The Northstar team have a long track record of managing global assets. Since 2012 a significant amount of analyst time has been devoted to global equity analysis, while the acquisition of SignalHill Investment Management at the start of 2017 brought specialist skills and even greater focus to this area of our business.
In marketing our global offering, we frequently encounter the view that South African based fund managers are somehow at a disadvantage to global managers, notably those based in the large financial centres such as London or New York.
In our experience, any practical disadvantages of not having a US or UK base can be fairly easily overcome, while fairly overwhelming evidence exists to suggest that being based outside one of the global financial centres is no longer a deterrent to establishing a superior long-term performance record and may well offer an advantage. Our view is vindicated by Buffett when asked why he has consistently used Omaha as his preferred investment address: “It’s very easy to think clearly here. You’re undisturbed by irrelevant factors and the noise generally of business investments.”
Informational advantage
The first point to address in the debate is whether or not one believes any informational advantage exists and whether more information (over and above an adequate level of disclosure) leads to better investment decisions?
In the age of the internet, 24-hour global business news channels and the availability of commercial databases, it can hardly be argued that fund managers suffer a lack of information, regardless of where they may be based.
The adoption of common global reporting standards, improvements in the level of disclosure of company information, along with the fact that public comments by company management teams are increasingly heavily scripted, implies that little to no informational advantage exists. Certainly, the largely desk-based analysis of the available information, a vital component of any research process, can be conducted as thoroughly, whether one is based in Tokyo or Timbuktu.
Access to talent
Drawing investment insights from the available information is of course a function of the human resources available. We continue to invest very deliberately in our Trainee Analyst Program in order to attract and retain the best young graduates and have found the ability to offer global investment experience to be a key differentiating feature of our Program.
Each of our team of 5 research analysts has, or is in the process of, completing the globally recognised Chartered Financial Analyst Program (CFA). We routinely receive approaches from South Africans looking to return from working overseas, having gained valuable experience with global institutions.
Philosophical and process discipline outweigh coverage
Successful investing, in our view, is the synthesis of information through an overriding philosophy and the application of a disciplined and repeatable process.
Our insistence on only investing in the relatively small group of companies we believe capable of sustaining an identifiable strategic competitive advantage and where that advantage is evident (and measurable) in superior Return on Invested Capital (ROIC) and Free Cash Flow (FCF), is hugely beneficial in reducing the investment universe to a manageable group of companies.
A defined “circle of competence” implies greater focus and with time, a deepening of our understanding of the investment universe and portfolio companies, which translates into greater conviction.
This approach runs counter to that taken by the majority of large global investment companies where coverage is paramount, given the need to satisfy a broad range of products and investment styles. As a consequence, portfolio managers are most often quite removed from the research process, likely operating off a Buy List, with little to no detailed understanding of the companies being included in their portfolios.
The Northstar approach is quite the opposite, with portfolio managers contributing to the research process and at the same time working in collaboration with our team of analysts to offer the benefit of their experience and to ensure the best insights and assumptions are driving the research.
Performance
We are fortunate to operate in an industry where results are imminently measurable and over time help make the argument.
Figure 1 shows the performance of the Northstar Global Equity Strategy (gross of fees in US dollars) versus the MSCI World Index as well as the average Global Large Cap (Morningstar) and South African based Global General Equity manager (ASISA). From this we can see that there is not a great deal to choose between the average South African and Global manager, suggesting no particular disadvantage from being based in South Africa.
More striking is the extent of the underperformance of both averages relative to the most widely followed benchmark, the MSCI World. Even the most generous adjustment for fees would leave the average manager trailing the index by some margin.
Northstar’s return would rank amongst the top 1% of global equity managers over every period from 6 months to 6 years.
Figure 1 shows the performance of the Northstar Global Equity Strategy (gross of fees in US dollars) versus the MSCI World Index as well as the average Global Large Cap (Morningstar) and South African based Global General Equity manager (ASISA). From this we can see that there is not a great deal to choose between the average South African and Global manager, suggesting no particular disadvantage from being based in South Africa.
More striking is the extent of the underperformance of both averages relative to the most widely followed benchmark, the MSCI World. Even the most generous adjustment for fees would leave the average manager trailing the index by some margin.
Northstar’s return would rank amongst the top 1% of global equity managers over every period from 6 months to 6 years.
Northstar Global Flexible Strategy reaches a 3-year track record
Next month the Northstar Global Flexible strategy reaches a 3-year track record. This strategy draws on our equity process but has the flexibility to invest across all asset classes in order to diversify risk and enhance yield. The fund has achieved a top decile ranking since inception (Figure 2).
Inception date 1 January 2013 Northstar returns are gross of fees, with income reinvested in USD This performance presentation is for information purposes only and does not comply with the ASISA Code of Advertising. Northstar Global Equity returns are representative of the Northstar Global Equity Model Portfolio, an “equity-carve out” for the Northstar SCI Managed Fund (2013-2016), Instit BCI Worldwide Flexible Growth Fund (2017) and the Northstar Global Flexible Fund (2018) Figure 1. Northstar Global Equity Performance. Source: Northstar Asset Management. Bloomberg and Morningstar (12 December 2018).
Conclusion
A sound philosophy, disciplined process and most importantly, the ability to focus on a defined investment universe is what sets fund managers apart. Behaviour and insight and not information are key differentiators and location appears to offer no advantage in this regard.
We are proud of the fact that we have been able to put together a global track record which stands up against the best in the world and which Northstar clients continue to benefit from.
Inception date 11 January 2016 Northstar returns are net of fees, with income reinvested in USD This performance presentation is for information purposes only and does not comply with the ASISA Code of Advertising. Returns shown prior to the launch date for the Northstar Global Flexible Fund of 1st June 2017 are for the Instit BCI Worldwide Flexible Growth Fund, an institutional segregated account following the same strategy. Figure 2. Northstar Global Flexible Performance. Source: Northstar Asset Management. Bloomberg and Morningstar (12 December 2018).