By Ryan Crowther, Portfolio Manager, Franklin Bissett Investment Management
and Yan Lager, Portfolio Manager, Equity Research Analyst, Franklin Equity Group
(Sponsor Content)
For well over a decade, investors have focused on growth stocks: shares of companies expected to grow faster than the market average. But in recent months, the calculus has changed. Market volatility, driven by ongoing COVID-19 concerns, Russia’s invasion of Ukraine, rising interest rates and inflation, has led to a noticeable shift to value stocks. As investors focus on companies with strong fundamentals and comparatively lower-cost shares, do growth stocks still have a place in a diversified portfolio?
Financial Independence Hub: How would you describe the current landscape for growth stocks?
Yan Lager: We’ve been witnessing one of the most pronounced rotations from growth to value stocks in decades. In retrospect, following a multi-year run for growth-oriented equities that were clear beneficiaries of ultra-low interest rates, a rotation to value stocks as interest rates increase is not surprising to us.
Ryan Crowther: Looking at growth stocks generally, the terrain has become much more challenging in recent months, both in terms of the outlook for business fundamentals and a more discerning investor sentiment.
Have all growth stocks been hit equally hard?
Ryan Crowther: This is an important question, because when there’s a broad sell-off and a significant number of stocks drop sharply, they might all be considered “growth” stocks; but do they really share the same fundamentals? What risk versus return is the share price truly discounting? That’s where our GARP approach (growth at a reasonable price) has proven powerful for over 40 years, as it helps avoid focusing too much on whether a stock sits in the growth or value basket.
Which stocks have been most affected by the recent pullback in equity markets?
Yan Lager: Companies that benefited from the pandemic shift to working from home and the broader adoption of e-commerce, or persistently low interest rates, have seen their shares pull back due to profit-taking or concerns that future earnings performance may fall short of pandemic-high levels. Harder-hit stocks have included earlier-stage companies in the information technology sector, which have seen significant price and valuations fluctuations. We’re constantly reassessing the fundamental, longer-term investment theses and strategic merits of our investments.
What types of companies do you look for?
Yan Lager: In managing a global growth fund, we believe that owning a diversified portfolio of high-quality companies with strong secular growth drivers, unique competitive positions and capable management teams can deliver attractive returns, as ultimately share prices follow fundamentals. This is particularly the case if you’re investing for the long term, which we believe you should be if you’re investing in equities.
Ryan Crowther: We look for businesses with strong, consistent earnings and growing cash flow—attributes that will hopefully work to offset some of the factors that can challenge growth in the near term. In addition, a company’s valuations must also be attractive. We focus on combing through our investment opportunity set to find stocks offering a good risk-adjusted return profile over the course of an economic cycle.
Where are you finding opportunities these days?
Ryan Crowther: Focusing on mid- to large-cap Canadian companies, we’ve been active in securities that sold off as part of the broad weakness in growth stocks. We took advantage of that weakness to add new, quality companies at an attractive entry point. The shift — from the largely complacent and speculative equity market generally experienced throughout the pandemic — to the less forgiving market, characterized by a more rational mindset thus far in 2022, has created opportunities for us. Continue Reading…
Warren Buffett of Berkshire Hathaway, which just held its first live annual meeting since Covid hit.
By Akshay Singh
Special to the Financial Independence Hub
You’ve probably heard of the multi-billion dollar company Berkshire Hathaway, owned by mega-billionaire and philanthropist Warren Buffett, but what does Berkshire Hathaway do exactly?
Berkshire Hathaway Inc. is a conglomerate holding company, meaning it does not produce goods or services and instead has a controlling interest in and owns shares of other companies to form a single corporate group.
That leads us to our next question: What companies does Berkshire Hathaway own to make it one of the most valuable companies on the planet? The team at Indyfin turned to the 2021 Berkshire Hathaway annual report to create this compendium of all of the Berkshire Hathaway companies. The holding company has a controlling interest in more than 60 companies and partially owns another 20 on top of that. You’ll recognize a lot of brand names from a wide variety of industries that make up the impressive Berkshire Hathaway portfolio.
Does Berkshire Hathaway own one of your favorite or most-used brands? Check out this roundup of Berkshire Hathaway companies from Indyfin to find out.
What Is Berkshire Hathaway?
