Investment veterans discuss that, and other investment trends
Longtime portfolio managers making up a roundtable assembled by Ariel Investments LLC expressed disappointment that the stock market downturn following Donald J. Trump’s victory was short-lived before a rebound the day after the presidential election, leaving little time for the bargain buying opportunities they had expected.
“This morning, I was somewhat disappointed the market didn’t collapse … when I got in,” said Robert S. Bacarella, chairman and president of Monetta Financial Services Inc., Wheaton, Ill., at the panel discussion Nov. 9 in Chicago. “By the end of the day, the (Dow Jones industrial average) was up 200 points.”
John W. Carey, executive vice president of Pioneer Investment Management USA Inc., the Boston-based unit of UniCredit SpA, Milan, said: “That was one of the most fleeting opportunities to buy stocks at a bargain I’ve ever seen.”
John W. Rogers Jr., Chicago-based Ariel chairman, CEO and chief investment officer, said, “We had this opinion that there could be a significant downturn. … So we prepared for it. Our thinking was we’d be coming in today (to work) having a chance to buy bargains and buy wonderful companies that would be on sale because of the temporary downturn in the marketplace.”
The discussion by four panelists, brought together because they have been portfolio managers of their flagship mutual funds for 30 years, drew an audience of some 250, including asset owners, investment consultants and other investment managers.
Health care and beer
Investment trends they discussed included:
• market opportunities and risks of Trump administration polices;
•the shift toward more active portfolio management from index funds; and
• rules for proxy access, enabling long-term shareholders to use corporate proxy materials to nominate corporate directors.
On market opportunities and risks from the new administration, Mr. Carey, referring to Mr. Trump’s platform to rewrite trade agreements, said, “If there are changes in trade policy over here, there will be responses overseas.”
In an analogy, Mr. Carey recounted a “story about a French general, who was said to have taken into account everything except the presence of the enemy in planning. So we just don’t know what kinds of responses some of the changes in trade policy could have and what the implications could be for companies” as investments.
Mr. Bacarella said, “It’s a little too early to tell … what the new president will do in terms of his Cabinet and direction … and how to adjust an investment strategy. … America has voted and they basically want change, and when you get change in the mix, it concerns Wall Street. We get a lot of volatility.”
Mr. Rogers said: “We have changes in leadership, changes in presidents, changes all over the world. … We have this upward bias to the market. The economy recovers. We recover and have a very good experience in the long run. If you are thinking long term, you aren’t going to get swept up with this short-term noise. … The economy is recovering … and it’s not based on who happens to win the presidency in the short tem.”
The Trump presidency will bolster fiscal policy, Mario J. Gabelli, chairman, CEO and chief investment officer, value portfolio, at GAMCO Investors (GBL) Inc., Rye, N.Y., said, leading Mr. Gabelli to “want to own anything to do with infrastructure” and buying military-related stocks.
Looking at longer-term investment trends, Mr. Gabelli said he favors health care and beer. Mentioning the aging of the populations in America and around the world, Mr. Gabelli said, “We have to do preventive medicine” and recognize “the notion of health and wellness.” In addition, Mr. Gabelli said, “There is a high probability we will continue to consume liquid products like beer, wine, soda.” Also, he sees cybersecurity, robotics and artificial intelligence as potential investment trends. He didn’t mention any companies.
On the economy, Mr. Carey said, “The jury is out whether the low interest rates have enhanced growth. Somewhat higher interest rates would encourage companies to work harder making investments to provide better returns. … Rates have been too low for too long.”
'The decade for stock pickers'
On active vs. passive management, Mr. Rogers said, “This is going to be the decade for stock pickers. … It’s been a long trend we’ve gone through where active mangers have underperformed. We know in 30 years of doing this … we have gone through these waves. Things become very popular, very hot and everyone follows that concept. What’s worked yesterday gets everyone excited and people give up on what’s not working and often that’s where the opportunities are.”
“When the market finally turns, people (will) realize a lot of companies are mispriced and (bought) for non-fundamental reasons,” Mr. Rogers continued. “They are buying them because they are part of an index fund. Those of us who are buying true businesses and true cash flows and (at) the right price will be rewarded. … So this is going to be a great period for the next 10 years for those who stand away from the crowd and not follow the indexing herd.”
But Mr. Rogers also said, “I’m a believer … the markets are extraordinarily efficient. … After 30 years of doing this, I’m more convinced very few active manages can outperform. For most people, putting money into indexes makes sense or having a satellite of index funds makes sense with some active managers around the satellite. But trends go in waves. … You have a 10-year period where 80% plus of (active) managers underperform. Everyone gets convinced active management is dead. … This has gone way too far. … More of us (active managers) will have our day in the sun. But over the long run, indexing is going to have a place in most core portfolios because this is a very difficult business to outperform in.”
Mr. Gabelli said index fund mangers “don’t know the companies they are investing in. We are buying a business. We’re buying a CEO … and we try to dig into what is (a) business worth and where it is going. … They are not doing that. … It gives me an edge when the markets give us these opportunities.”
On corporate governance, Mr. Carey raised concerns about index funds being eligible to nominate directors under proxy access at lots of companies “that they really haven’t studied or learned about. They bought (the companies) because they were in an index.”
Mr. Gabelli called proxy access “one of the dumbest new rules I’ve seen. … When I talk with the guys at (an index fund), they don’t have anybody focused (on companies).” They rely on corporate governance research firms, he said.
In addition, Mr. Gabelli criticized the Sarbanes-Oxley Act of 2002, aimed at stopping fraudulent corporate accounting, for adding to the cost of accounting and internal compliance at his company, which is publicly traded. ”When we go to board meetings, instead of talking about risks, we talk about process and checking the boxes.”