Emma Wall: Hello and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and I'm joined today by Lewis Grant, manager of the Hermes Global Equity Fund.
Hi, Lewis.
Lewis Grant: Hi, there.
Wall: So, there has been a lot going on in markets recently and over the last six months investors have looked to what they think are safe stocks to protect them from the market downturn and we've just been talking, you've got a really interesting point about the fact that actually perceived safety is not the same as actual safety, is it?
Grant: I think that's fair and I think it's understandable why investors have been looking over the last six months for safety. I mean, there has been a lot of uncertainty about global growth, about China. Really no one knows which direction the economy or the market is going to go in. So, people have been looking for these seemingly safe names, high-quality names, strong balance sheets, names which are paying a consistent dividend have been really highly sought after. So, dividend has been the king and it's that stable dividend that people have wanted.
But what I found quite interesting is that people have completely ignored the valuation on these stocks and it's almost been quality at any price which again is kind of understandable but it makes me slightly nervous and that safety has itself become a risk. And the reason I think that is because if we start to see a turn, if things start to pick up, certainly these companies can't justify the high valuations. Suddenly, safety doesn't really justify premium and we could see some strong drawdowns in these names. But then on the other hand, this is maybe slightly more negative view, if things keep going badly, these dividends, these consistent dividends maybe they are not quite as consistent as we thought and the classic example there is within the energy sector.
So, with the oil majors haven't really suffered as much as we might have expected given the low oil price. And actually, if the oil price isn't really going to pick up, maybe these oil majors can't actually pay those dividends anymore. And as soon as they cut or even scrap their dividend that becomes a whole different proposition for investors.
Wall: And does this apply to those stocks also which have become known as bond proxies, these sort of utility-like stocks that just kick off a dividend no matter what, like pharmaceuticals for example.
Grant: I think that's exactly right. I think it is the fact that we are looking for bond proxies. It is the fact that investors are desperate for yield that has led them towards some of these names. And let me be clear, I'm not saying they are all bad companies, I'm not saying they are all bad investments and there were a lot of companies that we hold that could be thought of as bond proxies.
But I'm just saying there are cases where we look at companies and we say, is that valuation actually justified? I mean, I understand people are nervous, I understand that fear is all that drives the market at times, but you've really got to think about value at the same time.
Wall: So, what you are saying is perhaps if you already own these, it's not a bad thing, but for new money flowing in at this point at this price, it's not the place to go?
Grant: I think that's fair. I think there are better growth opportunities and I think there is never a good time to completely ignore the value of what you're paying for your investment.
Wall: So, then I suppose that leads us to where are the greatest opportunities? Where are you looking to add new money?
Grant: I think short-term I can understand why you have to pay attention to this quality and you shouldn't really worry too much about the valuations in the short term, but we are not short-term investors.
At the Hermes Global Equity Fund we look for investments for five years plus. So, last year we spoke about our preference for Japan. That worked for a whole and then truthfully, it hasn't worked recently. People have got nervous. They have left that part of the market. But long-term the reasons for Japan still hold up and actually, long-term Japan still looks cheap compared to its own history and certainly compared to the U.S. and Europe.
And the corporate governance changes, the reason we got so excited last year, that all remains true and actually companies are now talking to their shareholders more. There is more transparency. And companies are sitting on all that cash. So, what interests me actually as companies start to increase transparencies, companies start to talk to shareholders, they'll realise that shareholders want them to deploy that cash and we could actually see buybacks and dividends coming from Japan which then again attracts that investor who is looking for yield. Actually, maybe Japan is the next place to look.
Wall: Lewis, thank you very much.
Grant: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
