Which works best in international markets: value or growth investing?

There has been a growing body of research published on value and growth as key investment issues in international equity markets. One study was Capaul, Rowley and Sharpe's "International Value and Growth Stock Returns."1 These researchers focused on the single factor of price-to-book (P/B) ratio as a determinant of what constitutes a value stock in the international markets. Low P/B stocks were considered value stocks, and high P/B equities were categorized as growth stocks. Capaul, Rowley and Sharpe found that over the period 1981 to 1992, value dominated growth in investment returns in the largest international equity markets.

Straightforward single-factor results from our database corroborate their findings. Exhibit 1 shows the annual returns across six of the major global equity markets of low P/B versus high P/B quintiles for the period 1975-1998.

In this analysis, two capitalization-weighted portfolios have been formed at the beginning of each year, consisting of the least expensive value quintile as defined by P/B ratios and the most expensive quintile based on the same measure. As can be seen, there have been major differentials in these markets favouring a value approach, defined as cheapness on the P/B measure. For example, in Japan, the differential between the low P/B and the high P/B quintile has been 12.6% per year over the time frame. However, one market where a simple low P/B strategy did not work particularly well during this period was the U.K. Similar analysis based on price/earnings (P/E) ratios also leads to the conclusion that value wins out over the long run.

While value-based strategies have done better than growth in the long term, this outperformance has not been the case for some shorter periods. It is useful to analyze under what conditions value or growth styles are most likely to outperform.

Exhibit 2 indicates that when global markets are particularly volatile, value stocks tend to underperform. Value investing has been more likely to outperform when world equity markets are relatively calm and underperform when volatility increases. A partial explanation for this linkage could be a "flight to quality" during volatile markets, where quality is perceived in the more predictable and less economically sensitive earnings patterns of growth stocks.

1. Capaul, Carlo, Ian Rowley and William F. Sharpe, "International Investing and Growth Stock Returns." Financial Analysts Journal, January-February 1993.Taken from a paper by John Chisholm, B.S., M.S., presented at the Institute for Fiduciary Education's International Investing Conference in Buenos Aires, Argentina, Fall 1999.

John Chisholm is Executive Vice President of Acadian Asset Management in Boston. Future


E-Commerce: The Wave of the Future
E-business, also known as e-commerce, refers to the use of the Internet and other digital networks in the production and purchase of goods and services. The e-business market encompasses technology companies that create and service these new customer channels for business, as well as companies themselves that are adopting e-business sales and marketing strategies.

As new Internet-driven business models evolve, the e-business market is set to enjoy phenomenal growth. In the U.S. alone, business to business on-line revenues are expected to reach US$1.3 trillion by 2003, while business to consumer revenues are targeted at US$147 billion.

It is estimated that the value of Internet transactions in the U.S. will amount to 9% of the country's GDP by 2003 and that over the long term, growth of Internet commerce will be equal to the growth of the U.S. economy.

The dramatic growth in the use of the Internet will be the key driver. It is estimated that today over 100 million adults in North America have on-line capability. Over 50% of these individuals have made purchases on-line. While use of the Internet by the baby-boom generation is maturing, the next generation--those born in the 1970s and later--promises even greater use. According to the findings of a study, "America's Most Wired Colleges," 90% of all college students own computers, 70% of college students go on-line seven days a week and the average college student spends almost three hours each day on-line. These students currently have tremendous influence on adult consumer spending and will be the future on-line spenders.

As e-commerce expands, the companies that are engaged in e-business will experience significant growth, surpassing growth levels enjoyed by traditional businesses, as is evident in the current market environment. Undoubtedly, some investors are nervous about this eventuality, especially given the fact that U.S. companies with no earnings (including many Internet-based companies) gained 52% last year, while traditional non-Internet based companies fell by 5% in the same period.

Perhaps the use of a simple analogy will help clarify this emerging trend. Imagine a city and an apple blossom festival in the countryside at two ends of a winding road. People from the city drive to the festival, supporting the businesses along the way. For many years these businesses have thrived, enjoying strong earnings. Then comes a developer who builds a straight road that directly connects the city to the apple blossom festival. What happens? More and more people begin to use the direct route and the businesses along the winding road lose their customers. They stagnate and their growth declines.

