CHRIS LEES and Nudgem Richyal have spent 17 years building one of Pendal Group’s most successful investment strategies — and now it’s finally available in Australia.
Originally created in 2004 at Barings Asset Management, the global equities strategy features very different names to those that frequently dominate such funds.
The pair brought their strategy to Pendal’s UK-based asset manager JOHCM in 2008, where they built it into a US$5.3 billion fund. Since then JOHCM Global Select Fund has delivered 3.13%* annualised alpha (before fees) compared to the MSCI All Country World NR Index benchmark.
It’s also delivered top-decile performance in Lipper and 2nd decile in Morningstar.*
After recently launching in Australia as Pendal Global Select Fund, Zenith awarded the fund its highest rating of “Highly recommended” (Sep 27, 2021).**
“If you asked clients about us, they would say ‘Chris and Nudgem are Yin and Yang’,” says Lees, a Londoner who now lives in a small village called Andermatt in the Swiss Alps.
“We both bring very different things to the process.”
Singapore-based Richyal says: “We feel unique because we are trying to combine this high-conviction, bottom-up stock picking within the context of top-down factors — particularly sectors and countries.
“It sounds glib, but it’s the Warren Buffet bottom-up stuff with the George Soros top-down stuff.”
Lees uses the word “quantamental” — a merger of quanatitative and fundamental — to describe the the process.
“The first dimension is old-fashioned stock-picking via fundamentals. We are looking for good or improving companies.
“The second dimension is valuation. We want those companies in the right sectors at attractive valuations.”
Analysis of sector, country and other factors is important in this part of the process. “Think of it like real estate. Even the best home in a deteriorating neighbourhood can lose you money,” Lees says.
“Third, we buy shares when they’re going up, not down, because that’s the only way you can make money for your clients.”
A critical part of the third dimension is understanding key drivers of not only different sectors, but different geographies.
“Just look at China right now. It doesn’t really matter what stock you hold, it hasn’t worked out well,” Lees says.
“And the fourth dimension is about tomorrow. The world is always evolving. Nobody could have seen the exact impact of COVID, for example. The fourth dimension is where we are really good,” Lees says.
“We can map out very quickly the good houses in the good neighbourhoods and map out what’s changing over time,” says Lees.
“We quant-screen and that tells us what the best stocks are, what the best sectors are and what the best geographies are. We do that Monday morning — we call that three-two-one.
“Then we spend the rest of the week thinking about the fourth dimension — what’s changing, what’s evolving, which good areas are getting slightly worse. Which bad areas are getting slightly better?”
Lees and Richyal adopt what they call an “open-source” attitude to finding opportunities — a reference to the software development paradigm that draws on expertise form many sources.
The pair draws on the expertise of 50-plus investment professionals at Pendal’s UK-based asset manager JOHCM.
“Open source always wins in technology because it’s about taking ideas wherever you find them,” Lees explains.
“All the teams in JO Hambro are coming up with great ideas for us to take a look at.
Richyal says this philosophy is critical to their ability to outperform the benchmark.
“We don’t care about the provenance of the idea. If it’s interesting we will go and do our checks on it,” Richyal says. “That open-mindedness to ideas really helps.”
Often, they don’t agree about stocks.
“That’s part of our strength. We come at opportunities from slightly different ways,” Richyal explains.
“We have this rule of thumb about stocks. If it’s one minus one — one of us likes it, and the other doesn’t — it doesn’t get in,” he says.
“If it’s one plus zero, that gets in if one of us can convince the other. Over time that’s where we’ve gotten the best results.
“But if it’s one plus one, those are the stocks that are usually at the end of their life,” Richyal says. “If it’s so obvious that we both really like it, it usually means there’s not much juice left.”
“And then there’s the minus one, minus one. They tend to keep underperforming.”
“If we’re both very bullish on something, we make good money on it but not really good money. Historically we’ve made most money where one of us is pounding the table bullish, whether it’s a stock or sector or geography or currency.
“In that case it’s good to have the other person’s scepticism in the room,” he says.
Agility is important, Lees says.
“By the time a large investment committee agrees on something, often the opportunity has gone. The real money is made where someone has spotted something early, and the rest of the room waits to gather more evidence.”
And given the breadth of the fund — global equities — there are relatively few stocks.
“If you want to outperform the global index, you’ve had to own a narrow set of companies,” Lees says. “It’s always been that way.”
Over the past decade holding the big technology companies has meant outperformance, he says. The decade prior to that was about holding emerging markets and commodities, and then in the 1990s it was about holding technology, media and telecommunications companies.
Digitisation, decarbonisation and deglobalisation are the new themes.
Lees says critical to the fund is knowing when to sell stocks.
“It goes right back to what Einstein said when he was asked what the greatest discovery humankind had ever made. He said the power of compound interest,” Lees says. “Most people still don’t understand that. If you are holding losers in your portfolio, you’re holding back the compounding effect.
Lees adds that it’s been proven that losing stocks carry on losing with greater persistency, and winning stocks carry on winning.
“Weed out the losers and let the winners run.”
Just as critical is equal weighting of the portfolio’s 30-to-60 stocks.
“It’s proven to work,” Lees says. “It tilts you away from large cap growth over time and it tilts you towards mid-cap value. And its systematic rebalancing. It forces you to trim you winners back to equal weight. And review your losers.”
Richyal says its about mitigating the endowment effect on the way down.
“That’s when you ascribe more value to something in your possession than its actually worth in the outside world. And on the upside, we’re trying to mitigate overconfidence bias.”
“We really believe that performance follows flows. And our process has been built to say where is the money going to go to? We aren’t trying to pre-empt that move. We are just fast followers and lock on to the trend.”
*Source: JO Hambro, Morningstar universe – Global Large-Cap Growth Equity funds, Lipper survey – Sector quartile ranking: IA Global, and Lipper Global Equity Global domiciled in the UK, offshore Ireland, or offshore Luxembourg. Lipper ranking is from A GBP Class. Please note that these performance figures have not been calculated in accordance with the Financial Services Council (FSC) standards
** The Zenith Investment Partners (ABN 27 103 132 672, AFS Licence 226872) (“Zenith”) rating (assigned ) referred to in this document is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at http://www.zenithpartners. com.au/RegulatoryGuidelines
Chris Lees and Nudgem Richyal are senior fund managers of Pendal Global Select Fund. The pair have been working together as investment managers for more than 20 years.
Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.
Nudgem has 22 years of industry experience, joining JOHCM with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.
* Source: JO Hambro, Morningstar universe – Global Large-Cap Growth Equity funds, Lipper survey – Sector quartile ranking: IA Global, and Lipper Global Equity Global domiciled in the UK, offshore Ireland, or offshore Luxembourg. Lipper ranking is from A GBP Class. Please note that these performance figures have not been calculated in accordance with the Financial Services Council (FSC) standards.
Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at September 27, 2021. PFSL is the responsible entity and issuer of units in the Pendal Global Select Fund (Fund) ARSN: 651 789 678. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8:00am to 6:00pm (Sydney time) or visit our website www.pendalgroup.com
The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.