Adviser roadshow highlights: stock picking in the current environment
At our recent adviser roadshow, Anton Tagliaferro and Daniel Moore from IML as well as Lee Rosenbaum, co-Portfolio Manager of the Loomis Sayles Global Equity Fund, discussed where they are uncovering Australian and global equity opportunities in the current environment.
The key takeout from the sessions was that there will always be noise in the market - be it trade wars, geo-politics, central bank policy - the list goes on. Yet, bottom-up, fundamental analysis remains key in the long term. Both IML and Loomis Sayles continue to focus their respective portfolios on what they see as good quality companies that their research indicates are well placed over the medium to longer term.
A Q&A panel with the three portfolio managers followed. Consistent themes arose in the questions submitted by advisers, with a summary of the IML responses below.
What are the impacts on global and domestic sharemarkets of the US-China trade wars, Brexit, Iran, and other geo-political pressures?
As we’ve seen of late, all of these uncertainties caused a fair amount of volatility in markets around the world.
The market is extremely short-term focused at the moment and as such we’ve seen fairly large swings in sharemarkets around the world as a result of the latest tweets from President Trump about tariffs on trade with China or the recent drone bombing of Saudi Arabian oil fields.
While all of these events have the potential to significantly impact economies around the world, the truth is no one can be really sure what the future holds.
So as fund managers with a longer-term horizon we try to look past the headlines and invest for the medium to long term. Given there’s a seemingly never-ending list of geo-political and other challenges with the potential to impact companies’ ability to grow, we believe it is prudent to assess each company’s ability to ‘grow under their own steam’ regardless of the economic backdrop. We also actually often use short term volatility in the share prices of the quality companies that we own in our portfolios to top up our holdings when the prices fall, and trim or sell when the share price is above what we consider to be full valuation.
How do you position your portfolios for low-zero-negative interest rates?
Is the bond market predicting a recession? Or is there a bubble in bond prices? Nobody knows the answer to these questions with any certainty. I think most investors would agree that it’s hard to see much upside in bonds from these record low levels.
At the moment around a third of bond markets around the world including Japan’s and many European markets, are in negative interest rate territory. Bond markets, as the ‘risk-free’ asset class directly impact on the valuations of shares, property and other assets which makes the current environment particularly challenging.
This anomaly in bond markets, is a major determinant for what is happening in equity markets. At the moment low rates and liquidity are very much driving a momentum-based market. The slowing economy in Australia (and slowing economies around the world) means earnings growth is harder to come by for many companies. Any company showing earnings growth is attracting investors and the share prices of many of these companies have been substantially rerated upwards which is causing valuations in many sectors to be stretched. Some investors say that the lower bond rate justifies higher PEs and while there is some truth to this, as a value investor IML believes many sectors are now very fully valued.
The correction in August caused by global economic uncertainty and the mixed FY19 reporting season served as a reminder that, while interest rates around the world look set to stay at their current record lows for an extended period of time, the uncertain and slowing economic environment is proving a challenge for many companies looking to grow their earnings.
At IML we remain cautious and continue to focus on good quality companies that we believe represent good value and which we believe can do well over the next 3-5 years.
As a value investor, how do you find reasonably valued opportunities in the current market?
It is a real challenge. However, through bottom-up, fundamental research and disciplined adherence to our long-standing investment ‘quality and value’ philosophy we can still find a few opportunities in this market. IML’s focus continues to be on populating our portfolios with companies which have a demonstrable competitive advantage, which have a predicable recurring earnings stream and who have honest, capable management. Of course, we always seek to buy these companies when they are trading at a reasonable price.
Sometimes that means buying companies that are out of favour, where our analysis shows that they can do well over the next 3-5 years.
We also like to identify companies which can grow under their own initiative, regardless of where we are in the economic cycle. These initiatives may include: removing costs from the business to increase profitability over time; making sensible bolt-on acquisitions that will be earnings accretive; investing in companies with a large percentage of their revenues tied to long-term contracts; companies with the ability to grow their market share; and companies which are restructuring in order to make the business more profitable.