Global wealth inequality may begin forcing more substantial government intervention in markets, offering an investment opportunity alongside intergenerational regulation aiming to benefit broader societies.
This is just one example of the long term secular drivers that Steve Wreford, portfolio manager of the Zurich Investments Global Thematic Share Fund, applies to his macro view of investing.
“People are no longer sure whether money transmits through the system effectively,” says Wreford, pointing to souring views on globalisation and the rise of populism.
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“We’ve watched asset prices push higher thanks to unorthodox monetary policy globally, but you’ll see society begin to push back against the distorted distribution of that wealth.
“And that pressure, combined with rapid technological evolution, we believe will get codified into government policy. We see high quality investment opportunities there.”
Rampant quantitative easing remains at the heart of most global investment discussions, though it has divided investors into two distinctive camps. The first argues that quantitative easing can continue indefinitely and governments are not constrained by fiscal deficits. This world suggests asset prices will rise indefinitely, supported in an investment spiral by leverage.
But the other camp believes QE may be reaching its limits, and the deficits will come home to roost for governments with the investment spirals sharply reversing.
“There are clear signs we are at the end of this current version of monetarism,” says Wreford, referring to centralised institutions controlling how much money is printed in an economy.
“The way that capital is distributed is likely to come under review, even if, in the meantime unorthodox monetary policy is being used to create money.”
“So rather than be pulled towards industries inflated by easy money, we’re deploying our capital to what we think is the right side in the forthcoming changes in policy, which will be led by the populations of those countries.”
WOEFULLY NEGLECTED INFRASTRUCTURE
Wreford points to the poor infrastructure investment in the western economies as a clear opportunity, particularly in increasing the productivity of long life assets.
“By adding a cloud layer or a software layer, we can see a great opportunity to upgrade existing infrastructure,” says Wreford.
But the under investment in infrastructure coincides with this extended period of monetarisation, meaning there are potentially huge ruptures to existing asset bases and to the way that investors allocate their money.
A deflationary bust, or an inflationary outcome in monetary markets may blindside investors, not to mention possibly commodity price volatility stemming from a shift in geopolitical power.
“These are unintended outcomes that some market participants have never witnessed,” he says, citing the long term vision of the fund as an important framework for successfully maneuvering this impending upheaval.
SUSTAINABILITY – THE RIGHT SIDE OF POLICY
With names like Digital Runway and Empowered Consumer, Wreford’s fund uses a top down/bottom up approach. The top-down aspect is thematic where themes are a portfolio construction device, but where themes are based principally on company, or “bottom up” observations to develop around ten global themes that form the core pillars of the portfolio’s construction.
Looking at regulation and how it responds to extraordinary monetary policy is one way of identifying mispriced investments and plays to the both the fund’s long term time horizon and sustainability considerations.
Using the social media giants as an example, Wreford points to the tension that exists between data privacy and the benefits the platforms provide to people themselves.
Movements in the European Union to curb the influence of these global monopolies is a clear signal of the kind of widespread change he expects to see.
“These social media and search companies are a feature of our current world, in that they’ve been the beneficiaries of lax regulation, globalisation and technological changes as well as monetary policy and societal attitudes,” says Wreford.
The likes of Facebook and Alphabet are enjoying a kind of market dominance unseen for a century, and given they give away their products for ‘free’, their roles in the next phase of global evolution seem assured.
“But we see these businesses like the Standard Oil of the digital age,” he argues.
“And the trade-off will be about data privacy and whether society is actually rewarded by their offerings, and as such at some point they are almost certain to be broken up, I would say.”
Pharmaceutical companies are also on the cusp of a powerful disruption, not only from competition from existing drugs but also from new technologies undermining existing formulas.
“But layered on top of that we see increasing societal pressure that will be effectively codified into government policy and press down pharmaceutical prices,” says Wreford, describing the growing backlash in the United States against opioid abuse and a bombardment of pharmaceutical marketing.
Ross MacMillan, senior analyst at Morningstar Australasia, agrees this top down, macro thinking has given the Zurich Investments Global Thematic Share Fund a unique investing point of view.
“It’s an unusual approach in global equities,” says MacMillan. “Most fund managers would use a bottom up approach where they look at stocks in an index and filter those stocks for various factors like earnings growth and high return on equity.
“But this team are looking for long term secular drivers that offer wealth creation and they’re not really designed to correlate with each other.”
Of course, the Zurich Investments Global Thematic Share Fund is not only about picking the altruistic path that governments will hopefully end up legislating in favour of, the danger of global excessive leverage is a vivid warning flag.
THE THEMES
Wreford also warns of the pitfalls of excessive leverage, with scorching levels of sovereign debt making governments very vulnerable to ruptures in that framework.
“It’s incredibly dangerous and it can be the single thing that really damages you,” he says. “We are also very wary of buying into companies that have levered up their balance sheet to buy stock.”
Corporates which have taken on considerable debt are at serious risk should a downturn threaten their profits and a rise in interest rates eat into their revenue.
Even if they’ve locked in low interest rates, a profits recession that could happen at any time should broader economic fundamentals change or an abrupt change in consumer behaviour or indeed a shift in government regulation.
“Corporates that have been extremely comfortable with the high levels of debt will suddenly go to extremely uncomfortable, particularly at the high yield end,” says Wreford.
As such, the Zurich Investments Global Thematic Share Fund thinks carefully about which jurisdictions it invests in and has dramatically reduced the number of levered companies it holds in the portfolio.
“In aggregate, the companies in our portfolio have only half the amount of debt of companies in the benchmark index,” he says, adding this should provide protection against the seismic global shifts that are on the horizon.
“None of us know what’s coming in the next evolution of the monetary system or how societies will eventually evolve,” Wreford says.
“But keeping an eye on new ways of creating and distributing wealth is one thematic we are taking very seriously.”
Wreford is a managing director and portfolio manager/analyst at Lazard Asset Management, where he is a portfolio manager of the Global Thematic fund. Zurich Investments distribute the Global Thematic fund in Australia.
