Bargains, if you know where to look

Published September 28, 2011

There are 'many pockets of great value', particularly if you are able to hold the stocks for five to 10 years, reports GENEVIEVE CUA


MARKETS are not yet in 'buy' territory, although a capitulation may be near, says Ben Funnell, equity strategist and portfolio manager for GLG Partners. None of the four indicators that he tracks - valuation, economic momentum, market positioning, and credit - are signalling a trough in markets yet. But if European leaders manage to get their act together on a grand plan to save the eurozone, that could be a buy signal, he says.


So far, there is little that is concrete. Reports of an ambitious scheme that could quadruple the eurozone's bailout plan and inject billions of euros into European banks buoyed markets yesterday. GLG manages roughly US$33.9 billion in assets as at June. It is part of the Man Group. Mr Funnell is the manager for the firm's global equity and mixed asset funds.

To date, fear has been the dominant driver of markets. EPFR Global reports that for the week ending Sept 21, investors have taken money out of equity, bond, and even money market funds. Eight of the nine major equity fund groups posted outflows, as well as six of the seven major fixed-income fund groups.

Still, Mr Funnell says there are 'many pockets of great value', particularly if you are able to hold the stocks for five to 10 years. In times of market stress, however, investors' horizons tend to shorten.

'If I was running a sovereign wealth fund, I'd love this because the market is coming to me, to the extent that I have assets that are not deployed or are in cash, I can buy with Ben Graham's margin of safety pretty much with impunity . . . I'd say for anyone with the time horizon and strong hands, this is a great opportunity to accumulate great values.'

He cites a German utilities stock, for instance, with dividend yield of at least 10 per cent and Chinese consumer stocks with single-digit PEs but with 20 per cent compounded growth rates.

For now, on the question of whether markets have become cheap enough to buy, the answer, he maintains, is not yet. Based on Shiller PE, which reflects today's stock prices based on the S&P 500 divided by the 10-year average earnings, the level for the US is 19 at mid-September - 'still quite a long way from the buy zone'. The Shiller PE needs to get to around 12 or lower for the US.

'When we get to 12 or lower, you have very high positive hit rates; 80 or 90 per cent of the time, if you hold for three years from that point, you have gains in your equity position and usually quite substantial.'

Economic momentum also hasn't troughed. The ISM index has dropped from 60 to about 50. Recession level is about 42. 'But the rule of thumb I use is that you should get defensive from the peak in the indicator until 50. From 50 to the trough, you should absolutely be out of equities and in cash. The stock market tends not to fall between 60 and 50, but between 50 and 30, the stock market will be killed. That's the situation we're in at the moment. I find it very hard to believe that the indicator won't fall substantially further.'

In the credit space, the iTraxx Crossover CDS index - which reflects the cost of insurance against default of 50 sub-investment grade European companies, is currently just below 850. During the 2008 crisis, it soared past 1,100.

He believes that Europe is in recession and the US is 'on the edge' of recession. 'My concern for the cycle is that I think we're at or past the point where financial market turbulence infects the real economy via the investment and hiring channels in the US . . . If we get quick action, it needs to be concerted and big. If that happens, I probably would give the US the benefit of the doubt and buy some US cyclicality.'

He is also cautious on Asia, even as he agrees with the consensus view that Asia is structurally very attractive. 'The one problem - and we see it across all markets in Asia - is capital flight.' US investors account for just 5 per cent of the world's population but about 50 per cent of world assets. In times of crisis, money is yanked out of risk assets and repatriated, causing risk assets such as emerging markets to tank and the US dollar to rise.

Meanwhile, managed futures manager AHL has outperformed traditional asset classes such as equity, with a relatively modest fall of just 1.9 per cent in the NAV of its flagship AHL Diversified fund in the current year to Aug 31. In that period, global equities fell 6.8 per cent and global bonds rose 3.7 per cent.

AHL is also part of Man Group. The fund is Man's largest with an estimated US$24 billion in assets. AHL assets are invested in futures contracts across a range of markets including interest rates, equity, and currency. It is purely quantitative and thrives on momentum and trend following. It seeks to generate returns while keeping risk at 14 to 15 per cent.

Harry Skaliotis, AHL investment manager, says the fund currently has a long position on bonds and interest rates, short on equities, and long on precious and base metals. Until recently, it was short on the US dollar but this has recently reversed to a long position. 'We're one of the few strategies that have consistently demonstrated a positive performance in weak equity markets and crisis periods.'

One of the fund's best years was 2008, when it generated a return of 25 per cent. That year, global stocks plunged 40 per cent and bonds rose 9.2 per cent. Man registered the AHL Trend Fund for retail sale last year, setting the minimum investment at $20,000. The fund is positioned as a diversifier in portfolios.