Morningstar Awards 2012 Winner Feature - Aberdeen Global World Equity Fund

Andrew McMenigall

Andrew McMenigall is a senior investment manager on the Global equity team of Aberdeen Asset Management.  Andrew joined Aberdeen via the acquisition of Edinburgh Fund Managers in 2003. Prior to that, Andrew worked at Ivory & Sime where he was an investment manager on the Global equity team. Previously, Andrew worked for Scottish Mutual as an investment manager on the North American team. Andrew also worked for Prospect Communications Ltd as Finance Director. Andrew began his career with Ivory & Sime as an investment administrator before progressing to an investment manager.

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Morningstar: What is your economic outlook for 2012 specific to the markets you cover and how are you positioned to take advantage of opportunities and/or mitigate potential risks?

McMenigall: Economic growth is slowing across the world. As far as we are concerned, that is good news – not necessarily for those ‘Western’ economies which could contract in 2012, but for some of the emerging ones, which had pushed through their non-inflationary growth rates. It is interesting to reflect that global growth had become too imbalanced, with disproportionate growth rates coming from some of these large emerging economies.

Were this a normal cycle, then monetary policy would be loosened in hope of effecting soft landings. Unfortunately that avenue is not open to many countries, particularly those who have expended their entire monetary arsenal over the course of the past 20 years. Some of these countries may look to use, or continue to pursue, so called ‘non-conventional’ monetary policy in the form of quantitative easing. It is highly debatable whether those that have chosen to go down this road over the past few years have realised much benefit.

We are clear that 2012 will likely see earnings expectations fall, in line with slowing economic growth. The more vulnerable equities will, in general, be those that are more sensitive to economic activity.

We are, and have been for some time, quite defensive in the general shape of the portfolio. We make no prediction of how markets will fare in 2012, but we believe that we have left ourselves in a position to take advantage of further speed bumps.

Morningstar: Could you highlight any major changes you made to the portfolio over the course of 2011? Were there any particular holding that drove the fund’s performance for the year?

McMenigall: Significant portfolio activity in 2011 included the introduction of three new stocks: Mexican convenience store and beverage company Femsa because of its reliable cash flows and attractive valuation; UK-based HSBC in view of its strong Asian and emerging markets franchise and robust capital position; and Swedish industrial company Atlas Copco given its solid business structure and sound management strategy.

Other major changes included divesting German utility group E.On as regulation of the domestic energy market was becoming increasingly opaque as well as Adidas and Philips Electronics because of better opportunities elsewhere.

Over the year, the fund outperformed its benchmark by around 2.6 percentage points despite volatile market conditions. Superior stock selection lay at the core of the fund’s outperformance, supported by our preference for well-managed companies, solid balance sheets and robust business models. Our consumer-oriented stocks, Philip Morris International and British American Tobacco, were among the best relative performers. Swiss holding Roche also generated healthy returns.

Morningstar: Can you comment on the risks facing the global economy, including the European debt crisis and the headwinds facing the Chinese economy? How do these risks affect your investment decisions?

McMenigall: Recent actions by the ECB have averted a potentially damaging credit crunch and may buy yet more time. But strict austerity measures across the Continent to rein in fiscal deficits will depress growth and government revenue, creating a negative feedback loop. Meanwhile, voters are growing increasingly sceptical of the euro. So there is potential for significant further volatility into 2012.

Meanwhile, China’s domestic economy is weakening at a time when external demand is also slowing. Given the way China works, however, that may not be as bad as it sounds. The government has money to spend to keep up growth. There is room to ease monetary policy, too. The risks are more about what happens afterwards. State companies are lending unused cash to those that can’t get it, creating a huge potential debt problem, and the banks will probably need further re-capitalisation.

As noted above, we do not try to predict economic conditions or the stock market. We prefer to spend time doing what we do best – focusing on companies’ strength and resilience, and whether they will be able to withstand whatever is thrown at them.

Morningstar: How is your investment team organized? Have there been or do you anticipate any changes to the investment team or structure over the course of the year? Do you anticipate adding to the team in the near future?

McMenigall: We have a team approach where investment decisions are made collectively – we avoid cultivating ‘star’ fund managers. We believe cross-coverage of securities increases our objectivity and lessens reliance on individuals. Furthermore, our asset managers are based in the regions where we invest so investors can benefit from their local knowledge.

To this end, we have regional investment teams in London, Philadelphia, Singapore and Sydney, plus managers based in satellite offices such as Hong Kong, Paris and Tokyo. The Global Equity team located in Edinburgh constructs the portfolios utilising our locally sourced in-house research. The team is currently comfortably staffed and has no plans at present to make any additions.

Morningstar: Can you highlight any areas where you feel that the investment team or the company can improve upon?

McMenigall: We will not change our bottom-up, buy-and-hold strategy. However, while the core elements are in place – a team approach, cross-coverage of markets, two-step due diligence for quality then price – we are always looking to refine the investment process.

We try to incorporate checks and balances as we learn from mistakes, reflect on feedback from clients or consultants, and refine ideas as the legal, regulatory and industry environments change. This is best reflected in our company visit template, which has been improved as we have added screens for the likes of forex, governance, off-balance sheet items, etc.