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02.11.2015

Giselle Roux - FINSIA INFINANCE News

IN PROFILE: Giselle Roux, Australia ─ still lucky

Giselle Roux, one of Australia’s most well-known and highly regarded investment strategists, is Chief Investment Officer at Escala Partners, a Melbourne-based boutique investment advisory firm established in 2013.

Previously she was CIO at JBWere for six years and she has also held a number of senior equities analyst and investment banking roles including with Citigroup, Bank of America Merrill Lynch and McIntosh Securities.

Roux first became an equity analyst in the late 1980s after migrating here from South Africa during the apartheid era. Morally that didn’t sit well with her and she was attracted by Australia’s great lifestyle.

She believes recent concerns in global financial markets about China’s slowing GDP growth and the prospect of rising US interest rates are largely overblown.

Indeed, Roux considers it a pity that the US Federal Reserve didn’t lift interest rates in September, arguing that the US economy is more than capable of sustaining a rate rise of at least 25 basis points. 

“I don’t think anybody has bought into the idea that somehow global economic and financial conditions are going to be more stable in the next month or two. It just creates more uncertainty as to what the Fed is actually looking for, and uncertainty is something markets dislike intensely.”

Now working closely with high-net-worth clients and not-for-profit organisations at Escala, Roux notes that being in an advisory role is quite different from being an equity analyst at an investment bank, where you’re talking mostly to fund managers rather than individual investors.

“When you sit across the table from the client and their financial well-being is to some extent dependent on your advice, you are acutely aware that this is a huge responsibility and you have to be very thoughtful about the advice you give.”

Prospects for China

Roux says that the ongoing market speculation about the prospects for Chinese economic growth, particularly following its large equity market correction and currency devaluation in August, suggests that the markets are getting things confused.

“It’s not as though the slowing in Chinese growth is news. Perhaps the timing of the devaluation of the renminbi was not ideal, but most people agreed that it was looking a little overvalued. 

“I think the US Fed’s decision not to lift rates was probably due more to concerns about China’s monetary conditions, including how much of its foreign exchange reserves China would need to spend to support the currency and whether they would need to sell US Treasuries. This would potentially have an impact on bond markets.”

Roux also notes that current account deficits are now occurring in some countries such as the Gulf States which typically run surpluses, so the Fed may be looking to see if the bond market will react to that, quite apart from what happens with interest rates. 

“I also think the greatest challenge for China is not about its GDP growth rate per se. Everyone acknowledges that the phase of massive capital investment is abating.

“The real issue is that the household sector doesn’t just neatly step into line, pick up the baton and run on. But, there’s plenty of evidence that Chinese consumers will continue to increase their spending on services such as travel, healthcare and education. This is a nuanced change in the Chinese economy, which is normal in all economies that reach a certain level of wealth.”

Capital outflows from emerging markets

Some industry commentators and experts, including Andrew Haldane Chief Economist at the Bank of England, have raised the possibility that financial markets may be entering another phase of the global financial crisis associated with an outflow of capital from emerging markets.

However, Roux argues that there’s been an enormous difference between the recent economic performance of commodities exporters like Brazil, South Africa, Russia (and even Australia) and countries such as India, Mexico, Chinese and Korea, which are far less affected by commodities cycles.

“I don’t see any crisis here, it’s just that realistically global economic growth is going to be lower in the foreseeable future than it has been in the past few years.

“Quite simply we saw a massive growth in global trade after 2000 when China opened up its economy to trade, but this was a unique event, and won’t be replicated.” 

She believes there are a host of other issues, including population ageing and continued relatively high levels of indebtedness, which stand in the way of a new global growth cycle, and economic growth is going to be lower in the next seven to 10 years for these reasons.

Australia – still lucky

Roux thinks Australia’s relationship with Asia will unquestionably have a positive effect on our economic prospects in coming years.

“We’re now the ‘lucky country’ because of where we sit geographically, rather than what we dig out of the ground.

“If we can grow our exports of services like tourism, education and healthcare to Asia, this will have a significant impact on our growth potential as these are the kinds of things that Asian consumers will want to consume more of over time.”

While the recent weakening in the Australian dollar relative to the US dollar will help improve the prospects for Australian services exports, Roux would also like to see further declines against cross-currencies including the euro, and the yen and other Asian currencies.

Momentum gone from the market

Roux says that one of the challenges for Australian asset managers is that our equity market is still heavily weighted towards mature companies such as banks and resource-related stocks, or companies which don’t have a lot of growth options.

