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Bell sounds a note of optimism

December 2018
The Australian
David Rogers

Bell sounds a note of optimism

December 2018

Ned Bell is rubbing his hands together after the recent correction in global equities.

The Bell Asset Management Chief Investment Officer says his funds’ decision to reduce exposure to the global technology sector by exiting Microsoft and selling half their Apple holdings earlier this year is paying off.

And with valuations for global benchmarks falling back to their lowest levels in years, he’s now seeing more opportunities to buy shares that meet his criteria of quality at a good price.

For the year to November made an impressive 11.8 per cent return in Australian dollars gross of fees, versus 5.8 per cent for the MSCI World index on the same basis.

Its global small and mid cap in the local currency returned 11 per cent, versus 1 per cent for the MSCI World SMID Cap index, a 10 per cent outperformance.

As well as the prescient moves to take profit in momentum or growth sectors and re- invest in companies with more appealing valuations, BAM’s performance was supported by bets in healthcare and an underweight stance in energy.

And despite the turmoil in global markets since January, BAM has experienced something of a growth spurt, having increased funds under management to $1.9 billion, thanks in part to a number of mandate wins. Its global small and mid-cap strategy recently picked up a $130 million mandate from Brisbane-based Energy Super.

Looking ahead to 2019, Bell expects a fraught global macroeconomic backdrop to usher in another challenging year for those who merely stick with passive investments in indexes now that central bank liquidity has peaked, interest rates are rising and a US-China trade war is raging.

But bouts of risk aversion will continue to give opportunities for active managers.

“2019 is going to be a bit like picking daisies in a minefield,” Bell says. “We are more optimistic because of the valuations, but it will be hard going.”

A decade of low interest rates and quantitative easing caused a “crowding in” to bond proxies in the market and momentum bets in the technology sector.

But 2018 has seen fixed income start to “compete” with the sharemarket, while higher rates have started to slow the US economy. On top of that, the trade war has exacerbated a China slowdown.

“What we saw in October and November was all those high-flying tech stocks like Amazon and Netflix basically get hit very hard and drag the broader market down,” Bell says.

“That kind of proved we were right, but I think where we are now is looking very interesting.

“The landmines are there for all to see — rising interest rates, the trade war and in fact any number of geopolitical risks — but the flip side is that we are probably more

optimistic about the opportunities available than we have been for quite a while.”

Bell’s optimism stems from the attractive opportunities in high-quality stocks, rather than the market valuations overall.

But even the benchmarks are now looking cheap after the biggest correction since 2016.

For example, the MSCI World index is now trading on a forward price-earnings ratio of 14 times, which is 20 per cent below its five-year average. European equities are “dirt cheap”, with benchmark trading on a P/E ratio of about 12.5 times.

Bell says his favourite sub-asset class now is global small to mid-cap stocks, where valuations have fallen to their lowest point in the past decade.

“Quite often in the past few years we would come back from our research trips overseas with these terrific companies we wanted to buy, but they were just too expensive,” he says. “But our portfolios have held up really well in what’s been a pretty turbulent environment and we’re now rubbing our hands at some of the opportunities out there.”

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