Two Barings equity strategies and one GE Asset Management strategy, all of which use GARP, have also been struggling.
Barings' focused international and focused international-plus strategies and GE's international equity strategy underperformed for the year and five years ended June 30, but outperformed for 10 years, eVestment data show.
Barings' focused international equity strategy had $1.74 billion in North American institutional assets as of June 30, down 8% from a year earlier. Its focused international-plus equity strategy had about $960 million in North American institutional assets, down 48% from June 30, 2013. GE's EAFE strategy had $7.23 billion in North American institutional assets at June 30 — down 7% — from the $7.79 billion the same time the year before.
“Over the last several quarters, (we've faced) some challenges with respect to performance because market sentiment doesn't always coincide with our views,” said Michael A. Siciliano, Barings' senior vice president and head of sales and business development for North America, Boston. “Peripheral Europe has outperformed core Europe. There's been a low-quality resurgence in certain sectors around the globe, and that doesn't mesh well with our philosophy and process.”
Still, Mr. Siciliano said Barings is “not looking to change gears” because “there's a lot of conviction in the process and in the team, both in the portfolio managers and our analysts.”
GE spokesman Chris Linehan declined to comment.
Newton's international equity strategy underperformed for the year and five years ended June 30 vs. the benchmark, but outperformed for the 10-year period.
“We have felt that high cash returns would look attractive at a time when interest rates have been anchored artificially low in order to keep debt serviceable,” said Newton portfolio manager Paul Markham, London. “This hurt Newton's performance for the first couple of years of (quantitative easing) policies as investors drove up prices of risky assets on the basis of their cost of capital being low.”
He noted the recent hunt for yield in the market has benefited the firm. “As markets have rallied and are now on much higher multiples, outright capital return may be harder to come by,” Mr. Markham said. “More of return will come from cash returns, rather than capital returns.”
North American institutional assets in Newton's strategy were $2.04 billion as of June 30, up 48% from a year earlier.
Global market conditions, including such geopolitical events this year as Scotland's vote on leaving or staying in the U.K., and Russia's military intervention in Ukraine, have led to macro factors being bigger drivers of stock prices than company fundamentals, sources said.
Hilary Wiek, vice president and head of global equity research at investment consultant Segal Rogerscasey, Darien, Conn., said the EAFE markets haven't benefited GARP investors in the past couple of years because there's been a “disconnect between fundamentals and stock prices.”
“The markets have just been whipsawed too much,” Ms. Wiek explained. “GARP managers tend to be quality managers. They're looking for good management with sustainable quality. I think they're finding good management, it's just that the markets aren't supporting those names.”
Iain Douglas, investment consultant, head of Asia ex-Japan equity manager research and part of the global manager research team at Towers Watson & Co. in New York, said GARP is “not clearly defined (because) what a reasonable price is can vary from manager to manager.” Still, Mr. Douglas agreed the markets haven't been supportive of what could be categorized as GARP investing in international equities over the last three to five years.
“So depending on how you define GARP,” Mr. Douglas said, “it may have been a detractor to performance.”
