I’m Laurence Taylor, Portfolio Specialist for Global Focused Growth Equity strategy. I’m here to speak about equity markets, some of our thoughts about markets and how we are positioned today.
We are a global, all country approach high conviction, looking for companies which are defined by improving economic returns where we have very specific insight about what is going to drive those economic returns upwards and we are looking to not pay an extreme valuation.
How do you view the current market environment?
So, our current view on equity markets is that we are still in an environment defined by stability and improvement but you are seeing, in terms of February and March’s volatility perhaps a sense that some of those drivers of last year’s very strong return – 25% from global equities – starting to be more mixed in terms of data.
Last year everything surprised on the upside: economic growth, earnings growth, politics, low inflation, easy monetary policy. You are starting to see perhaps people question politics and maybe inflation as well.
We still believe that the economic environment is pretty sound and we think that some of the market movements have perhaps taken the heat out of markets. One way or another, we still think there is enough improvement in equity markets to work with to have an optimistic view, both on our portfolio but also on markets in aggregate.
How do you manage market volatility in your portfolio?
So, this year has been a reminder that volatility in equity investing goes hand in hand and in some senses that is healthy because last year when volatility collapsed I think that was very unusual.
How do we think about risk and how do we mange volatility? First of all, we own real businesses with economic relevance in the future. And those companies growing and beating estimates, that is one way to protect risk and the actual value of the businesses. The fact that they are durable, are economically relevant in the future, they tend to over time to outperform because they are getting bigger they are not shrinking, their terminal values are high.
Ultimately, we blend that philosophy with old-fashioned diversification. We have a lot of ideas at T.Rowe Price, a portfolio where we are going to own 70-80 names, high conviction, 85-90% active share, but ultimately we are looking to bring together a portfolio which can help us weather some of the storms that are naturally going hit equity markets.
How is the portfolio positioned today?
We own around 75-80 stocks today, very unconstrained in the way that we build the portfolio. We build based on our expectations for improvement and valuation and effectively where we see conviction coming from our analyst platform and the resources that we have at T.Rowe Price today.
Ultimately, we build the portfolio from the bottom-up, but we find more opportunities today in areas like technology, in healthcare but also in some of the consumer stocks that we think the market is overly pessimistic on.
We’ve also been adding to industrials taking the weight back towards the benchmark by building an aerospace position today - again because we think that that market is perhaps getting overly fearful.
It is all very bottom-up driven. We are in a world where certainly the market is getting very top down again that gives us a really good opportunity to pick some stocks and make the portfolio sharper.
How does your approach differ from other global equity managers?
So, we think that there are very few managers that have the breadth of resource that we do in terms of bottom-up ideas and we have a portfolio management team a, team of four investors led by David Eiswert, who are looking for individual insights – not just growth, not just quality, but individual insights about what’s going to cause a company’s fundamentals to accelerate and improve.
And that changes as we look across a cycle and we think that were are able to capture the very best of secular growth, cyclical growth and companies which are helping themselves to improve and grow. And when you blend that in a high conviction portfolio the outcome tends to be that bit more idiosyncratic, a bit more pure in terms of bottom-up stock picking, a less heavy factor driven portfolio. And we think that this is an environment where factors are becoming harder to capture, because they are less stable sources of alpha but stock picking is something that is very perennial and we feel very well placed to do that consistently as we look out.
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