“As always the key remains to focus on long-term valuations and step aside from the emotional rollercoaster which accompanies it.”

This is an excerpt from a recent interview that Dr. Sandy Nairn, the CEO and founder of Edinburgh Partners Limited (EPL), did with a U.K. publication, Independent Investor.

The interview is an in-depth piece that runs eight pages. As he did in a previous piece we published in May (For 'New Paradigm' Read 'Decoupling'), Sandy does a great job of putting the big picture into perspective. In that context, he talks about the current cycle and how alternative investing, leverage and China fit into the management of a global equity portfolio.

For those who want more detail on EPL’s strategy for the Global Equity Fund, the last two pages are an excellent review. If you don’t have time to read the full interview, here are a few other quotes from the good doctor:

• When abundant liquidity and low borrowing costs coincide, investors typically react the same way. Risk is dropped from the investment lexicon.
• The other thing that happens during sustained periods of low interest rates is that market practitioners get to work creating new esoteric vehicles ... In all but a few honourable exceptions, returns have been driven by leverage rather than by some new discovered skill set.
• On the prospect of Asia’s economic prospects decoupling from the U.S. economy: Two things worry me about this argument. The first is that the orders of magnitude just don’t work. The U.S. economy is five times the size of China. To expect the latter to be able to bail out the former is simply asking too much. It is mathematical nonsense.
• Confusing exciting stories with investment opportunities can be very dangerous.
• What often happens to global equity managers is that the further into a bull market you go, the more their portfolios start to look like emerging market portfolios. In the chase for growth, risk gets forgotten.
• If I hear one more busted hedge fund manager talking about a once-in-a-thousand year event, I’m going to lose my sanity.

Dr. Nairn isn’t shy of voicing his opinions, which quite evidently aren’t formulated from following the herd. And while his tone in the interview is bearish, his underlying message is that EPL has taken a defensive stance to better weather a coming downturn in the economic cycle. This isn’t done by avoiding stocks. As Sandy puts it, “It is hard to imagine a situation where you could find no companies at all to invest in. Hence it is unlikely you will ever want to go 100% into cash.”

EPL’s CEO feels there are still companies with good cash-flow strength and relatively secure earnings – telecoms and pharmaceuticals for example. As well, there are pockets of value emerging in the banks and homebuilders. It is these areas where the Global Equity Fund’s assets are concentrated.