Investors building a portfolio today are often asked to choose between Growth or Value. That’s the wrong question to be asking, according to Scott Berg, portfolio manager of the Gold-rated T. