P&I: Martin Currie is already well known for its Asia Long-Term Unconstrained. What are your plans to extend this strategy, and what are the opportunities?
Willie Watt: Over the last seven years, we've built up ALTU to over $2 billion, and it's performed incredibly well over that period. ALTU has validated this style of investing, and we now want to take that style into a more global opportunity set.
What is the style? At its heart, it is very simple. We seek to find great businesses and then compound their returns over the long term. We invest with an absolute return mindset, giving a significantly less volatile journey; that allows us to capture long-term growth and offer good downside protection. If we look at our Asia strategy over its seven-year life, it has delivered market-beating returns, but with a lower beta and two-thirds of the market volatility.
The learning we have built over this period has given us the confidence first to design and now to launch a global version of that strategy. Global Long-Term Unconstrained has many similar characteristics to ALTU but has evolved to enable us to deliver on a much broader stage. In our development phase, we have undertaken significant back tests, and these confirm to us that we can deliver market-beating returns over time with GLTU again with a lower beta and significantly less volatility than the market.
P&I: Tell us a bit more about the principles and philosophy that underpin all your Long-Term Unconstrained investing, as well as some of the differences in implementation that might occur as you move to the global stage.
Willie Watt: All of the LTU strategies have a focus on an absolute return. I think that's very important. We don't want to be knocked off course by short-term market volatility, but instead be orientated toward delivering a real return for our investors.
To ensure we can build long-term conviction, we have an intensive research process enhanced through a proprietary forensic accounting approach. Crucially, we invest for the long term, so we have low turnover, maximizing the compounding effects and minimizing the negative impact of transaction costs.
In terms of differences between GLTU and our Asian strategy, the key one is our investment objective: For Asia, we aim to deliver returns commensurate with Asian GDP growth, but for GLTU, we are targeting a return of CPI plus 6% p.a.
P&I: How have you proved the GLTU strategy works for the market, and what have been the origins of its development?
Willie Watt: The genesis of this new development for us has been out of the success of ALTU. We have been asked by clients to develop a global version of the strategy.
An additional part of the development phase was to research companies that we felt might be appropriate for this strategy on a global basis—not just an Asian basis—then get the forensic work done on those businesses. We used the lessons that we've learned from Asia for the global opportunity set.
We then had State Street Global Exchange undertake an extensive and rigorous back test for us. That was a very detailed piece of work that extended over many years and really was proof-of-concept in the global marketplace. The work validated our view that the strategy screened companies exceptionally well and, further, that stock picking could add additional return to those portfolios over the long term.
P&I: What is the risk-return profile investors can anticipate in terms of Global Long-Term Unconstrained?
Willie Watt: This strategy is all about creating real returns with a hurdle over inflation, and the back test validates returns in excess of CPI plus 6% p.a., measured over the long term.
We would expect the risk profile of a strategy such as this to be somewhat lower than the market with lower volatility and lower beta. Typically, we would expect this strategy to deliver in a rising market—though not necessarily keeping up with the market—and to outperform in negative, sideways or trendless markets.
The whole raison d'etre of this strategy is the power of compounding, and that should see us, long-term, beat market indexes over a five-year rolling period.
P&I: How specifically will portfolios be constructed? Tell us a bit more about your process.
Willie Watt: The portfolios will be between 25 and 40 stocks. There will be a very high bar in terms of the quality of those stocks, because we'll be looking—at all of them—for the long term.
The portfolio is unconstrained, so we will be able to invest across the whole world from a geographical or sectoral point of view, and we're not overly concerned about concentration. However, we are concerned about diversity within the portfolio, and we manage risk by assessing the cross correlations between the different names we hold.
In terms of the type of stocks that we will be looking to put into this portfolio, we are looking for companies that generate a consistent return on invested capital over and above the cost of equity. We love companies that grow organically, that have defendable market positions and that are truly aligned with the minority investor. We analyze the relationship between goodwill and assets and spend significant time on accounting processes and how capital decisions are made and deployed. We invest
across the market cap spectrum, but are unlikely to invest in companies with a free float that is less than $5 billion. That's the starting point before we think about portfolios.
P&I: We've discussed the opportunities; what are some of the risks? What risk management practices will you have in place?
Willie Watt: We have a lot of experience managing risk in absolute return portfolios, both through our experience with ALTU and also in our long-short portfolios. We have a long-established risk team that works with our investment managers but is truly independent of them.
We're clearly not interested here in risk against a relative return benchmark, because it's an absolute return portfolio. So really, it's more about absolute levels of risk managed at the stock level and making sure that we are giving the clients what we say we are going to do.
P&I: To whom do you think the GLTU strategy will appeal?
Willie Watt: I think it will appeal to a similar client base as our Asian version of the strategy, and that is quite a broad client base.
It should appeal to foundations and endowments that are looking for absolute returns with possibly less risk than the market. It also appeals to wealthy individuals who are looking to protect their capital but still have exposure to equity markets.
Other potential clients for the strategy are sovereign wealth funds, which are already very much in evidence as clients of our Asian version of this strategy.
P&I: Do you think it will appeal to a new audience above and beyond your existing client base in ALTU?
Willie Watt: Yes, I think it will, because Asia is a very niche opportunity set, and certainly in the U.S., there aren't many clients that buy Asian strategies. Going global increases the potential number of clients, both institutional and retail.
Going global also offers us a much bigger opportunity set to invest in. This has implications at the product level in terms of improved liquidity. GLTU will be available on a daily liquid basis, and we will, over time, offer this as a '40 Act fund in the U.S. and as a cross-border fund in Europe, both of which will enable us to tap into broader wealth management partners than we have historically done. And we'll do that in partnership with our parent, Legg Mason (LM).
There's a big, big concern in many investors' eyes about relative return investing and what you get for your money. And ultimately, we believe that over time, more and more investors are going to want real return rather than index-relative investing. So we think that plays well for GLTU.
When clients come to us for ALTU and are interested in this new strategy, they say that what we are doing is very different. There aren't really other things that look like this, and in a world of commoditization it is refreshing to hear that we are delivering a distinctive and unique proposition.