For super funds and their advisers

Hexavest questions the big tech stock valuations

Marc Christopher Lavoie

Fund managers love their acronyms. We currently have the FANGs and more lately we have the BATs. We used to have the BRICS too, but they fell out of favour. But both the latest tech-orientated acronyms – FANGs and BATs – have their drawbacks, according to Hexavest. Value is being tested.

Value managers have, over the past 80 years, generally outperformed the other styles. Not always, of course. But generally. Momentum and growth managers have, too, from time to time. But if you are investing for the long term, you’d probably want to do it in a value style. Benjamin Graham came up with the “Theory of Investment Value” in 1938. The Rothschilds followed suit and made a lot more money than poor old Ben did.

Meanwhile, Montreal-based Hexavest, which has eight big Australian fiduciary investor clients and about A$2.5 billion in Australia-sourced mandates, is looking forward to the next little while in global markets. Most pundits believe that almost all share markets, particularly the US and Australian markets, are over-valued and headed for a fall. Hexavest’s flagship global portfolio is defensive in nature. It should outperform in the expected coming down market.

Marc Christopher Lavoie, the Hexavest president and portfolio manager, who visited Australian clients last week, says his firm is questioning the value in the ‘FANGs’ (Facebook, Amazon, Netflix and Google). Hexavest recently produced a paper on the subject.  He is also doubtful of the immediate prospects for the Chinese equivalents, known as the ‘BATs’: Baidu, Alibaba and Tencent.

Hexavest, an affiliate manager of Eaton Vance, is a multi-style macro manager with a leaning towards value and momentum and with a process which includes a lot of stocks – more than 300 in its global portfolio. Lavoie says: “What worries us most is the combination of expensive valuations and complacent investors… Everyone thinks they can exit the market before the others do…”

He says that in the last two big downturns, which led to recessions in most countries (but not Australia), in 2000 and 2008, the causes were not weakening economies. They were the markets.

Duncan Hodnett, the Sydney-bases head of Eaton Vance, says that Hexavest was active in its management of currencies, too, where it felt it could add value as a macro manager. “Over the long term, currencies are a zero-sum game,” he says. “But short-medium term can provide some extra alpha.”

Hexavest’s current view is to be overweight Europe, where it has put profits from its previous overweight position in emerging markets. The firm had been overweight emerging markets for about three years, selling down in April. “We think Europe is about mid cycle while the US is late cycle,” Lavoie says.

As a top-down manager, Hexavest has a keen eye on politics. Lavoie says the recent “disastrous” G-7 Summit (“it was really G-6 plus 1”) showed up the problem with new tariffs. “They are a tax on the consumer,” he says. “For instance, the new tariffs on Canadian lumber will add about US$6,000 to the average US house price. Who is going to pay for that?”

Hexavest believes that the tipping point will come soon when US interest rates rise a bit more, perhaps around the 3.35-3.50 per cent mark. “At some point the relationship between fixed income and equities will change,” Lavoie says. “That’s why we prefer Europe right now.”

– G.B.

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