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Principal Global Investors has been a beneficiary of market turmoil, adding around $4 billion of new mandates to the $20 billion it manages in global and international (ex-US) equities over the past 12 months. But the extremes in volatility in early 2008 have been difficult for its investment team.
ThatÆs because the firm has a hybrid strategy of quantitative screening and bottom-up fundamental research that, the firm claims, generally outperforms indices such as the MSCI World in both up and down markets (by 200-400 basis points, for its most active strategies), but not during æinflection pointsÆ, times when the leading dynamics in equity markets change.
Early 2008 has been such a period, Dunbar says, but he thinks the dominant trends for the foreseeable future are now set: fears of inflation, rising energy costs and a troubled financial sector.
By identifying the most important forces in the global economy, PrincipalÆs equities team can then figure out the stocks it wants to put in its portfolios. For example, inflation expectations and rising energy costs impact the market for corn. Until recently this food item was so inexpensive that it had become pervasive throughout the United States, but now Principal says it is a fossil fuel-based commodity, because oil is required to run the big harvesting equipment, and nitrogen is required for fertilizing the crops. In America, corn has gone from $2 a bushel to $7 a bushel. The longer oil prices remain high, the bigger the impact on the price of processed foods.
ôIn a period like this, the ideas generated through our investment process change rapidly, and so turnover in the portfolio has become higher,ö Dunbar says. The team has shifted to being underweight financials and overweight certain commodity plays such as fertilizer and potash.
But the more important thing is that he believes the team is reaching clarity about what the rest of the year, and perhaps next year, holds. ôSome of these concerns will linger for a while,ö Dunbar says, noting that write-offs and surprises will continue to plague the financial sector, inflation will continue to scare businesses and governments in developed and emerging markets, and energy will remain expensive. ôIÆve heard every theory about where the oil price is going and IÆm pretty sure itÆs not going back to $60/barrel,ö he says.
But itÆs not yet time to plunge into those bets that are shaping up on his analystsÆ screens, in part because of the risk of government response. ôGovernments are manipulating markets,ö he says, such as housing. Rather, the firm is gradually building positions, and becoming more confident about where to find value.
ôItÆs certainly a better time to invest in global equities than it was in January,ö Dunbar says. ôItÆs going to remain volatile but P/E ratios and valuations are more attractive. In the long term weÆre optimistic because of the efficiency gains still to be had in emerging markets, particularly China and India.ö
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The fund's 29.6% returns marked its best ever and exceeded its reference portfolio, which has 80% allocated to equities, by 1.73%.