Berkshire Hathaway is an American conglomerate holding company with a market cap of US$774.24 billion, making it the seventh most valuable company in the world. What is a conglomerate? A conglomerate is a combination of businesses from a variety of different industries that operate as a single economic entity under one corporate group. Conglomerates are usually large and multinational and generally include a parent company and many subsidiaries. The “conglomerate fad” was big in the 1960s due to low interest rates, rising prices, and a decline in the stock market, which led to large corporate conglomerates like Berkshire Hathaway forming. The parent company in this scenario is also referred to as the holding company, as it holds a controlling interest in the securities of all of the other companies. Holding companies do not produce goods or services; instead, they own shares of other companies to form a single corporate group. Holding companies are beneficial because they reduce risk for shareholders and can hold and protect assets like trade secrets or intellectual property.
As we have written before, sentiment and emotions can have an outsized influence on investor psychology and investment decisions. Relatedly, there is a powerful inclination among investors to perceive markets that have outperformed as being less risky than those that have underperformed.
Interestingly, this tendency exists not just among individual investors, but is also prevalent in the professional investment community. A 2008 study by finance Professors Amit Goyal and Sunil Wahal explored the performance of investment managers who had been fired by institutional investors. The analysis compared the managers’ performance in the three years before being fired with their subsequent three-year performance. The results of the study are summarized in the following graph.
The Selection and Termination of Investment Management Firms by Plan Sponsors
On average, fired managers had poor performance in the three years preceding their termination, with average annual underperformance of 4.1% vs. their benchmarks. This figure should come as no surprise, as you wouldn’t expect that they were fired for knocking the lights out! However, what may be counter-intuitive to many is that these managers tended to subsequently outperform, with average annual outperformance of 4.2% over the three years following their termination.
Clearly, not only does looking in the rear-view mirror fail to prevent you from hitting something that is in front of you but may in fact cause it!
The other takeaway is that even seasoned, institutional investors can be swayed by short-term performance, which in turn can lead to decisions which are both ill-timed and economically perverse.
Beware the Mean Reversion Boogeyman
Last year saw a continuation of a long-established trend of U.S. stock outperformance, with the S&P 500 rising 28.7% as compared to 8.3% for the MSCI All Country World Index (ACWI) Ex-U.S. From the end of 2008 through the end of last year, the S&P 500 rose at an annualized rate of 16.0%, producing a cumulative return of 587.3%. In comparison, the ACWI Ex-U.S. Index rose at an annual rate of 8.6% and delivered a cumulative return of 190.7%.
The outperformance of U.S. stocks argues for actively reducing U.S. exposure and increasing allocations to other regions, as the mean-reverting, contrarian nature of investment manager performance can also be applied at the country level. The following chart covers the period from 1970-2021 and includes the U.S., U.K., Germany, France, Australia, Japan, Hong Kong, and Canada. Specifically, it illustrates the results of investing every three years in a portfolio of country indexes based on their trailing returns over the previous three years.
3-Year Performance of Countries ranked by Trailing 3-Year Performance
The chart brings fresh perspective to the standard regulatory disclosure language in the marketing materials of investment funds, which states that “Past performance is no guarantee of future returns.”
Outperforming countries tend to become subsequent underperformers : those that have had superior returns over the past three years tend to produce relatively poor results over the next three years. Conversely, underperformers tend to subsequently outperform: those that have lagged over the past three years tend to outperform over the next three years. Continue Reading…
By Kathleen Anderson, Director, Client Portfolio Manager, ClearBridge Investments
(Sponsor Content)
Considering how much COVID-19 has dominated our thoughts over the past 18 months, it is important to remember the significant challenges the world was facing prior to the pandemic. Aging demographics, growing inequality, and of course, the massive threat of climate change remain major concerns for global leaders, and that holds true in the investment industry too.
Sustainable investing and a focus on the environmental, social and governance (ESG) ratings of companies has become an important consideration for investors in recent years. Our firm, now part of Franklin Templeton following its acquisition of Legg Mason last year, was a signatory to the UN’s Principles for Responsible Investment in 2008, and first introduced ESG-integrated portfolios in 1987. Back then, responsible investing was a niche part of the industry, but attitudes have shifted considerably in the years since. At ClearBridge Investments, ESG factors are fully integrated into all our investment strategies after we formally introduced ESG ratings in 2014.
