e-fundresearch: Which benchmark do you adhere to?
Smith: MSCI World Index (net total return) is our most commonly used benchmark.
e-fundresearch: Are you also responsible for other funds at the moment?
Smith: Yes, I also run Ignis’ Europe, Australasia and Far East (EAFE) (World ex-USA) and World ex-UK funds using the same process. In addition I manage the Ignis International Emerging Markets Fund using this approach.
e-fundresearch: What is the total volume that you manage in all your funds?
Smith: I currently manage approximately €915m
e-fundresearch: Regarding the performance: which performance did you achieve since the beginning of the year and in the years 2003-2008? Absolutely and relatively to the relevant benchmark?
Smith:
e-fundresearch: How content are you with your own performance in the last years and this year?
Smith: 2008 was the worst year I have experienced in my career. I expected monetary and fiscal stimulus to improve sentiment sooner than it did and I thought equities were significantly undervalued in late 2008. As a result, the fourth quarter of 2008 was especially poor. Conversely, 2009 has been the best year that I can recall largely due to the mean reversion of many of the same oversold/undervalued holdings. Accordingly, although I felt humbled by my performance last year, at least I feel some vindication at having persevered with my relative value/mean reversion philosophy.
e-fundresearch: How are you able to deliver added value for your investors with your performance?
Smith: Although my philosophy is described as being based on relative value and mean reversion the main reasons it works are really the weight of probabilities and a longer term perspective. Simply put, we select stocks trading at large discounts to both the market and their history, with sound balance sheets and return on capital employed (ROCE). There will be some reasons why investors do not like the stock but if they are cyclical or fairly temporary we are prepared to buy it on say a two to three-year horizon. With a big discount to fair value and with adequate diversification the odds are in our favour that the fund will do well. My average holding period is probably two years but I have held stocks for longer if the data remains promising. Although the market might be efficient in the very short term, we know from empirical evidence that it is not efficient over 12 months or more. We are, therefore, in an advantageous position because the majority of investors, despite what they might say, are not willing to tolerate holding a stock for more than a year if it is not rising. The final point is that we adopt a consistent approach - we avoid any pressure to be style agnostic or to chase momentum just because something is rising.
e-fundresearch: How long have you been a fund manager already?
Smith: 25 years
e-fundresearch: What were your biggest successes and your biggest disappointments in your career as fund manager?
Smith: The above-mentioned experience of 2008/09 ranks worst/best in terms of sheer size of under/outperformance. Similar past experiences include staying out of TMT stocks in late 1999, which was damaging to performance but later proved to be sensible.
These (and other) experiences show a pattern of mean reversion but are an example of a major disappointment in terms of being too optimistic about a recovery in the banking sector in the fourth quarter of 2008 and underestimating the degree of correlation across the various financial sub sectors as the market panicked.
e-fundresearch: What kind of capital market situation do we have at the moment? How do you act in this environment?
Smith: I think we have moved from an environment of widespread cheapness in equities to a phase where conditions have improved but profit growth must be delivered in order to sustain the bull market. Generally, and especially in Europe, I believe that equities are still good value as an asset class. It is now more important, however, to select sectors and stocks carefully rather than just buying the broad market. I believe that as 2010 progresses there will be a return to more defensive sectors such as pharmaceuticals, telecoms and energy, especially if monetary policy is tightened.
e-fundresearch: What are the special challenges in this environment?
Smith: As always, I find it challenging to make short-term predictions. So while I believe that the equity market is well supported by cheap money and cyclical recovery I do worry about the handling and impact of the inevitable removal of monetary and fiscal stimulus and, even worse, actual tightening. That, to me, is the biggest risk. I am often asked how I see the next three to six months. To be honest, I am not sure if we will see a short-term correction followed by a rally or alternatively, a “melt up” in coming quarters followed by a more serious sell-off. All I can say is that the more exaggerated the move seems to be, the more likely that we will gradually move against its direction.
e-fundresearch: What objectives do you have till the end of the year and in the mid term for the upcoming 3 to 5 years?
Smith: One of our characteristics is to apply our process and philosophy in a consistent and disciplined way. So, for example, it might seem tempting for us to “lock in” very good performance this year ahead of year-end and move closer to benchmark but we would not do this unless it was justified by a sense that our holdings had become fully valued. We always let the relative valuations shown by our analysis influence our trading. It is our responsibility to watch over clients’ money in a prudent way rather than be caught up in short-term “noise”.
Similarly, on a three to five year time horizon our objective is to consistently beat the index for our clients. The best way to do this is to identify significantly undervalued but essentially decent companies overlooked by the market, wherever they might be located. We accept that there are phases when this approach does not work but it tends to work well over the longer term and particularly on a three to five year timeline.
e-fundresearch: Do you model yourself on someone? Any ideals?
Smith: I don’t consciously model myself on an individual investor but I do have a lot of respect for investors in the Value style of investing and also concepts connected to Behavioural Investing. Both of these areas are arguably more developed in the USA rather than elsewhere.
e-fundresearch: What motivates you in your job?
Smith: The goal of outperformance on behalf of my clients. Witnessing well-researched ideas coming to fruition is a very powerful reward. An added factor is when you know your clients and you have their trust, you just don’t want to let them down. I don’t think that I am exaggerating when I say that I would not accept a promotion, no matter how fancy its title, if it meant I could no longer make investment decisions.
e-fundresearch: What else do you want to achieve or do you have any further aims as a fund manager?
Smith: The essence of the job is that one is always learning. Even after 25 years, I honestly believe that I am still improving as a fund manager. So my main aim is to continue to beat the market over the long term. So long as I work in a place where I am permitted to apply my skills and, as long as I retain my passion for investing, then in a professional sense, I am fairly contented. I realise that sounds a bit sad!
e-fundresearch: What other profession would you have taken interest in, apart from becoming a fund manager?
Smith: Possibly a job related to Psychology.
e-fundresearch: Thank you for the interview!
