SINGAPORE (June 19): The Covid-19 outbreak has rattled financial markets and dampened economic sentiment. More companies around the world have had to settle for lower revenue and reduced profits. As the global economy undergoes an “economic rewiring”, Capital Group’s investment director Andy Budden believes the New Economy Fund is set to resonate with Asian financial markets now more than ever before.
Launched by Capital Group on Feb 10 in Singapore and Hong Kong, the fund is a global equity strategy that pursues growth by investing in companies that can benefit from innovation, exploit new technologies or provide products and services that meet the demands of an evolving global economy. The fund is currently distributed by DBS.
With some US$2 trillion ($2.8 trillion) worth of assets under management, Capital Group is now shifting its focus to companies that are at the “cutting edge of the new economy” — including ones that are actively innovating and helping to fuel a “constantly-changing economy”, Budden tells The Edge Singapore in an interview.
“Today, I think it’s particularly relevant because what we’ve already been seeing over the past 5–10 years is the rewiring of the global economy, and this rewiring is really accelerating today as a result of the Covid-19 pandemic,” he says.
According to Budden, the fund’s strategy aims to capitalise on the shift from a manufacturing-dominated economy to one that is based on services and information companies. The traditional economic sectors now struggle to grow as quickly as before. New growth today can only be achieved by accessing the new economy. “The new economy has ended up being a pretty powerful investment theme,” he says.
“We particularly like to invest in companies where we see innovation taking place. It has proven to be a good way to invest since the fund was set up, and it’s really coming to its golden age over the last 10 years in line with tech advancements,” he adds.
Unique proposition
While other funds generally depend on a single portfolio manager, the New Economy Fund adopts a capital system of management with six managers.
“A single portfolio manager is good in terms of having conviction in a portfolio and making the person accountable,” says Budden. “But some do have bad years, and sometimes they get poached to work for other organisations as well. Those represent significant risks for investors.”
Instead of having a client’s portfolio managed by a single person, the fund divides each portfolio into different sectors which are managed by different people. “This means that it doesn’t matter if one of them has a bad year, the other managers will still be performing well and ensuring the client’s portfolio performs well,” says Budden.
“It also means that you can introduce different perspectives into a portfolio to produce reliable investment results over a very long period of time,” he adds.
According to Budden, the fund is particularly appropriate for investors who have long-term views and are fairly comfortable with taking risks without any urgent need for the money.
“The reality is that all investors are different in terms of profiles, goals and risk tolerances,” he says. “We have different funds that are available for different types of investors with different goals.”
Digitalisation to thrive
From its inception in 1983 to 2019, the New Economy Fund strategy has generated annualised returns of about 10.5% per annum, ousting the MSCI All Country World Index which returned 9.5% per annum over the same period.
From Budden’s point of view, this boils down to the growth and innovation trends across several industries. For instance, he recalls how most economic activity back in 1983 was driven by manufacturing activities, or “getting stuff such as oil or commodities out of the ground."
“When the fund was launched it was all about services and information, and as time passed that still remains a big focus for the fund. But we’ve realised that you actually get growth and innovation in a number of industries,” says Budden. In particular, he notes, the past 10 years have been “truly exciting” for the fund as digitalisation has increased exponentially across countries and companies alike.
“Companies are now using tech and the internet to disrupt and transform their respective industries, and these are no longer limited to just the IT sectors,” says Budden.
For investors who are viewing the New Economy Fund as just another “tech-focused fund”, Budden stresses that the fund is far from a “hot, thematic fund” that focuses only on the latest trends. “A lot of these funds appear exciting, but we’re worried about whether they can produce good results and we also think they’re hard to use because investors have to think about which theme and when to enter or leave the market,” says Budden.
Apart from a track record of 36 years, Budden says the New Economy Fund bypasses the thematic approach, but instead focuses on delving into individual businesses through extensive research. For instance, the fund scours markets for companies with strong leadership, lean and agile production processes, efficient and effective internal operations, as well as superior research and development (R&D) processes.
“We try to understand a business, the situation it’s in today and how it’s going to evolve,” says Budden. “That’s our biggest competitive advantage today.”
Investor sentiments, preferences
While lockdowns and recessions loom, Budden says the Covid-19 pandemic has increased market shares of several new trends which are quickly becoming more important.
He points to the likes of electronic and online payments, e-commerce, online entertainment and cloud computing — all of which have seen an increased demand on the back of the virus outbreak despite creeping up over the past decade or so.
Citing “dramatic changes” in an increased consumption of Netflix or video streaming services, Budden says these companies are ones to watch.
He is also bullish on pharmaceutical drugs, particularly because technology plays a critical role in accelerating the research and development processes.
On the flipside, investors are seemingly uninterested in commodities, which he says could be a good thing as it reflects how investors are beginning to think about changes that are impacting their own lives.
“Covid-19 is accelerating the changes in what we buy, how we buy them and where we buy them from,” says Budden.
He acknowledges that investors have been “extremely nervous” amid the economic uncertainty and volatility, and fund flow data has demonstrated this with increased outflows from fixed income and equity funds. However, the New Economy Fund has bucked this trend.
“While the industry has been suffering from outflows, our funds have been getting inflows. We’ve been impressed by the calmness of many of our clients and their advisors,” says Budden.
“I would say based on investor reactions is that it’s clear that this is the right fund for this type of environment. It’s exposed to a lot of the great businesses and trends which are accelerating right now,” he adds.
Focus on the long term
For the near future, Budden advises investors to brace themselves for some “shocking economic data” as the virus takes a toll on the global economy. “Many economies are going to have all sorts of data confirming that they’re going through an unprecedented slowdown,” he warns.
“Many businesses are also going to announce significant declines in earnings and we’re going to see different countries announce second waves of infections,” he adds.
The way he sees it, central banks may have to do more to inject liquidity into financial markets and governments will have to pump out more in terms of fiscal stimulus.
“These things are tough to predict, but the challenges in the short and medium terms are clear,” says Budden. Change always brings about new opportunities, and the current pandemic will lead to the emergence of new secular trends and opportunities for companies to disrupt their technologies and market shares, says Budden. And this will allow the New Economy Fund to thrive.
“Our portfolio managers don’t see downturns as something to be scared of, but instead view these as times to be searching for companies that are going to emerge very strongly,” he says.
“I’m guessing that we’re going to see new interest around such companies amid the rewiring of the global economy, and there are smart investors who are going to potentially earn a rewarding place,” he adds.
