.
"We believe having a quality bias does help because it means you generally steer clear of many of utility stocks and other stocks that aren't environmentally friendly, but you really have to have some positive selection and active portfolio construction to get a carbon intensity level as low as BAM's," he added.
The Bell Global Equities Fund and the Bell Global Emerging Companies Fund have ESG scores consistently above the MSCI World Index and the MSCI World SMID Cap Index, and a significantly lower carbon intensity.