Lucy MacDonald of RCM explains the research and investment decision-making processes for investing in global equities.

Date: Jan 2011

Tags: Equities, Asset allocation, Portfolio construction

• Global equities offer growth prospects which tend to be higher than can be achieved within any particular region
• Companies which look to have sustainable growth, have a good quality and duration of return, can fund their own growth, and also have good management with a solid track record are attractive prospects
• RCM’s Grassroots research looks at the non-financial aspects of a particular company’s products and services to get an on-the-ground perspective to ensure conviction portfolios

According to Lucy MacDonald in an interview, global equities offer growth prospects which tend to be higher than can be achieved within any particular region.

They also offer better diversification than can be gained from just one region, she added. Plus, they offer a lot of anomalies because the field is still not over-supplied.

Selecting stocks

MacDonald said she likes investing in companies which look to have sustainable growth – either through their exposure to a particular industry or a certain region.

She also likes companies which have a good quality and duration of return, meaning barriers to entry in their industry, or anything which can help them maintain their margin and return.

Further, she added, balance sheets are important because a company which can fund its own growth is an attractive prospect.

MacDonald said it is also important to ensure there is a good management team with a good track record, so that it will allocate capital well across the various opportunities.

Sourcing investment ideas

According to MacDonald, the main source of RCM’s investment ideas is the firm’s global analyst platform, with the analysts identifying the best stocks they can find in their particular industries.

A team in London then filters all these ideas to create a concentrated portfolio of around 65 stocks.

The filtering process is both qualitative and quantitative, she explained, to assess and determine the best stocks to add.

Grassroots research

In response to the many criticisms which get levied at the fund management industry for it not being in touch with the real world, MacDonald pointed to RCM’s Grassroots research approach.

This was set up 25 years ago, she explained, to look at the non-financial aspects of a particular company’s products and services – by talking to intermediaries, retailers, consumers and distributors to get an on-the-ground perspective and feedback to ensure conviction portfolios and positions.

As a result, when there is a lot of volatility in the market, MacDonald said RCM is able to hold on to, or add to, its positions.

The buy and sell decisions are therefore more intense because it is a concentrated portfolio, she added, so the quality of this decision-making is what adds value over time.

Why a stock might be sold, however, may be because of a downgrade from the relevant analyst, as a result of a lack of conviction, or due to certain quantitative measures coming through.