Investors seeking high alpha should look to concentrated strategies, according to Andrew Arbuthnott, head of large cap European equity at Pioneer Investments and lead manager of Pioneer Funds Top European Players.
“Concentrated investing allows managers to really exploit their ‘best ideas’ – that is, investing in a limited number of companies which they believe will deliver the greatest potential returns.”
Arbuthnott says that, in a market less driven by macro events going forward and where company fundamentals will matter much more, focusing on companies with the ability to deliver potential returns should result in outperformance. Focusing on company fundamentals, choosing the best companies and investing with conviction means that each well-researched idea will have a definite impact on performance.
Pioneer Investments believes it can invest in this manner without taking on unnecessary risk and says that investing in 35 to 45 stocks creates sufficient diversification without diluting the impact of its best ideas. Each stock, when it performs well, will have a meaningful impact on the portfolio’s return.
“We would argue that running a diversified portfolio creates a risk in not generating sufficient alpha or net returns in excess of the benchmark over a longer-term horizon,” he says.
Arbuthnott, however, recognises the risks of concentrated investing and manages the risk in the portfolio in two ways. First is discipline in the approach to investing. He believes emphasising quality helps to manage downside risk in a concentrated strategy. To this end, he seeks undervalued companies with a healthy balance sheet, strong competitive position and management, recognised franchise and potential to grow within their industry.
Second, and a key point of difference he claims at Pioneer Investments, is a dedicated portfolio construction team.
“We have developed a proprietary risk analysis system with the primary objective of helping to maximise the risk-adjusted performance by identifying what is contributing to risk within each portfolio,” says Arbuthnott.
“This dedicated team works closely with all portfolio managers on my team to identify potentially unintended risk positions and key drivers of both the portfolio and market performance. This allows us to make decisions about individual investments based on a clear understanding of the contribution to risk and portfolio return expected from each individual investment position.”
Combining a concentrated approach with stringent risk analysis has helped the European equity desk at Pioneer Investments achieve high alpha portfolios with low tracking error.
‘’This results in a high information ratio, which measures the consistency of the fund manager in generating superior risk-adjusted performance, illustrating that we have generated alpha efficiently and, importantly, aim to do so in a repeatable manner.’’
Pioneer Investments believes that 2014 will be another positive year for European equities. “We believe the profitability in Europe should improve in 2014 but as a result stock selection will matter more for investors. Therefore, selecting the correct companies becomes ever more important.
Unless otherwise stated all information and views expressed are those of Pioneer Investments as at November 15 2013. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. The content of this document is approved by Pioneer Global Investments Limited. In the UK, it is approved for distribution by Pioneer Global Investments Limited (London Branch), Portland House, 8th Floor, Bressenden Place, London SW1E 5BH, Pioneer Global Investments Limited is authorised and regulated by the Central Bank of Ireland and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority (FCA) are available from us on request. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.
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