When football fan Bruce Stout watches Dundee United play, he goes on an emotional rollercoaster that only a loyal supporter can understand. But back in the office his head is clearly in charge.
‘If you get emotional in this job, you’re finished,’ he says.
Having run the €558.39 million Aberdeen Global - World Equity fund since September 2002, Stout is no stranger to the peaks and troughs of performance, or to the challenges presented by an uncertain outlook.
‘I have no idea what the future holds, you have to have the discipline to take advantage of both the cheap and expensive markets. When market moves happen you have to put emotions to one side.
‘If you don’t, you’ll start buying things at ridiculous prices and when the price starts falling you’ll be selling. That’s why we have a process and a discipline,’ he says.
However, Stout’s approach is clearly under pressure. Over the last three years, the fund has returned just 4% in US dollar terms versus 26.35% from its Citywire-assigned benchmark, the FTSE World TR USD. The manager is all too aware of the performance gap but he is quick to qualify it.
‘On a relative basis the performance over the last few years has been poor’, he says.
I joke with him that this could be comparable to Dundee United’s form in recent years, and he says there are plenty of comparisons that could be drawn between the two.
‘From an empirical view, I couldn’t argue against that because the football team was relegated in 2016 and they have consistently underperformed relative to their benchmark. Here it’s been the same, it’s been really difficult for us on a relative basis with all the issues we have had.
'For younger colleagues that is the here and now, and it’s hard for them to understand. But for me, I’ve seen this before, I saw it happen in 1998-2000.’
Made in the USA
Despite accepting the clear underperformance, Stout says the team hasn’t changed anything and that those rough periods were predominately caused by a narrowing of the market.
‘The US started to lead, just like it has before in previous difficult periods. Obviously, if you have been underweight the best-performing market in the world for the last three to four years, which happens to be 60% of the benchmark, then that is very difficult,’ he says.
Even though Stout is considerably underweight the US, with only 31.5% of the fund allocated there as at the end of September 2017, compared the benchmark’s 62%, he says it is probably the highest amount the team has ever held in the country over the last 15 years.
‘We don’t set out to manage a quasi-sovereign US fund and I think any fund that has more than 50%, never mind 60%, in one region is effectively a country fund. I’ve seen it happen before, at the end of 2000 and the beginning of 2001, the US was 62% of the index, because at the time the tech bubble was predominately US-driven.
‘You can’t actively manage against a benchmark because you don’t know what the benchmark is going to do. We have always been very demanding of a high active share’, he says.
Sticking to your guns
As well as the dominance of the US, Stout says the market also narrowed to a focus predominantly on tech, biotech, and healthcare.
‘We do have exposure to some of those businesses like Roche (3.3%), Novartis (3.0%) and tech companies in general (17.8%), but never as much as what actually drives markets.
‘We haven’t seen a huge move in earnings or fundamentals over the past few years. What we have seen in the sector is an expansion of multiples, and the price people are prepared to pay just keeps creeping higher and higher. However, the higher price is not accompanied by higher profitability.
‘It’s all about the promise of future delivery, which may or may not come.’
Stout affirms that he doesn’t want the fund to become a quasi-country or tech fund and says the team is focused on keeping the strategy a diversified global product.
‘That has served us very well in both absolute and relative terms in shorter time periods. There have been times where that has been fine from an absolute return point of view but then it’s also hurt from a relative perspective.
‘The periods I remember most clearly are 1998 to 2000 and 2013 to 2015. These examples are very similar in terms of the way the benchmark moved and both were very unfavourable for our style of investment.’
Stout says the market is prone to such moves, but that doesn’t mean the team changes the way they manage money.
‘There are always opportunities you miss, because you can’t be all things to all people. There will always be issues with investments where you look back and think you could have done better. But it’s just the same with life, isn’t it? It’s always easy to look back, but we have to look forward and acknowledge we had a tough time from a relative point of view, but we have got to keep progressing.’
Investors without Stout’s staying power have voted with their feet. In October 2016 assets were around €782.29 million, while redemptions have reached €150 million in the past year. Again, Stout says the team hasn’t sold out of anything because of this, and instead he goes on to highlight another out-of-favour asset.
With notable country allocations in places such as India (3.1%), Taiwan (3.1%) and Brazil (2.8%), he says the fund has always had consistent exposure to emerging markets, which had previously been shunned by investors.
‘Those markets were unloved in 2013 to 2015. There was a sort of cathartic sell-off in EMs, with the prevailing wisdom that the asset class was finished, which was a bit ridiculous because there are so many top-quality companies, but the asset class has been through the mill.
‘There was taper weakness in currencies, higher-than-expected interest rates and lower-than- expected growth. There were some really negative factors but some great businesses and in the last 18 months, it’s become clear that there is no longer this revulsion towards EMs.
‘I wouldn’t say the world wholeheartedly embraces the concept again, but the selling has dried up and there are even positive inflows going back into the asset class.’
Emerging markets seem to have come out on the other side of troubled times, but Stout says he can’t predict whether or not his fund is about to follow suit.
What he does want to make clear is that his team doesn’t manage money with relative performance in mind.
‘It’s impossible because you have no idea what the market is going to do, but what you can do is understand the business and the value of it.
‘If you can value it correctly you should be able to tell whether it is expensive or cheap. That’s at least a step in the right direction. If it’s cheap and nothing is changing, then buy more of it, if it’s really expensive just take some money out of it and recycle it,’ he says.
Despite being buffeted by unfavourable trends, Stout says his fundamental stance has given the team a style and a process which is evermore important as financial markets continue to change.
‘Your style makes you hold onto things when everything around is chaos. Financial markets are so short-term now, they are a lot more short-term than they have ever been in my career. There are day traders now for goodness sake, who spend their whole day buying and selling just to make money over a period of eight hours when the markets open.’
Having started his career with Aberdeen in 1987, with roles as an investment manager and within the emerging markets team, Stout is clearly not in it for the short term.
‘That’s not what we are about, we are involved in the long term. But you can’t deny that all of these sorts of things have a big influence. Shorting has a big impact, as do ETFs. Then you get things like the FANG (Facebook, Amazon, Netflix, and Google) stocks.
‘You have people putting together ETF products that represents the FANGS, we have seen things like that before. It might be fine, it might not be, I don’t know. But what I do know is that it’s not normal practice,’ he says.