From Trump-proofing portfolios to trend spotting and looking to the longer term, equity investors are refining their strategies in many ways to factor in the potential risks and opportunities of the new US administration. Rob Griffin meets the rated managers making the most of the new regime.
‘You’ll need to buy and hold companies that create economic wealth for their shareholders but not get too greedy or take excessive risk,’ says Acheson, who is ranked sixth in the US equity sector over three years. ‘Markets may be forward-looking but they’re seldom patient.’
While optimistic about the prospects for economic growth in 2017, he expects more market volatility than has been seen in the recent past. In such an environment, he suggests, it pays to remain relatively cautious.
Acheson’s fund has a high-quality bias, focusing on large-cap companies that can generate good returns on growth capital, have strong competitive advantages, and can benefit from secular growth.
‘These types of companies were not in favour in 2016, but we believe heading into 2017, quality stocks are likely to perform well,’ he says.
As a result, he has overweighted consumer staples and healthcare. ‘Consumer stocks, in particular, could begin to outperform if US corporate tax rate cuts are approved under the Trump administration,’ he says.
It’s worth accepting there are going to be challenges with a new administration as it beds down, even if corporate earnings at selected companies continue to impress.
That’s the view of AA-rated Taymour Tamaddon, who has just taken over the T Rowe US Large Cap Growth Equity fund from Robert Sharps. Tamaddon remains largely constructive when it comes to the longer-term performance of stocks.
He believes proposals to lower and simplify corporate and personal taxes, reduce regulation, and increase infrastructure spending, should drive stronger economic growth and corporate earnings.
‘We are generally supportive of these proposals,’ he says. ‘However, we would emphasise that many programmes will not be adopted easily, quickly, or in their entirety.’
In particular, he says that renegotiation of trade deals and other actions influencing trade policy, such as border control taxes levied on imports used in production, must be pursued very skilfully.
‘We are more constructive on financials given some of the policy changes mentioned and the prospect of better net interest margins,’ he says. ‘The combination of higher rates, a steeper yield curve, and a more favourable regulatory environment is a powerful driver for financials going forward.’
Getting beyond the noise
These are challenging times but + rated Howard Gleicher, founder and CIO of Aristotle Capital Management, who runs the ABN AMRO MMF Aristotle US Equities fund, will remain true to the company’s philosophy and process.
‘We own unique companies whose attributes are not widely recognised by others and hold these durable franchises for the long term,’ says Gleicher, who is ranked 10th and sixth over three and five years, respectively. ‘We prefer not to rely on macro or cyclical industry factors.’
Neither is considered a catalyst in the company’s approach,’ he says.
‘The key to our success is a focus on company fundamentals and doing so with a long-term perspective,’ he says. ‘This requires discipline to ignore what others may spend days and weeks trying to forecast, events we refer to as short-term noise,’ he says.
Although the investment process doesn’t rely on top-down views of particular industries, the company’s bottom-up stock research helps to identify trends, some of which may help or hurt companies and the industries in which they operate.
‘The country’s aging infrastructure is in need of investment and the new administration may ramp it up,’ he says. ‘Aggregates companies, such as Martin Marietta, may benefit from such a trend.’
Another is the need to transport power and natural gas from remote locations to cities. ‘This may be beneficial for electric transmission companies and those with midstream operations, such as EQT Corporation and Phillips 66,’ he says.
Andrew Wellington, the + rated manager of the Conventum Lyrical fund, hasn’t needed to carry out any repositioning in the wake of Donald Trump’s victory because his focus – and that of co-manager Caroline Ritter – is to ensure it’s an all-weather portfolio.
‘We buy companies that would be successful regardless of who was president because they’re not gravely impacted by the government,’ says Wellington, who is ranked first over five years. ‘We avoid those that are dependent on the political environment.’
Similarly, he steers clear of companies whose fortunes depend on factors that are hard to predict. ‘We also don’t own any banks or pharmaceutical companies as it’s harder to get them right,’ he says.
Conversely, he is drawn to businesses involved in diverse sectors such as ATM machines, communications and even tyre production. ‘Goodyear will probably sell the same number of tyres whoever is president,’ he says.
Wellington views the fund’s past performance as a batting average. ‘It’s our success rate,’ he says. ‘We look at the percentage of the 33 stocks in the portfolio that managed to outperform over the past year. It’s never about a particular stock.’
His most recent analysis suggests 62% of positions outperformed last year – slightly down on the 67% longer-term average. ‘It works out that we had about 1.65 winners for every loser and that goes a long way to driving performance.’
He favours stocks that are cheap but that have solid, easily analysed businesses. ‘The US market is huge,’ he says. ‘We have 1,000 stocks in our universe and that means we reject a lot of things.’
One of the most common reasons for a stock position to fail is poor execution by the management team. ‘That’s very difficult to predict,’ he says. ‘Also, the world keeps changing and not every change coming down the road is visible.’
The answer, he suggests, is diversification. ‘We know we’ll get unlucky with some of our stocks and something bad we couldn’t foresee is going to happen but as long as it’s a small percentage of the portfolio, we can offset those events by our successful positions,’ he says.
A question of style
A-rated Ian Heslop (picutured), manager of the Old Mutual North American Equity fund, agrees that diversification is key and he is focused on having a broad mix of styles in his portfolio. This approach, he says, helps safeguard investors’ cash.
‘If you’re nicely diversified across a number of different styles you won’t get caught in big drawdown situations if a particular style that you prefer is not being favoured by the market at that time,’ says Heslop, who is ranked seventh over five years.
In fact, he suggests the marked underperformance among active managers, particularly those covering the North American market, has a lot to do with funds being too concentrated when it comes to style exposure.
‘If you’d outperformed pre- September, then the likelihood is that you’d underperformed post-September, and vice versa,’ he says. ‘Diversification across styles is important to show a level of consistency over a number of years.’
As far as Heslop’s style exposures are concerned, one significant factor he’s noted has been falling levels of volatility. This is in contrast to the early part of 2016 when there was high volatility within North American markets.
‘You’ve got to be careful about momentum trend, particularly at a stock level, in high volatility environments,’ he says. ‘Buying the winners from an historic period at a stock level will be fraught with danger in such environments.’
So while he had very little momentum trend on this score a year ago, he gradually bought it back over the course of 2016. It is now at more normalised levels and that’s a position with which he is comfortable.
‘The markets are generally happier,’ he says. ‘We hold less balance sheet quality companies at the moment. That’s not to say we’re buying rubbish but we’re not totally hung up on them being squeaky clean.’
In the current environment the key is being able to strike the right balance between the cheapness of stock relative to its type of balance sheet. ‘We’re willing to take a little bit more risk as we’re getting those stocks at a discount,’ he says.
These comments originally appeared in a supplement published with the February edition of Citywire Selector magazine.