This analogy puts in simple terms the realities of a changing business model, spurred by the development of the Internet. Companies that base their strategies on the Internet are therefore poised to surpass those that do not. These companies include ones that are organizing the delivery of their products and services and key business processes around the Internet and other networked communications technologies; established small, medium and large brand name companies that are achieving a competitive advantage by employing effective e-business strategies; and suppliers of software, hardware, communications, information and business services that enable the e-business infrastructure. They can be classified into three categories: pure Internet, bricks and mortar, and infrastructure companies. The chart below provides examples of companies that fall into each category.

by Ian Ainsworth, Vice President & Head of the Equity Team, Altamira Investment Services.


Multi-Manager Hedge Funds. How many managers are enough?

A hedge fund is an alternative investment vehicle, the goal of which is to produce absolute returns with the lowest possible risk for a given target return. The manager of a hedge fund will continually change the net exposure to the market by using long and short positions in stocks, bonds and/or derivatives.

Institutional investors interested in adding a multi-manager hedge fund to their portfolio face the dilemma of choosing between funds with five, 10, 20, or even 60 or more managers. How many managers are enough?

Some argue that five managers is the very bare minimum needed for a fund, eliminating 80% of the diversifiable variance.1 With such a small number of managers, however, higher concentrations must be allocated to the under-lying hedge funds and if one or two managers perform poorly the performance of the entire fund suffers.

Ideally, a hedge fund is comprised of managers whose strategies are not correlated to one another or to the market. Nine or 10 managers seems to provide a balanced mix of strategies. Once the number of managers rises much beyond 10, average correlation and standard deviation statistics do not indicate good portfolio diversification.

If this is the case, why do some hedge funds have 20, or even 60 managers? One possible reason is to give investors the illusion of safety in numbers. However, the main risk (and reward) of a hedge fund is the manager's skill. With a fund of 20 or more managers, individual manager judgment is in essence diversified away, a prescription for mediocrity. As well, weekly communication and quarterly on-site visits with managers are required to scrutinize their strategies. This is physically difficult, time-consuming and costly with a large number of managers.

1. Henker, Thomas. Naïve Diversification for Hedge Funds, Journal of Alternative Investments, Winter 1998, pp.33-38by Greg N. Gregoriou, a Doctoral Student in Business Administration at the Université du Québec à Trois-Rivières and a consultant for Crystalline Arbitrage Management Inc. in Montreal.


Fearless Forecasts
In a recent survey, 62 money managers made the following forecasts for 2000:

* The TSE 300 is predicted to increase by 11%, with emerging markets and international (EAFE) equities expected to perform even better (14% and 13%, respectively).

* The U.S. market is expected to slow down, with performance expectations for the S&P500 of 8.2%.

* Expected performance of sectors of the Canadian market: industrial products top the list, followed by metals & minerals and paper & forest products. On the downside, managers are bearish on both the real estate sector and the gold & precious metals sector.

* The top five Canadian stock picks are, in alphabetical order: Alcan, BCE, Bombardier, Nortel and TD.

* Two-thirds of the managers do not believe Microsoft should be split up.

* Concern about the increased concentration of the TSE300 with the recent surge in share prices of Nortel and BCE was expressed by 83% of the managers.

* Globally, the countries most frequently expected to have top performing equity markets are Japan, Canada, France, Germany and the United Kingdom, with Japan as the managers' favourite.

* The managers favoured sector/industry allocation over country/region allocation as being more important in future global equity management.

* Three-quarters of the managers do not support a common North American currency. Reasons given include structural differences between the U.S., Canadian and Mexican economies, and that the different exchange rates can in fact act as a shock absorber to capital market volatility.Based on William M. Mercer Limited's Ninth Annual Survey of Investment Managers' Market Forecasts. Managers participating in the survey collectively manage in excess of C$300 billion for Canadian investors and nearly $2 trillion world-wide.

Transcontinental Media G.P.