The Lead - "All Eyes on China"
- The CSI 300 Index, comprised of the largest 300 stocks on the Shanghai and Shenzhen stock exchanges as measured by market capitalization, was the best performing major stock market in 2019 and thus far in 2020, according to Bloomberg.
- We see the Chinese market differently from that of the West and this continues to evolve with near, intermediate and longer-term implications.
- With China set to be the home of what the Wall Street Journal stated could be one of the largest IPOs ever, changes in the region may warrant more investors’ attention.
Sterling Capital Launches Focus Equity ETF
Sterling Capital Management LLC (Sterling) is pleased to announce the launch of the Focus Equity ETF (NYSE: LCG), which will be available to the public on August 27, 2020. The Focus ETF is the first exchange-traded fund launched by Sterling, and will be the first of several ETFs to be offered on a Sterling ETF platform.View PDF
The Lead - "The Price of Growth"
- This year, the market has rewarded relative earnings growth in the largest five stocks in the S&P 500® (Apple, Microsoft, Amazon, Alphabet, and Facebook).
- We point to the early 1970’s as a period of time in the market that also rewarded familiar growth stocks with higher valuations, in the form of the Nifty Fifty.
- By looking at history and engaging in rigorous assessment of portfolio holdings, we seek to generate both above average returns with below average risk over time.
The Lead - "The Importance of Balance Sheets"
- The current economic environment highlights the value of cash to businesses with 306 equity issuances totaling $99 billion in the U.S. this quarter, according to Bloomberg.
- One area where our investment pillars blend to the potential benefit of our clients is when strong balance sheets and valuation can combine to create opportunity, and we can adjust our assessment of valuations accordingly.
- Cash-rich companies in the S&P 500® are unique, with only 16% that have more cash than debt on their balance sheets and Sterling equity strategies own the majority of the top 5 in the index ranked in terms of total net cash.
The Lead - "Looking for More Internationally"
- The case for international equity outperformance based on valuation alone has been a challenging one.
- If an investor overlays relative earnings growth with valuation, the combination has the potential to increase the probability of success.
- The Equity Opportunities Group defines a “good bargain” as one that has the combination of growth and value in favored themes worldwide.
The Lead - "Can Culture Generate Performance?"
- As active managers, part of our investment process can involve interviewing management teams to determine if their corporate culture enables them to adapt to challenging periods, such as early 2020.
- We provide an example from a recent management discussion in April.
- Glassdoor provides a tool to measure corporate cultures and academic studies, such as those by Norwich Business School, indicating companies that score well in terms of compensation, senior management, corporate values and work/life balance have the potential to outperform peers.
The Lead - "Dislocated Opportunities"
- Perhaps it is because our investment teams are located outside cities where the typical investment firm is housed, but our team has several views on market opportunities that appear divergent from the mainstream in the current market environment.
- The “sell what you can” dynamic has presented opportunities to find value at attractive prices.
- Our conviction to make investment decisions is supported by strong measures of insider buying and that many of our investments are funding and working towards finding solutions to the COVID-19 threat.
The Lead - "Cash is King"
- According to Empirical Research, free cash flow margins have been the best performing characteristic in the U.S. large cap market over the past one, three, five, and ten year periods.
- As public companies drive efficiencies to attract capital, the bar to be in the top 10% of stocks with high cash flow margins has continued to move higher.
- Most of these companies are in the technology and healthcare sectors, where many of our investment strategies are overweight relative to their benchmark.
- From Empirical Research’s work, it appears quality businesses also make quality investments.
The Lead - "Have Process, Will Travel"
- Our favorite college basketball team employs a proven defensive framework to help them win championships.
- Sterling Capital has repeatable investment processes that put the odds of success in our clients’ favor.
- Recently, our research provider expanded their databases globally, increasing our conviction that our process can add value, regardless of geography.
The Lead - "The Equity Market is Not Partisan"
- The performance of domestic equity markets in 2019 “rhymed” with history in year three of the cycle, posting strong returns versus the preceding two years – up over 28% in the case of the S&P 500.
- Election years tend to be the smoothest in terms of quarterly returns and many combinations of political control can lead to solid returns for equity investors.
- Our focus has been on keeping our “eye on the prize” to build portfolios of unique companies at unique prices.
The Lead - “Quality Shines”
- Recent work by Sterling Capital shows how quality as defined by return on equity shines in both up and down markets.
- How has quality fared in 2019? In a strong upmarket, domestic quality stocks more than doubled the performance of lower quality stocks with similar trends globally.
- Quality is an important component of our philosophy of investing, where the investment team rigorously assesses current and potential client holdings across multiple dimensions.
Associate Spotlight - George Carbaugh
This month’s Sterling Capital Associate Spotlight features Quantitative Research Analyst George Carbaugh. In his Q&A, George shares three qualities he believes are important to have in this industry, why, if he could choose, he would have dinner with Winston Churchill and more.View PDF
The Lead - "Where Will Growth Come From?"
- One of the world’s largest institutional investment advisors recently noted the changing complexion of global growth.
- This large consulting firm is also a fan of active management because of its ability to get ahead of changes in markets.
- As active managers, we use cognitive diversity to avoid group think when assessing stocks and pinpointing the sources of potential growth on a portfolio basis.
The Lead - "Flight to Quality"
- Owning “quality” has worked for equity investors in 2019
- In our view, quality stocks have six essential elements: industry leadership, niche domination, mission critical, quality compounder, misunderstood, and a disrupter
- Merrill Lynch notes that there are fewer quality stocks in domestic markets, which may make active managers focused on owning scarce quality stocks appealing