“It is a problem when you look across the investable universe here, because your options are very small when you’ve decided to limit your participation in those mature industry sectors. So it will be really important in the next few years to have more listings of companies.”

In recent years there have been a number of new listings on the ASX of aged care businesses as well as others like Seek and realestate.com, and Roux is keen to see more listings of businesses that are well managed and have scope to grow either in the Australian market or globally.

She thinks that, realistically, the past few months in global equity markets have shown that the momentum in the market which has ridden on the back of the quantitative easing (QE) ─ including the US the buyback phenomenon ─ is over.

It’s now paramount, she adds, that asset managers are focused on the fundamentals: Is the company managed well? What are the cash flows? What are the company’s characteristics? What is its valuation?

“I think the easy days for the equity market are over. Equities are no longer cheap, so selections are critically important and so is patience, which is something that is really lacking right now.”

Investment strategies

One important issue for any investment strategist is determining how often to reset the strategy based on new information.

Whether the investment thesis is based on themes or individual stocks or regions, Roux says it is most important that there is a logical and consistent argument for whatever the investment approach is, and that it should recognise and adjust for any significant changes within the market.

While the technology and healthcare sectors have been by far the strongest performers for the past five years, Roux is watching this closely to see whether valuations are getting ahead of the likely growth path, because too many people are bunkered down in those sectors and they are being driven partly by momentum.

She is always keen to hear about new ideas, particularly in the services industries, but also stresses that while some sectors may look pretty ordinary overall, there are always going to be some companies that are unusual and can reach above that. 

“Lego, which is an unlisted company, is a good example of this. Although 10 to 15 years ago people said it wasn’t going to be successful because children were going to be playing on computer games, Lego has gone ahead in leaps and bounds. Sometimes apparently very ordinary companies can reinvent themselves and stay relevant much longer than what people give them credit for.”

Roux has some sympathy for investors’ growing interest in passive investment in an attempt to access lower management fees, particularly where they are investing relatively small amounts of capital and they want to manage the overall costs of their investment portfolio.

But she has some unease about so-called passive strategies like ‘smart-beta’ that she believes are really quantitative screens – i.e. they screen for companies with a dividend yield above, say, 5%.

“I don’t agree that’s passive at all; it is an active decision and there’s no way of knowing if these businesses have performed well because there is no benchmark against which they can be measured. I would be very careful of some of these kinds of strategies, but index strategies are fine.”

She would also like to see management fee structures be aligned with the investment horizon. 

“In some cases the fees are simply too high. Where funds tell you that they expect to achieve a certain return, the hurdle for fees should be set at that level, rather than at zero. 

“This is a big issue and there needs to be more of an industry pushback against fee structures that are not rational. While institutions are increasingly driving down the fees, wholesale and retail investors are often still paying quite wide spreads on investments.”

For Australian investors looking at how they can manage longevity risk, Roux says, “The vast majority of self-funded people would be aghast at the level of the aged pension, so they need to retain capital growth in their portfolios even after they reach retirement”.

“This varies hugely depending on how much capital you’ve got, your lifestyle expectations, and whether you’re able to realise an asset such as a house. But we need to get over the idea that we’re going to sit on our large five-bedroom houses forever.

“It’s regrettable that the system encourages that behaviour. It’s bad for the economy, and people should be prepared to realise their properties at some point.”

Work and life

What’s excites Roux about her career is that no day is ever the same as the one before. 

“There is no repetition in this industry at all. There’s so much wonderful information and knowledge out there, and so many fascinating people working within the funds management and advice industry.

“I learn from the clients and the people in this industry all the time, and sometimes the simplest questions are the most interesting ones. To be able to question, absorb information and contemplate how that could possibly make a difference to someone’s financial well-being is such a pleasure and always fun.”

Reading things like The Economist, the Financial Times and The Wall Street Journal almost every day of every week, Roux says there are always pockets of fascinating information out there.

“Perhaps it’s a pity that so many clever people have been attracted into the world of finance, but some of them write very interesting things.”

Roux also enjoys travelling overseas to experience different lifestyles.

“We like to go to cities and spend a bit of time there, and walk and walk. We use airbnb and stay and shop in the community. I think that’s the pleasure of travel.” 

In Australia, she loves going camping and roughing it a bit. 

She says, “We’ve done the Larapinta trail hike and I would do that again in a heartbeat any time. We should be so grateful for our wonderful environment here.”

by Marion Fahrer | 30 Oct 2015 | FINSIA INFINANCE news

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