With this actively managed solution, the portfolio managers target international stocks they believe are mispriced by markets, and use a fundamental, bottom-up approach to invest in quality businesses across the growth spectrum (Structural, Secular, Emerging) (see chart below). Quality in this case means companies with strong balance sheets and good management, offering unique products or services, or having strong niche positions locally or globally. Portfolio construction is also governed by a strict buy and sell discipline, with all capitalization, sectors and regions represented among the fund’s 40–70 names.
The case for looking outside of North America is also strong right now as the vaccine rollout gathers pace internationally. As always, history offers us some guidance.
International equities outpaced U.S. stocks the decade before the financial crisis
The U.S. has been the undisputed global leader on equity performance since the Global Financial Crisis of 2008. Prior to that, international equities outperformed the U.S. for close to a decade, showing that geographic leadership tends to persist over a long period.
Commentary by Joseph H. Davis, PhD, Vanguard global chief economist
Republished with permission of Vanguard Canada
There’s only one sure way to identify an asset bubble, and that’s after the bubble has burst. Until then, a fast-appreciating asset may seem overvalued, only for its price to keep rising. Anyone who has tried to breathe one last breath into a balloon and finds it can accommodate two or three more breaths can relate.
Yale University’s William Goetzmann learned just how hard it can be to pinpoint a bubble. He found that assets whose prices more than double over one to three years are twice as likely to double again in the same time frame as they are to lose more than half their value.1
Vanguard believes that a bubble is an instance of prices far exceeding an asset’s fundamental value, to the point that no plausible future income scenario can justify the price, which ultimately corrects. Our view is informed by academic research dating from the start of this century, before the dot-com bubble burst.
Are there asset bubbles out there now? We at Vanguard have great respect for the uncertainty of the future, so the best we can say is “maybe.” Some specific markets, such as U.S. housing and cryptocurrencies, seem particularly frothy. U.S. home prices rose 10.4% year-over-year in December 2020, their biggest jump since recovering from the global financial crisis.2 But pandemic-era supply-and-demand dynamics, rather than speculative excess, are likely driving the rise.
Cryptocurrencies, on the other hand, have soared more than 500% in the last year.3 It’s a curious rise for an asset that is not designed to produce cash flows and whose price trajectory seems like that of large-capitalization growth stocks: the opposite of what one would expect from an asset meant to hedge against inflation and currency depreciation. Rational people can disagree over cryptocurrencies’ inherent value, but such discussions today might have to include talk of bubbles.
What about U.S. stocks? The broad market may be overvalued, though not severely. Yet forthcoming Vanguard research highlights one part of the U.S. equity market that gives us pause: growth stocks. Low-quality growth stocks especially test our “plausible future income” scenario. For some high-profile companies, valuation metrics imply that their worth will exceed the size of their industry’s contribution to U.S. GDP. Conversely, our research will show that U.S. value stocks are similarly undervalued.
Low-quality Growth has outperformed the market
Notes: Data as of December 31, 2020. Portfolios are indexed to 100 as of December 31, 2010. Low-quality growth and high-quality value portfolios are constructed based on data from Kenneth R. French’s website, using New York Stock Exchange-listed companies sorted in quintiles by operating profit and the ratio of book value to market value (B/P). The low-quality growth portfolio is represented by the lowest quintile operating profit (quality) and B/P companies. The high-quality value portfolio is represented by the highest quintile operating profit and B/P companies. The broad U.S. stock market is represented by the Dow Jones U.S. Total Stock Market Index (formerly known as the Dow Jones Wilshire 5000) through April 22, 2005; the MSCI US Broad Market Index through June 2, 2013; and the CRSP US Total Market Index thereafter.
Source: Vanguard calculations, based on data from Ken French’s website at Dartmouth College, mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html; MSCI; CRSP; and Dow Jones.
Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Low-quality growth stocks — companies with little to no operating profits — have outperformed the broad market by 5.5 percentage points per year over the last decade. Of course, there are reasons why growth stocks may be richly valued compared with the broad market. Growth stocks, by definition, are those anticipated to grow more quickly than the overall market. Their appeal is in their potential. But the more that their share prices rise, the less probable that they can justify those higher prices. A small handful of these “low-quality growth” companies may become the Next Big Thing. But many more may fade into obscurity, as occurred after the dot-com bubble. Continue Reading…
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