The Lead - "Defensive Investing – 20 Years Later"
- The dynamics of market participants paying rich valuations for fashionable stocks are evident in 2021, just as they were when Benjamin Graham wrote his book on value investing in 1949 and in one of our first investor communications titled “Defensive Investing” from 2001.
- Bloomberg noted this month that trillions of dollars are pouring into market capitalization-weighted index funds, and that, as a team of researchers from Michigan State, the London School of Economics, and California-Irvine noted, fund flows over the past 20 years may have disproportionately increased the price of the largest stocks in the market relative to smaller-cap companies.
- We would note that these disparities appear to be impacting relative valuations as, per month end, the top ten companies (ranked by weight) in the S&P 500 Index were trading at 29x their forward earnings estimate, while the other 490 companies were trading at over a 30% discount.
- Just as when we started 20 years ago, we remain committed to the same investment approach that served us well over that timeframe, as we seek to take advantage of these opportunities to source promising investments for our clients.
The Lead - "Value in Perspective"
- We look beneath overall market performance to highlight potential opportunities pertaining to disparities between growth and value as well as large caps and small caps, amidst some historic anomalies.
- While the outperformance of growth stocks relative to value stocks over the past 14 years is among the longest in terms of style cycles, the performance difference between large growth and small value is even more pronounced.
- We highlight the concentration of the S&P 500® Index and institutional investors in a relatively small number of stocks.
- With relatively low portfolio turnover in our fundamental equity strategies, and by owning stocks that differ from the benchmark, we adhere to processes that Empirical Research Partners suggests may enable investment managers to generate outperformance over time.
The Lead - "The Health of Healthcare Stocks"
- The S&P 500® Index was up 14% at the end of November, but healthcare was one sector that did not fully participate.
- However, we would note that in many instances, underperformance ahead of presidential elections tends to be followed by outperformance, as healthcare was among the most consistent outperformers of any S&P 500 sector (75% of the time) after a presidential election, per Ned Davis Research.
- Several of our equity strategies have added healthcare positions in 2020 in anticipation of brighter days ahead.
The Lead - "Improving Access to Global Opportunities"
- According to the World Bank, in the year 2000 the U.S. represented 30.5% of World GDP.
- That share declined to 24.4% even though GDP in the U.S. doubled over that time period, according to Bloomberg.
- How do investors gain simple and cost-effective access to stocks in these foreign markets as they grow in prominence?
- We discuss how the growth in bank-sponsored American depositary receipts, or ADRs, are availing investors to these potential opportunities.
The Lead - "Dividend Growth in Demand"
Over the last twelve months, investors tended to favor those companies in the S&P 500® that increased dividends at the fastest rate.
- One dynamic that may come into play is the scarcity of dividend growth in domestic markets that we highlight this month.
One of the hallmarks of the Sterling Capital Equity Income strategy is targeting a dividend growth rate in excess of the overall market (in addition to its overall yield above the S&P 500).
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.