Different investment approaches from two asset managers were to the fore in a conference discussion about the state of the economy and markets last week.
Despite sharp strategic differences in their approach to investing, two prominent asset managers at the Morningstar Investment Conference agreed that the stock market’s steep decline offered promising opportunities for patient investors.
“Risk is lower now than it was a year ago,” said Sarah Ketterer, CEO of value-oriented Causeway Capital Management, speaking at Morningstar’s “Where in the World are Equity Opportunities” session. “From a market perspective, some of the air has come out of the bubble, although there may be more to go – and it’s hard to know how much more. From an investment perspective, we’re much calmer now.”
Growth-oriented manager Sammy Simnegar, a portfolio manager for Fidelity Investment’s equity division, also believed that investors should look past the market’s current downdraft. The unusually tumultuous events of the last two years, including a pandemic, a European war and severe supply chain disruption, have been a compressed version of the previous century’s travails, Simnegar argued.
“This too shall pass,” he said. “Things will normalize, inflation will come back down. In my opinion, once the economy normalizes in 2023, the rest of the decade will look very similar to the decade between 2010 and 2020.”
Wealth managers are wrestling with a mass of macroeconomic, geopolitical and post-pandemic forces in judging how to position clients’ portfolios. (Click here to see a previous report from the Morningstar conference.)
Growth vs value
The differing investment philosophies of the two asset managers surfaced, however, when they discussed specific market opportunities.
Causeway was adding financials to its portfolio because banks were not dependent on the supply chain and a number of European banks were undervalued, Ketterer said. “There are institutions the market just doesn’t understand” that asset managers can exploit, she added.
Simnegar said he avoids banks because he views them as a “commodity business” that didn’t command brand loyalty and, like retailers, had volatile gross margins “and not a lot of pricing power.”
“I’m not interested in companies that are dependent on [external factors] like interest rates and who is president,” he explained.
By contrast, luxury companies like LVMH do have brand loyalty and can charge premium prices, Simnegar said. His funds, which include Fidelity’s International Capital Appreciation Fund, look for companies with compounding earnings' growth that are reasonably priced and have “their destinies in their own hands.”
Another criterion: companies that are “near a solution toward providing automation. We want to be more invested in R&D and tech-oriented and future-facing businesses that are re-establishing supply chains.”
Value managers are currently looking at stocks “with some level of skepticism,” Ketterer said, targeting stocks with low multiples “that are sufficiently undervalued to create a margin of safety.”
As value investors, Causeway discounts cash flows of a business to the present using a discount rate “we think incorporates the tightening cycle we’re in.”
Cyclical stocks are a priority if the economy falls into a
recession, she added. “Industrials, materials and financials will
come roaring back and we think it is absolutely essential to be
positioned for that.”