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Carmignac increases long-term, non-cyclical investments

Paris-headquartered Carmignac has increased allocations to Chinese equities, as it focuses on secular growth opportunities to raise returns, which are becoming harder to harvest in a low-interest rate environment.

It comes after Didier Saint-Georges, head of portfolio advisers, managing director and member of the strategic investment committee at Carmignac, commented in a note last December that the asset manager maintains its conviction-based approach to investing.

Saint-Georges said: “We are thus convinced that the most robust way for us to achieve long-range returns is to identify business models that can generate powerful growth and substantial profits over a five to 10-year span.”

Since September 2019; the Carmignac Portfolio Emerging Patrimoine, a mixed fund with €487m of assets under management, has raised its exposure to Chinese equities in areas such as e-commerce and fintech/digital economy (to 18.3% from 10.9%) and online ads and health care (to 7.4% from 3.2%).

Strategic focus

Carmignac selects companies with superior business results in sectors that drive the technological revolution and belong to disruptive, long-term trends.

David Older, head of equities and a fund manager at Carmignac, said that their conviction-based approach applies a rigorous company analysis and allows the asset manager to increase positions even when “the market goes against you”.

Looking more to the long term, Carmignac has also reduced short-term trading, Older told Expert Investor at a press event in Paris.

“We have dialed down the thought that we can time the market,” he said, pointing to difficulties in anticipating short-term changes in stock valuations.

Older sees particular value in Chinese stocks as they trade at a discount. The positive dynamic coming from the US-China trade war and the signing of a first phase agreement further adds to this, he noted.

Meanwhile, Guillaume Rigeade, fixed income fund manager at Carmignac, believes that risk could come from the tightening of China’s monetary policy.

It would need more stimulus, Rigeade said, so that China’s economic growth does not slow down.

While China’s central government supported the economy with infrastructure investment, its implementation at the local government level is slow, he noted.

Background

Carmignac, with €35bn of assets under management, has seen large outflows from two of its funds between November 2018 and December 2019.

In this period, the Carmignac Sécurité fund shed €4bn, while the Carmignac Patrimoine fund decreased by €5bn, according to Morningstar data.

Saint-Georges explained that one reason for the underperformance was because the asset manager failed to “extract” the strong investment convictions from its research that it used to.

In January 2019, Carmignac set up a strategic investment committee in a bid to return to its roots.

Last year; the asset manager launched, among others, two global large-cap equity funds: the Carmignac Portfolio Grandchildren and the Carmignac Portfolio Family Governed fund, both applying environmental, social and governance (ESG) criteria.

Carmignac also announced it will release an ESG code this year.

US view

Frédéric Leroux, head of cross asset and a fund manager at Carmignac, explained to the press that it views the position of the US as “slightly stretched”.

He expects the US to benefit less from expected global growth, while the US is signalling possible weakening consumption.

“We see strong signs that the dollar might deteriorate against the interest rates,” he added.

Older sees continuous growth potential for US tech stocks, such as Google, Facebook and Instagram given the latest US-China trade war developments.

Such companies will gain greater access to the Chinese market as part of the planned US-China phase two agreement, he believes.

Older differs, however, in the types of tech stocks he believes will benefit going forward.

“You’ve got some lower tensions around the tariff war, for sure, but we do not think that the strategic tensions are really gonna abate.

“You will have a technology war, 5G is another example; those are generally areas that we are avoiding,” Older said.

Outlook 2020

While Carmignac expects a rebound of the world economy in the first half of the year, Leroux told the press that they foresee a short-term improvement driven mainly by stimulus from China.

The stimulus by central banks, he explained, creates a “very positive” liquidity environment for risk assets and is not expected to decline.

But Saint-Georges commented in his note that there is a price to pay.

“This [stimulus] approach reduces the economy’s medium-term growth potential and results in low, secular economic growth rates, increasingly anaemic and short-lived cyclical upswings, and a dwindling number of companies that can grow their profits over the long term.”

And as the asset manager is “quite unconvinced” about the potential for a cyclical upturn, it is sticking to its “growth-stocks” orientation, Saint-Georges said.

It is also important to note that Leroux’s comments were made amid fears of a global outbreak of Coronavirus, originating from China; which could have a material impact on global markets in the first half of 2020.

Elena Johansson

Senior Reporter

Part of the Bonhill Group.