Separating the Wheat from the Chaff

Why selectivity matters

03.31.2016 - Carin Pai

As active portfolio managers, our goal is to help investors meet their long-term objectives regardless of current economic conditions or market performance. However, there are certain environments in which we believe professional portfolio management can be especially valuable.This is one of them, for several reasons.

First, we anticipate relatively flat S&P 500 Index returns this year, as corporate earnings drift downward (CHART). Second, we expect the S&P’s lukewarm performance will be lifted by a select group of stocks and market sectors this year, as it was in 2015.

Finally, we believe that active managers with disciplined investment processes and global research capabilities may be uniquely qualified to separate the wheat from the chaff in these markets—distinguishing securities that are discounted because of investor pessimism from stocks that are undervalued for fundamental reasons.

Rigorous Screening

During recent bouts of market volatility we have seen stocks selling at 20% to 30% discounts to their intrinsic value because of technical selling pressure or pessimism among investors. These situations unlock opportunities for us to closely examine companies with strong underlying fundamentals and attractive stock prices. If the target meets our rigorous evaluation standards, we may acquire or add stocks in which we have a high degree of conviction.

Some of the qualities we look for include:

  • Durable Growth. Corporate growth that is driven by sales and profits, not low interest rates.
  • Resiliency. High-quality companies that don’t rely on economic expansion to generate cash flow.
  • Technological Innovation. Firms with forward-thinking digital strategies and social media approaches.

Among the market sectors we are targeting:

  • Healthcare. We see several drug distributors,insurance companies and IT service providers that could be well-positioned for growth.
  • Technology. While this sector has been challenged by a soft economy, we continue to see productivity gains and long-term growth potential in cloud computing and security.

Focusing on Fundamentals

As always, we remain committed to capturing these growth opportunities without exposing our portfolios to unnecessary risk—not only to guard against losses, but also to provide steadier performance. Therefore, a broad variety of industries is represented in our portfolios, while we maintain our overweight positions in technology and healthcare. We also rely on fixed income investments for their capital preservation qualities and non-traditional (alternative) asset classes to provide upside potential when equity markets are stressed. While markets fluctuate, uor commitment to investors remains steady. A high level of selectivity is the cornerstone of our approach.

This communication is intended solely to provide general information. The information and opinions stated are as of March 1, 2016, unless otherwise noted, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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