PM Capital’s latest gamble is a global-equity income fund inspired by similar ones in the US that adopt options and currency strategies to help reduce downside risk.
The boutique manager has partnered with Zurich and the fund, described by Donohoe as a “halfway house” for investors skittish about global equity markets, will be branded as the Zurich Investments Global Equity Income Fund.
The fund is designed to provide investors access to global equity markets, with enhanced levels of income and reduced downside risk.
Zurich general manager retail life and investments, Philip Kewin, says there is increasing demand for income-generating investments, particularly among older investors, but that investor appetite for risk remains subdued.
“We believe, given the low-growth environment in Australia and the relative cheapness of international stocks, this is the right time to be accessing global equity markets,” he says.
“This fund provides that exposure to growth opportunities, but also employs strategies to reduce risk and provide a healthy level of income, well in excess of cash rates.”
The Zurich Investments Global Equity Income Fund will comprise a portfolio of 40 income-producing international stocks across a range of sectors and locations.
“We sit somewhere between debt and equity. So it’s not a new asset class – it’s still equity and it still has all the risks associated with equity,” says Tim McGowen, option strategist at PM Capital.
“But what we are trying to do and what we have done over the past two years is sell this volatility in the market and return it to investors every quarter.
Eat or be eaten
The “outside zebra” may sound like a particularly tricky yoga position, but for PM Capital chief executive, Chris Donohoe, it represents an investment philosophy intrinsic to its new global volatility fund.
As Donohoe tells it, if you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd.
The zebras in the middle see only grass that is half-eaten or trampled down, while the more aggressive ones on the fringes eat much better.
“[But] there comes a time when the lions approach,” says Donohoe. “The outside zebras end up as lion lunch and the skinny zebras in the middle of the pack may eat less but they are still alive.”
He argues that portfolio managers for institutions like bank trust departments cannot be “outside zebras” and are encouraged to adopt a group mentality.
“He cannot afford to try for large gains on unfamiliar stocks that would leave him open to criticism if the idea fails,” says Donohoe.
“We have tried to be outside zebras most of the time… and there are plenty of claw marks on us to prove it.”
“The exciting part is that the product has global scale and capacity so we can search the US and Europe, we can be in eBay and all sorts of other names, and convert market volatility into regular distributions.”
Kewin adds that this global approach provides access to a bigger universe of stocks and hence, greater opportunity for diversification and growth.
“Companies like Google and eBay are part of the current global-growth story and offer real diversification from the resources and finance stocks that dominate the Australian market,” he says.
A recent survey of advisers conducted by Zurich indicated a growing demand for equity exposure but low expectations for overall growth in local markets.
Around 70 per cent of advisers indicated that they would be moving clients’ cash to equities in the next six to 12 months, with 25 per cent favouring international equities.
Almost 45 per cent are expecting the Australian share market to provide single-digit returns over the next 12 months and just nine percent expecting double-digit growth.
The Zurich Investments Global Equity Income Fund is available to investors with a minimum investment of $5000.
