Global giants and hidden gems in equity investing

19 Feb 2024
 

Actively managed global equity investments are on investors’ radars, given the mixed outlook for global economic growth. Meet the strategic minds behind the Macquarie Walter Scott Global Equity Active ETF (Managed Fund).

Companies with strong balance sheets and market leadership provide risk-mitigated exposure to global growth equities. That has been the investment philosophy of Walter Scott, an Edinburgh-based investment management firm, for over 40 years.

And its team stands by this fundamental approach during current geopolitical tensions and economic uncertainty. They combine the traditionally conservative, ‘Scottish’ principles of investment, with rigorous, tech-enabled in-house research and a disciplined buy-and-hold investment strategy with a long-term horizon.

Walter Scott manages A$121 billion¹ across global and emerging market equity strategies, predominantly for institutional investors.

“The firm has become known as a powerhouse of fundamental equity managers,” explains Blair Hannon, Macquarie ETF Investment Strategist.

Walter Scott’s strategies have been available in Australia for over 18 years through Macquarie’s Professional Series program, which partners with a carefully selected group of external investment managers.

“Walter Scott is passionate about uncovering growth opportunities that have consistent profitability profiles for the long term, and this is something we know our clients look for in a manager,” says Hannon.

That’s one reason Macquarie chose the Walter Scott Global Equity Fund as one of its first three active ETFs. After first introducing the strategy to the Australian market as an unlisted managed fund in 2005, it made the fund more accessible as an ASX-listed product in late 2023.

“Over the last 18 years, this fund has become popular as a way for Australian investors to access actively managed global equities,” says Luis Sarmiento, Senior Investment Specialist - Macquarie Professional Series. “A number of advisors have allocated to it for many years, and it made sense to make it easier for investors to access the fund as an ETF.”

The power of many minds

Walter Scott has a uniquely collegiate decision-making framework, which helps avoid biases and ensures an objective analysis of company fundamentals. Hannon says this team orientation is a strong point of difference.

“Rather than relying on one ‘star’ stock picker, buying a stock requires the unanimous support of the entire 20-strong team of investors,” he explains.

Notably, it also takes only one dissenter to sell.

This high hurdle means the fund’s portfolio – while diversified – is relatively concentrated, holding between 40 and 60 stocks. More than half of these companies have been held in the fund for over seven years.

The fund is also diversified across both mature and emerging companies, from well-known global giants to little-known leaders in niche industries. As well as a few major tech companies, the fund currently also invests in a leading sensor supplier, fibre optic connector manufacturer, software provider and cybersecurity leader – as well as healthcare and consumer brands.

What unites these companies are the fundamentals for long-term, compound growth: market leadership, the ability to adapt and innovate, strong balance sheets, good cash generation and excellent management. 

“At Walter Scott, we often talk about ‘sticking to our knitting’,” says Roy Leckie, Walter Scott Executive Director – Investment & Client Service. “We very deliberately focus our energies on what we think we do well. The starting point (for change) is always to consider, ‘is this going to improve outcomes for our clients?’ The solid foundations built over the last forty years allow this process to happen in a thoughtful, deliberate, and structured way.”

Leckie joined Walter Scott in 1995, and still plays an active role in the investment process today.

“I have a front-row seat in the very dynamic world we live and invest in,” he says. “I really enjoy contributing to the research team meetings that take place several times a week, discussing and debating existing holdings as well as new ideas. I’m lucky to work with brilliant colleagues, who are all striving towards the same goal for our clients.”

Not all companies are equal

Leckie is optimistic about global equities in the medium to long-term, believing the asset class will continue to benefit from the general propensity for economies to grow and living standards to rise, as well as opportunities in new technologies and services.

Having invested through many market cycles, he has seen equity markets consistently navigate their way through challenges to generate significant returns. And that means sticking to that proven investment philosophy, while accepting volatility and uncertainty are a given. 

“In a world so caught up with the here and now, we believe it’s important to remain focused on the long term. As investors, we can only really control two things: what stocks we buy and how much we pay for them,” he says.

