30 October 2020 / VIDEO
Navigating Uncertain Markets in 2020
T. Rowe Price analysts have adeptly navigated a unique environment in 2020. Yet, collaboration, communication and total research produced have each actually increased across the globe. Our portfolio managers have been able to make informed, active management decisions on behalf of our clients.
Rob Sharps, Head of Investments:
On the surface it may appear as though it would be more difficult to generate fundamental insight in this sort of environment given the inability to travel, a lack of interaction with corporate management teams and industry experts and other market participants at industry conferences, inability to do field research, on-site diligence, etc. but our experience would suggest that it’s certainly different but not necessarily harder.
The leveraging of technology, of WebEx, of Zoom, has really enabled us to stay in close connection with each other to debate and stress test and validate ideas but also to stay in very close connection with the executive management teams of the companies that we are investing in and assessing for potential investment.
We’ve not seen any wholesale changes to our approach in response to the overall volatility, and as we’ve gotten into a rhythm, we continue to do much of what we’ve historically done although obviously doing it in a virtual way. So, we continue to hold our weekly investment meetings, and they continue to be robust with a tremendous amount of discussion.
There are a number of meetings that we’ve set up specifically to replace the informal interaction that might occur if people were in the office after you meet with or discuss an investment opportunity with a corporate management team.
To talk more about how our research teams have been operating over the last six months, I’ve asked two of our directors of research to join the discussion.
Justin Gerbereux is a director of credit research based in Baltimore, and Jon Matthews is our director of equity research based in London.
Justin Gerbereux, Director of Credit Research:
I’ve been able to reflect on the past six months because clearly, we’ve been engaged in volatile markets that are constantly shifting.
I’ve been in this business for 18 years and had the opportunity to experience the great financial crisis of 2008 and 2009. And, I believe today’s current environment has certainly presented us with some unique challenges. But I think it’s more important to observe what hasn’t changed. And that’s the collaboration and communication that are really ingrained in our DNA.
And yes, it’s certainly been more difficult to communicate in a work from home environment, but we have found new ways to collaborate at a very high level. So, we’ve increased the frequency of meetings and also have moved them to video. Therefore, we’re able to keep and maintain face-to-face interaction. We’ve also augmented the investment process with technology; such things as email and instant messaging.
And last but not least, utilizing the phone in an old-fashioned way just to pick up and talk to people and work through the challenges that we’re facing.
And definitely, the pace and change of markets during those months was unprecedented and nothing like we’ve ever seen before. But I really believe, and I’m really proud of our analysts being able to adapt quickly to that environment and increasing their output significantly. So, we took a look at the number of research notes that were produced during the second quarter. And they have increased 65% over the prior year period.
What this really means is our portfolio managers were armed with the most up-to-date thoughts of our investment platform and were able to make investments based on those valuations and those ideas in a real-time manner.
And again, I just want to highlight collaboration with our equity colleagues as a key component of what we do. I think working together has given us an informational advantage and really helped us gain wholistic views of not only the risks but the opportunities in the current market environment.
I think a great example of this is a phenomenon that we witnessed in the investment grade market with a high level of downgrades, or what we call fallen angels, from the investment grade market to high yield. Those are formerly BBB companies being downgraded to BB. And a large preponderance of those companies of those names came from the energy industry.
The main reason for that is we saw a significant downdraft in commodity prices which really hurt the near-term earnings of these companies. But our fixed income and equity colleagues worked together and really gained comfort in the fact that commodity prices had bottomed and should be improving slowly over time.
And this enabled us to invest in a lot of those of those fallen angels at very attractive prices.
And lastly, when we take a look at access to company management teams, we’ve been really able to maintain these interactions despite the fact that both conferences and travel have gone almost to zero.
The relationships our analysts have forged over time with these management teams really allows us to pick up the phone or have a video interaction with them to help maintain that communication, that dialogue on a going-forward basis. And again, this is really important because to me if feels like the rigor of our investment process has not missed a beat.
And now I’d like to turn it over to my colleague, Jonathan Matthews, who can help provide some insights into the equity research platform.
Jonathan Matthews, Director of Equity Research:
The last six months has been unique in many ways, but also in many ways, a lot has not changed. I think we’ve had a very smooth transition to working from home in a home environment.
Morale is extremely strong. Actually, our internal employee engagement scores are up so we’re very happy with how the team is and how they’re coping personally and professionally in this environment.
One thing I think that’s really important is that we’re still getting the answers that we need in our work. So, we’re meeting actually with more companies than we have been meeting with previously.
We’re meeting more often. And we’re doing more in many cases.
So, the number of meetings with management of companies was up about 25% this year. And in terms of internal meetings, I think we’re up more significantly than that.
The number of notes that our team is writing up something like 45% in the first half of the year. And again, our analysts are seeing significant opportunities with the companies that they’re looking to invest in, and they’re writing about those and moving our clients’ assets into those. So, a unique environment but actually an environment that I think is working really well for us as a company and therefore for our clients.
So if I think about the way the environment has changed in the last six months, I think that what it has done is really focused on the strength of our position and the investment that we have made in the relationships with the companies that we invest in for our clients over the last decades.
If I think about the consumer sector, which is one sector that’s been under very significant pressure given the environment we’ve been in, for example, our consumer analyst in London, he’s been in the seat for 13-plus years. He will have met his companies 30, 40, 50 times over that decade long period.
He’s built very significant relationships with those companies, so he knows which are the best businesses, which are the businesses that are best equipped to survive and thrive. Which are the management teams that can best take advantage of these situations.
And he has the relationships that we can continue to have good quality one on one meetings with those companies and explore all of those issues. So, I think that we’re really benefiting from being inside the door as those barriers to entry have gone up. It’s harder to build those relationships from scratch in this environment. Having spent years and decades building those, I think we can really put that to good use for our clients.
So, one of the things we are seeing change in this environment is we’re seeing change in the way that we organize interactions and trips with many of the companies that we will talk to.
We will often organize bespoke trips for our investors, analysts, and portfolio managers that would cover a particular sector or region and take several days as we focus on a particular area. And those trips are incredibly complicated to organize but very valuable.
In this environment, we are making those trips much more virtual research trips. I think while we still benefit from the relationship, we will also get massive benefits in terms of our productivity, so significantly less complicated to organize, much easier to organize. And much easier to get diaries aligned such that we can get more meetings in the diary, and again our number of meetings is up very, very significantly this year.
So, I think we are seeing the model change in terms of how the way that we’ll interact with companies in the future. I think we will see more virtual trips. But I think we’ll also see more hybrid trips where we’ll get a core group of people to go and meet a management team or a group of management teams in an area of the market, but we will facilitate that with virtual meeting for others who will be able to piggyback on that.
So, I think we are seeing the world changing. I don’t think the world will ever be quite the same again.
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