Nedgroup Investments' Global Flexible Fund capitalises on volatility in the market

The Nedgroup Investments Global Flexible Fund has been adjusting its portfolio in response to market volatility, taking advantage of discounted valuations to make new purchases in sectors and securities where prices have been most affected, such as APAC equities, leisure, travel and hospitality.

Portfolio manager Steven Romick explains the rationale behind these acquisitions, saying: “As bottom-up investors, if the market sells off from a high index price level but we are able to find attractively priced businesses to own, then we will own them.  Risk exposure is not a constant and is dictated by what we see at the company level.  If we find attractive risk/rewards, we will be more invested; if not, we will be less. We believe when global economies recover, investors will appreciate the merits of many of these unloved companies with deeply discounted valuations compared to the market.”

Romick’s firm First Pacific Advisors (FPA) have been running the Global Flexible Fund since mid-2013 when they entered into a partnership with Nedgroup Investments. The portfolio is structured around FPA’s Contrarian Value Strategy, which has built up an enviable 27-year old track record since its inception in 1993.

Over a 20-year period FPA’s flagship fund for their Contrarian Value strategy has an annual total return of 9.17 per cent, whereas the S&P 500 returned 5.91 per cent over the same timeframe. In Q2 this year the fund achieved an overall gain of 15 per cent, with long equities held by the fund returning 22.29 per cent, outperforming both the MSCI ACWI and the S&P 500.

The Fund focuses on high-quality, growing business that trade at good prices or good businesses that trade at great prices. The equity portfolio has remained attractive relative to the market, with a three-year historic EPS growth of 13.9 per cent as of the end of June, compared with 6.5 per cent and 3.5 per cent for the S&P 500 and MSCI ACWI respectively.

It also has the capacity to invest in high yield bonds, which it has been under allocated to in recent years due to low yields and credit spreads. The Fund added to its exposure during the market turmoil earlier this year, but did not allocate a substantial amount given the brief window which did not present widespread opportunities that met the Fund’s yield and risk/return hurdles.

The success of the fund can partly be attributed to its focus on downside protection as well as upside growth; although targeting growing companies - whether that be cyclical or secular growth - the fund avoids secularly challenged businesses such as bricks and mortar retail, broadcasting and restaurants. The Fund may hold cash if there isn’t enough value to be found in the market.

Describing his current outlook, Romick says: “We have changed what we are willing to own. We never want to remain stagnant as investors. Technological innovation has secularly harmed many industries while other industries have benefited. As such, we have expanded our horizons and research capabilities and own more tech and internet companies, including some in China.”