With ultra-low interest rates likely a thing of the past, companies are now facing a meaningful reset in the cost of capital for the foreseeable future. In the year ahead, those with low leverage and strong cash flows will be better placed to ride out any ongoing uncertainty.

Walter Scott’s conservative approach to valuations aims to avoid overpaying for growth, while its emphasis on strong balance sheets and cash flow is designed to ensure the portfolio has a significantly lower debt-to-equity ratio than the wider market. 

“This fund is focused on growth, but it also seeks to provide defensive returns for our clients,” notes Sarmiento. “Everybody gets nervous when markets fall, so it can be reassuring to have a base of quality businesses that have greater potential to weather tough economic times. 

Easier access to global ETFs

A patient approach to growth investment positions investors well for the next market cycle. And they can now access this global equity strategy via an active ETF – making it as easy to buy into the Walter Scott Global Equity Fund as trading an individual ASX-listed stock.

That can be a significant advantage for Australian investors, given the challenges of investing globally across time zones and diverse economic regions, while also removing the more onerous processes involved in accessing the strategy via a traditional unlisted managed fund.

“We have always focused on offering access to high quality investment capabilities, whether they’re internal to Macquarie or carefully selected external managers from around the world,” says Sarmiento. “That’s why we brought Walter Scott to the Australian and New Zealand markets.”

For investors looking for a diversified global equity allocation backed by a consistent, long-term approach, choosing an experienced, active quality growth manager like Walter Scott has potential to provide exposure to growth while managing downside risk. 

“When you look at the fund’s top 10 holdings, it's very consistent from quarter to quarter because their approach is patient, low turnover, and selective,” Sarmiento adds. “When they buy a stock, they hope they never have to sell it.”

That makes it easier for investors to understand their portfolio’s exposures, putting their money to work and their mind at rest.

For more information on Macquarie ETFs, including educational materials, please visit our dedicated active ETF site here.

Risks

All investments carry risk. Different investments carry different levels of risk, depending on the investment strategy and the underlying investments. Generally, the higher the potential return of an investment, the greater the risk (including the potential for loss and unit price variability over the short or long term). The risks of investing in this Fund include: 

Investment risk: The Fund has exposure to share markets. The risk of an investment in the Fund is higher than an investment in a typical bank account or fixed income investment. Amounts distributed to unitholders may fluctuate, as may the Fund’s unit price, by material amounts over short periods.

Market risk: The investments that the Fund has exposure to are likely to have a broad correlation with share markets in general. Share markets can be volatile and have the potential to fall by large amounts over short periods of time. Poor performance or losses in domestic and/or global share markets are likely to negatively impact the overall performance of the Fund.

International and emerging market risk: The Fund has exposure to a range of international economies, including emerging economies. Global and country specific macroeconomic factors may impact the investments that the Fund has exposure to. Governments may intervene in markets, industries, and companies; may alter tax and legal regimes; and may act to prevent or limit the repatriation of foreign capital. Emerging markets may experience lower liquidity (including as a result of securities or bond markets being closed for extended periods), potential for political unrest leading to recession or war, greater potential for sanctions to be imposed on the country or its citizens, companies or institutions, increased likelihood of sovereign intervention (including default and currency intervention), currency volatility, and increased legal risk.

Find more information on the risks of investing in an ETF in the Product Disclosure Statement for the ETF. This and the Target Market Determination for the ETF should always be considered before deciding to invest in any ETF.

Important information

The Macquarie Walter Scott Global Equity Active ETF (Managed Fund) is designed for consumers who are seeking capital growth and income distribution; are intending to use the Fund as a core component, minor allocation or satellite allocation within a portfolio; have a minimum investment timeframe of seven years; have a high or very high risk/return profile for that portion of their investment portfolio, and require the ability to have access to capital within one week of request.

The Target Market Determination (TMD), available at macquarie.com/mam/tmd, includes a description of the class of consumers for whom the Fund is likely to be consistent with their objectives, financial situation and needs.