Despite the best efforts to create an international investment hub in Australia, the local industry is still tied to what happens in the traditional markets of Europe and the USA. For this reason David Lugton argues it is worthwhile having an international manager based in those markets.
The major part of a fund manager’s job is to identify companies that are under valued by the share market. To do this they need to collect and analyse a lot of information about the company itself, about its industry, about its competitors, get feed-back from suppliers and so on.
In other words, there is a need to tap into multiple sources of information. Part of this, such as financial reports, come from the companies themselves and is readily available. However, the rest relies on having access, of being amongst the action.
It is for this reason that I believe the northern hemisphere is where the action is. It dominates economic activity and accounts for nearly 90 per cent of equity investment opportunities. It is no surprise that it is where nearly all the investing is done.
According to the MSCI index configuration the geographic division of the world equity market reveals that of the mature markets North America has 53.5 per cent of the market, Europe, including the the UK 33.3 per cent while the Pacific region only has 13.2 per cent.
As well as accounting for all but 13 per cent of the equity markets, the northern hemisphere also dominates the new industries, such as information technology, which are crucial to future economic growth and, hence, of great interest to investors.
They are also dynamic, with swift changes in direction and also shifts in winners and losers. These are not set and forget types of investments, it is crucial to stay on top of both the industry dynamics as well as what is happening to individual companies.
The home base of the companies in the various sectors is shown in figure 1. and emphasis a need to be close to the action at the base of these sectors. In that case how does a fund manager get access to the best information?
While in the past fund managers have relied heavily on brokers for their information there is a concerted move away from this. There are two main reasons: brokers serve more than one master with the corporate connection often being more important than the relationship with the fund manager. Also, there is nothing exclusive about broker research.
As a result, fund managers are looking to source their own information. This requires being close to the action. In Putnam’s case, we are based in Boston with nearly all our analysts located in the one office, to aid communication of information and ideas. Additional analysts in London and Tokyo enhances this process.
While there are many other bases and ways to operate we feel there are a number of advantages to having this type of arrangement in place.
These bases are usually major investment centres, such as Boston where Putnam is based. This means that senior company management regularly visit analysts and portfolio managers. It is important to them that fund managers have a good understanding of their business. This enables analysts to cross check information and alerts them to changes within their industries.
Those managers choosing to operate out of the US do so out of a major market. The world’s major companies and its most significant industries are at the doorstep. The travel time is modest and hence, analysts undertake frequent site visits to companies.
Such managers are also able to attract experienced people. Analysts have often worked in the industries that they are analysing so are able to quickly assimilate and evaluate new information. They have grown up with it.
Most of these financial bases, and once again Boston is a good example, are also in the right time zone. Information from European companies is available to the analysts in the morning while any news from US companies is released during their working day. This enables them to act quickly, if needed.
In a world where proprietary information is becoming crucial to be able to produce superior investment returns, it makes sense to have your analysts and fund managers within easy reach of the major companies. Increasingly these are in the US. This, together with coverage of Europe and Japan captures some 97 per cent of the world share market.
