OBSR view: Stick to what you know

Or alternatively, decide what you are good at and stick to it.

Which brings me to Veritas Asset Management, an independent asset management company formed in its current guise in 2004 when Stewart Newton, yes that Newton, and his colleagues at The Real Return Group merged with Veritas Asset Management. What do they do believe in and what do they do? From an investment perspective, they seek to protect and grow the real value of clients’ capital. In my personal opinion that’s what many investors want and need. From a business perspective, the culture of the firm is one of partnership and an alignment of interests alongside their clients. The team is experienced, an invaluable trait in times like these, and many of them have worked together for a long time, at Veritas and previously at Newton. The fund range is narrow, five in total, three long-only and two long-short, and is managed according to Ucits III rules. They are Dublin-based but nowadays that should be of no concern to advisers and their clients.

Two are focused on Asia and run by Ezra Sun and his team, while three are global and managed by Charles Richardson and Andy Headley. Ezra is readily acknowledged to be one of the finest managers in his field. However it is the global funds, or rather the Global Equity Income fund, on which I would like to focus, for the remainder of my allotted space.

If and when everyone eventually stops worrying (and writing endlessly!) about US recession, Europe, even more financial meltdown, Chinese hard landings and so on it is likely we will be in an environment of fairly modest growth in developed economies, growth that will be held back by ongoing private sector deleveraging and fiscal consolidation. This will require monetary policy to support growth through low interest rates, and investors will favour income over capital, or a “search for yield”. History shows that stagnations that follow financial crises tend to favour bonds over equities as deleveraging and sub-par growth keep short rates and long-term yields low for a considerable period of time. However the appeal of bonds when inflation abounds is lowered as investors overpay for safety. Therefore equity income investing should continue to be ever more popular.

The Global Equity Income fund aims to deliver a high and growing level of income from a global portfolio and to preserve capital in real terms in the long term. In practice, the fund aims to provide a yield in excess of 115 per cent of the FTSE All-Share index. In those respects, it is relevant to UK investors. The fund’s stand-out characteristic is the extent to which the managers aim to deliver real returns to investors. Indeed, preservation and growth of capital are considered to be of more importance than benchmark risk and the portfolio is managed with little regard to an index. The managers’ use a thematic framework to help identify industries globally which they believe will benefit from long-term structural drivers. This is then overlaid with the search for companies with durable competitive advantages and strong, sustainable cashflows. In every investment made, they seek to understand the margin of safety built into the price they pay, to understand the intrinsic value of a business as opposed to the relative value. The fund is concentrated and the real return focus has meant that the fund has delivered strong returns in both rising and falling markets.

By the time this article is published, all three of the long-only funds will have our highest rating. Good indeed!