At GAM Investments’ Weekly Investment Meeting held on 27 March 2019 the speaker was Ali Miremadi, who outlined his outlook for global equities in 2019.
Our investment ethos is built on constructing a concentrated portfolio of strong companies trading on deep discounts to long-term intrinsic value. We focus on fundamental stock picking rather than employing a simple value screen. We believe this helps us to avoid ‘value traps’ of which there is always a plentiful supply – buying stocks that are optically cheap is likely to prove a fruitless exercise if the underlying fundamentals are less than rock solid. Consequently, we research the durability of a business, assess the strength of balance sheets, competitive advantage and industry structure and conduct a large number of company meetings. As such, we have built up a lot of intellectual capital over the years, which relates to the universe of stocks which we know well. We have a focused portfolio of around 40 stocks (from a potential universe of 15,000, meaning that there is a very high entry bar) spread around the world, and in different sectors. Our turnover tends to be around 20%, equating to a five-year holding period. In addition to our portfolio holdings, we also maintain a ‘bench’ of additional stocks which are under serious consideration for inclusion in the future. When we consider that one of these bench stocks may offer more potential upside than an existing portfolio constituent, this becomes a catalyst for change.
We conduct a three-year forward scenario analysis on all our positions, considering possible valuation parameters. We believe that our contrarian, concentrated and value-orientated approach is differentiated from its peers by the concept that markets are less efficient over longer time horizons. While many analysts look to predict short-term price adjustments, we seek to invest in businesses with the ability to generate sustainable growth or those with significant turnaround potential over a three-year horizon – we feel this is a competitive strength as we have confidence in our ability to analyse firms over such timeframes, which is something we believe that other market participants typically lack or are simply not interested in doing. For us, the most important attribute is that the share prices of these companies must trade at a significant discount to our proprietary calculations of intrinsic value. We also recognise that scenario analysis does not always play out as anticipated and our central case is a by-product of our ‘tramline’ calculations of bull and bear scenarios. The essential trading aspect of the discipline is that we must objectively offload those positions that are failing to perform as anticipated, yet recognise when short-term noise is obscuring the intrinsic value of a stock which we should fundamentally stick with.
In terms of the market environment, we can look back on a very difficult second half of 2018 in which stocks that traded at compelling valuations were among those who were punished hardest. Sentiment has proven much more favourable during the first three months of this year and levels of dispersion have increased. As such, the market is more fundamentally driven and dispersion in stock prices tends to favour managers who run strategies that are benchmark and peer group differentiated by a high level of active share. At the sector level, we have benefited from a strong recovery in our energy holdings, though our underweight in technology has caused some relative pain.
As we look ahead, we perceive that we are at a pivotal point in the monetary policy cycle. Although the European Central Bank has not come close to raising rates, the Federal Reserve (Fed) has hiked on 11 occasions, so if we are not at the actual top of the cycle, we will soon get there, in our view. Clearly, Fed rhetoric has seen a pronounced shift in tone so far this year. Meanwhile, growth has outperformed value for pretty much a decade. We believe the tide has to turn in our favour eventually and remain focused on investing in decent businesses at deeply discounted valuations.
Important legal information
Source: GAM unless otherwise stated.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.