Virtual Roadshow: Loomis Sayles Global Equity Fund
In our recent Virtual Roadshow, Investors Mutual Investment Specialist Peter McPhee discussed with Loomis Sayles Global Equity Fund Co-Portfolio Managers Eileen Riley, CFA and Lee Rosenbaum the fundamentals of their investment approach, and the portfolio managers answered questions from roadshow attendees.
Eileen Riley, CFA
Eileen Riley kicked off with a summary of Loomis Sayles and the Global Equity Fund. Founded in 1926, headquartered in Boston, and with offices around the globe, the company is focused entirely on investment management. The Global Equity strategy offered in Australia is a concentrated, best ideas approach which looks to take advantage of two market inefficiencies – the ‘duration effect’ (the ability of businesses to compound their cashflows over time), and mispricings. The portfolio managers’ focus is on delivering a concentrated, unconstrained portfolio with a long-term time horizon, drawing on the competitive advantage of the firm’s deep fundamental research.
If you’re creating a global best ideas portfolio, constraining yourself by artificial metrics like style or geographical constraints is limiting yourself, Eileen Riley stated. The portfolio management team implements a disciplined approach for the unconstrained portfolio by consistently identifying businesses that possess the alpha drivers of quality, have the ability to help grow their intrinsic value, and which trade at what they consider an attractive valuation. Riley outlined that the approach does not rely on broader macroeconomic calls or currency calls to generate potential returns. The majority of the Global Equity Fund’s returns are driven by stock selection, with country and currency exposures only modest contributors. Understanding the drivers affecting cashflows and valuations of the businesses in the portfolio is a much more consistent and rigorous way to approach research and portfolio construction, Riley stated. The team wants to find their best 35 – 65 businesses to invest in, rather than the best market or industry. The portfolio also consistently maintains a very minimal level of cash, alleviating the potential for cash drag.
Lee Rosenbaum expanded on the strategy’s long-term focus. He reiterated the concept of “time being our friend” – a reference to the duration effect, that the businesses owned are going to be worth more over time, as the focus is on only owning businesses where the team forecasts a positive slope to free cashflow over time. As the businesses earn out their return on equity year after year, the fair values of the companies should also march higher over time, he said, and therefore when markets are performing well, the companies in the portfolio should keep up. Ultimately, price discovery will come true, enabling Loomis Sayles to preserve downside protection when markets get more turbulent.
Wall Street vs Main Street
In response to a question about the dichotomy between “Wall Street and Main Street” – that sharemarkets have been performing strongly during a significant economic downturn – Riley stated that the businesses in the Global Equity Fund which are doing well are those which are taking advantage of existing investments in things they have been doing for a long time. Many companies have during the COVID-19 environment been innovative in their management of their cost structure, and very innovative in how they serve their customers. This has been an acceleration of pre-pandemic trends in areas such as e-commerce penetration.
Eileen Riley gave as an example Home Depot’s digital offerings and supply chain management. This company has been able to rapidly pivot aspects of its business model and how it serves customers in the home improvement market, despite fewer customers being able to come into the firm’s stores. Home Depot has been able to do this because of its pre-pandemic investments in its supply chain and inventory management, which has allowed the firm to pivot rapidly and be very innovative.
Volatility as Opportunity
Lee Rosenbaum was asked whether Loomis Sayles’ investment process enables the portfolio managers to take advantage of market volatility. Rosenbaum outlined that volatility is something that the portfolio managers look to take advantage of, rather than shying away from, as it allows the portfolio managers to execute against the market inefficiency of the mispricing effect.
He gave as an example Mastercard, which had been on the team’s ideas generation tracking list and they had been studying for some time, and which had already met the firm’s quality and intrinsic value growth alpha drivers, but which had not previously met the valuation alpha driver. Mastercard had been one of the first companies to pre-announce negative results, and the portfolio managers had started to see an opportunity to initiate a position in the company. The portfolio managers were of the view that Mastercard’s differentiator in business services, data analytics, and related services would be beneficial as transaction volumes slowed. What they thought was attractive was the opportunity for MasterCard to continue to expand its served markets, benefitting a very capital light, highly free cashflow-generative business. Establishing a position in Mastercard was an example of the team using the opportunities provided by market volatility to take advantage of a mispricing effect where the analysts and portfolio managers had already undertaken the in-depth work to understand a company.
Rosenbaum also emphasised that what is important is that the companies owned in the Global Equity portfolio are resilient and offer opportunity. Indian banking and financial services company HDFC Bank had an existing track record of executing well and had been undertaking excellent credit underwriting as we entered the COVID-19 environment, for example. Dominant semiconductor manufacturer ASML – introduced into the portfolio in 2020 – had adapted well on the back of having already started to engineer and install remote video technologies allowing the firm to service customers remotely. Being able to adapt quickly has allowed additional areas of the company to continue to grow.
More Effective Use of Technology
Lee Rosenbaum also commented that the portfolio managers have observed many types of businesses in a variety of sectors bringing technology more and more into how they conduct business, using data and analytics to develop strengths and improve lean manufacturing and product and service delivery. Accenture, for example, is enabling company C-suites and line managers to really understand their challenges through expertise in cloud computing and data analytics. Accenture is working with the Australian Rugby League Commission in areas including data analytics, live digital streaming, and digital customer relationship management augmentation. Other companies not traditionally thought of as having a technological edge were also benefitting from this: another key portfolio holding, healthcare firm IQVIA, has introduced data analytics and software bringing together its data science and clinical trials businesses.
Riley and Rosenbaum were asked for their views on the forthcoming initial public offering of ANT Group (parent Alibaba is a holding in the Global Equity portfolio). Eileen Riley outlined that the team had been undertaking a significant amount of work on ANT Group as a standalone business. She described ANT as fitting into a broader profile of the rise of innovative business models and capital in search of these business models, and financial services businesses which are less balance sheet intensive and more about aggregation of customers. Describing payments and payments technology as “a really interesting space”, she stated that the team would continue to get their arms around the more specific financials of the ANT Group business.
The China Syndrome
The portfolio managers were also asked for their views about how China will evolve over the next five to 10 years. Lee Rosenbaum reserved any specific forecast on such a big question as how US/China relations are likely to evolve, but commented that Loomis Sayles’ current base case is for a continued high degree of ‘great power’ competition between the United States and China, with potential for a thawing of current tensions on the basis of the outcome of the forthcoming US presidential election. He stated that the portfolio managers continue to look for opportunities as a result of share price volatility stemming from shifts in this outlook to trim existing positions or introduce new businesses to the portfolio if the businesses are attractive on the basis of the strategy’s alpha drivers.
In response to a roadshow attendee’s question about the effects of continuing low interest rates, Eileen Riley commented that the easy access to capital has and will continue to benefit many businesses, but especially those with a strong starting point in their balance sheet, and which can use this to drive existing opportunities in their business or for merger and acquisition activity. US fiscal policy will also potentially be supportive for business, Riley said, depending how it is rolled out. On the issue of the effect of consistently low interest rates on market valuations and fund managers’ discounted cashflow valuations, Riley commented that the appropriate interest rate to use in DCF modelling is something the team continues to focus on.
While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock. Past performance is not a reliable indicator of future performance.
Examples above are provided to illustrate the investment process for the strategy used by Loomis Sayles and should not be considered recommendations for action by investors. They may not be representative of the strategy's current or future investments and they have not been selected based on performance. Loomis Sayles makes no representation that they have had a positive or negative return during the holding period.