Focus on Oyster funds – US fund mindful of Brussels and open-minded to valuation analysis
The managers of Bank Syz’s Oyster US Selection fund have been increasing the number of non-US macro indicators they use within their investment process, in a sign of how important Continental events have become for asset managers worldwide.
The Oyster fund is managed for the Swiss bank by Scout Investments, from its base in Missouri in America’s central heartlands, but Scout is increasingly mindful that what goes on in Europe’s bureaucratic heart of Brussels has the potential to affect even a US equities strategy.
Thus, they are adding non-US purchasing managers indices and interest rate indicators, “to give us a better idea of business sentiment”, explains co-portfolio manager Derek Smashey.
He says it is increasingly important to take a broad view when considering what could impact on valuations in his home market.
Scout Investments looks at over 100 economic and sentiment indicators in total, including ISM indices and its sub-components such as orders, inflation expectations and weekly unemployment claims, and the Vix index of near-term S&P 500 expected volatility.
“The political situation matters and what the central banks are doing, so in addition to indicators, we also listen to Wall Street research advisory services. It all helps us develop themes, and where we should focus our efforts and what areas of the market we should be bullish or bearish about.”
The top-down component of Scout’s work for Oyster aims to anticipate market conditions and identify broad themes, and show whether the climate overall is constructive, or cautious.
Scout is also analysing stocks, using fundamental measures, to find what the manager believes are “quality companies trading at a discount and with a catalyst. We want high quality companies, good valuation given the kind of environment we are in, a catalyst to drive the stock, and to avoid company-specific risks. We want to see cashflow growing relative to an asset base, and we look carefully at the balance sheet, and the amount of debt relative to cashflow.”
Scout will not buy companies with over five times debt relative to cashflow, which often eliminates utilities, and some Reits.
The team will then look at companies’ income statement, and calculate if a company is generating “real earnings” – a step that may eliminate biotechnology or pharmaceutical companies with treatments only ‘in the pipeline’.
Putting all this together, Scout’s strategy has made 59% since launching in October 2006, compared to 3.4% from the Lipper Global Equity North America peer group, and a 5% gain from the S&P 500 index.
The Oyster fund is not biased towards any investment style, but has an interesting valuation methodology, moulded to fit the prevailing investment climate.