Emma Wall: Hello and welcome to Morningstar Series Why Should I Investment with You. I am Emma Wall and here with me today is Ian Heslop, manager of the Old Mutual North American Fund.
Hello, Ian.
Ian Heslop: Hello.
Wall: So, I thought we'd start with Janet Yellen's comments recently saying that, she thought that U.S. equities were fully valued. When you've got the Head of the Federal Reserve saying that, what should investors think?
Heslop: Well, I think it's not an unreasonable thought that, we've had a very strong run. The earnings growth that we're seeing around about 7% this year with evaluation looking at kind of 18.5, maybe 17.5, forward 12. So yes, it isn't cheap, it's fully valued. But I think the question that maybe investors should be asking themselves is, kind of where can I find value in markets like that. So, there is always areas of the market where we could find interesting stocks, even if the aggregate market is somewhat fully valued.
Wall: So the next question is, where are you finding value then? Are you able to pick up anything at the moment?
Heslop: Here, what we're seeing actually at the moment is, I think plays into how we actually run money, which is a huge amount style rotation, very, very unstable market. So I think it's interesting that when investors look at markets, they often look at things like cross-section volatilities or how stocks are moving relative to one another, and that's being very subdued, mainly due to the impact of Central Bank and liquidity from Central Banks coming into equity markets.
Wall: Do you mean that then everything has come up together rather than there being a normal sort of…?
Heslop: Yes. But actually when look within markets, there is a huge amount of style rotation, huge amount of kind of winner becoming losers, becoming winners, value outperforming, then underperforming, then growth takes a turn, all of these things. When you are trying to build a portfolio for consistency, it plays into the idea that you really need to have a diversified style across your portfolio. So a number of types of stocks in a portfolio and that's how we try to add value. So find good stocks, but good stocks in a number of ways to try and stabilise your overall returns.
Wall: I know that you used to prioritise value, but during 2008 that became – that threw up some value traps. So now it's just one of the considerations. How do you blend those different themes then?
Heslop: That's the kind of secret sauce I guess. What we are trying to do really is, recognise that the market changes. Investors change and the market changes because of the way the investors react to information because of macro environment, the market changes, and you really need to change the tools you use to predict return. So, we're very agnostic about what type of stock we need in a portfolio at any point in time.
We often talk about this idea that we rent stocks, we don't buy them. We are not looking for very, very long-term position. Our average position length is about six – three to six months. They come into the portfolio to do a job and then they leave portfolio when that job is done. It is very much an idea of building alpha that's consistent over the long-term. We don't want to be fund managers that only work when the markets are going up.
There are a lot of them. While the markets are falling or volatility is high or low, we want to be in a position where we can show very consistent returns.
I think last year was a classic example of that where many fund managers – I think a huge majority of my peers in North America underperformed the index. I think they underperformed the index mainly because they have very concentrated style exposed portfolio, they are value manager or a growth manager or they have a lot of momentum in the portfolio, and that can lead to up and down returns, that's what we're trying to avoid.
Wall: I think it's very interesting that how short you hold a stock for. Do you think that's because of the nature of the U.S. market, which is obviously a developed market index? It's very transparent, there is lot of information out there because people are perhaps investing in emerging markets, looking for growth stories, will hold a stock for five years.
Heslop: Yes, that's true. I mean the growth story normally is a growth story until the catalyst comes. We would very much recognise that because of the way the markets work, because of the huge amounts of change that you see in the U.S. market, I think that has to do with the ideas of efficient implementation of new information which we have in markets.
You just need a different approach. You need to recognize actually that you don't always have, you've got best mousetrap now, you don't necessarily have the best mousetrap for 12-months' time, and recognising that investors have a huge part to play and tell you which stocks that are likely to outperform or underperform. It's not just about us, and what we think, we have to listen to everyone.
Wall: With all that in mind where are you seeing opportunities at the moment? What sectors look attractive?
Heslop: Well, the interesting thing about sectors actually is, the way that they have changed over the last three or four months. When we came out of 2014, the market was quite defensively placed in relation to sector. So, for instance, you would have utilities outperforming, you would have energy underperforming toward the end of last year, healthcare out performing, financials are underperforming. We've kind of kept some of that.
But we've actually moved a lot into the kind of more neutral stance, because we really do believe that the market at the moment can go one of two ways, and it is very difficult to actually take very concentrated bets in portfolios that could be very binary and could be very disadvantageous to the overall return if you get them wrong.
So, for instance, the utilities position which we held for a while is now more neutral in the portfolio, the same thing with energy. We had a very underweight position in energy stocks, which benefited the portfolio in the second of last year. We've actually now moved that much more neutral and that's following really what investors are doing, what investors are telling us.
The kind of interest in these sectors is changing, and that ties in with the change that we're seeing in markets in general where there is a genuine rotation away from maybe the winners that have won over the previous periods to new stocks, more interesting stocks, given the environment we're in.
Wall: And of course, those energy stocks you pick up on the cheap because they did so badly last year.
Heslop: Yes. I mean energy stocks are flagging cheap, but again as we always say, sometimes cheap stocks are cheap because they are neglected by the market or they are misunderstood by the market or sometimes cheap stocks are cheap because they should be, because they are a bit risky. So we have to make sure that we understand why things are cheap. Why they are cheap because they really a way of actually incorporating more risk into portfolio or they are there as an opportunity because they are actually misunderstood by the market.
Wall: Ian, thank you very much.
Heslop: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
