By Andrew Main
Myooran Mahalingam, Global Equities Portfolio Manager, MLC
Myooran Mahalingam doesn’t come across as a man who stays awake at night worrying about the A$20 billion global equity portfolio he looks after for NAB Asset Management, possibly because he’s had 10 years to get used to the idea.
A qualified actuary who worked in that role at Deloitte before joining MLC in 2001, he knows how to compartmentalise and most usefully, how to delegate.
He joined as a top-down strategist, moving in 2004 to manager research, and has now had a decade in the ‘big picture’ role.
And a lot of his time is spent researching the capabilities of the wide range of international equity managers that he mandates to get the best performance from his funds.
As an escaped actuary he’s mathematically inclined but he’s aware that choosing a manager by their numbers risks being a retrospective exercise, because the statistics are all about past performance.
“You go through that process and you realise that although the numbers and the analytics are helpful, they are only a small part of how you come up with a solution.’’
He concedes that all managers want to tell him how good they are, but the occasional quiet exit interview with fund managers’ former employees provides him with a more complete picture.
“We say it’s people, philosophy and process.”
One of his most illuminating proofs of that mantra came in September 2008, when he found himself in London. At that time the rumour mill correctly predicted that giant US investment bank Lehman Brothers was about to collapse.
“It was a fascinating time to be there because we were going into the offices of global equity managers and there was a wide range of unknowns, and of possible outcomes. That’s the time when managers should absolutely not be emotional, they should just be objective. They should just revert back to their stated process. That’s where process and your philosophical underpinnings become really important,” he says, inferring that some stood out by being cool under pressure.
“We don’t go down the path of regionals. We pick the best manager, irrespective of whether they are in Europe, Asia or the US. We want our managers to select the best companies from around the world, irrespective of where the company is listed. We assess managers that assess opportunities on a truly global basis so we give out global mandates.”
And he compares the process of selecting managers to baking a cake.
“There are two steps to take. The first is to select the kind of pristine ingredients, and when I look at global equities I’m talking about selecting the high-quality investment managers, that we expect have a process of selecting companies that will outperform the market. Those are the core ingredients.
The next step is putting all those ingredients together and you want to make sure it ends up looking, feeling and tasting like you want it to.
Too much of one ingredient upsets the balance. We want to ensure we have diversity within the cohort of managers that we pick. If there are two high quality managers who do exactly the same thing, we don’t need both.”
“What we want to have happen is when some managers are zigging, we want others to zag so there’s true diversification.”
“Any portfolio in Australia that doesn’t contain an element of global exposure is running a risk.
If you look at the Australian equity market, it only accounts for around 2.5% of listed equities around the world so if you don’t go global, you’re missing out on say 97% of investment opportunities.1
And the world is becoming much more globalised. The phone that you’ve got in your pocket was probably designed in the US and made in Korea or in China.
You will miss out on a significant part of the investment opportunity set and remember too that the domestic equity market in Australia is dominated by financials and mining. It’s very narrow.
Dividend franking does provide reasons for investors to invest domestically rather than overseas. The local market’s got a higher dividend yield than globally, and franking comes on top of that to provide incremental returns.
Franking does help a domestic investor but purely from a risk and an opportunity perspective, going global is more sensible and more prudent.”
“That’s always a hard one in the sense that there’s always a role, in our view, for foreign currency exposure to play in an overall portfolio.
Foreign currency exposure initially acts as a diversifier. It reduces the overall portfolio volatility but after a while, the diversification benefits start reducing because you can have too much foreign currency exposure.
You need to have some exposure that is unhedged and potentially some that’s hedged. The hard thing is judging how much to hedge and vice versa.
That depends on a whole range of factors such as what we call carry, interest rate differentials, or starting valuations, and what pairs of currencies you are looking at because our investors are Australian dollar investors.
So there’s just a whole range of factors that you need to take into account to create the optimal hedging strategy.
We’re quite dynamic in making that assessment so it’s difficult to come and say, that “x” should be your exposure to unhedged.”
He said one factor would be whether or not the Australian dollar was perceived to be under or overvalued, with an undervalued Australian dollar for instance, encouraging hedging.
“The initial exposure to global equities introduces foreign currency exposure because it’s unhedged so it provides diversification.
And once you hit a certain point then broadly speaking, you’re better off having that incremental amount hedged than unhedged. How much you should have just depends on how much global exposure you have.”
1. MSCI, 31 March 2017.
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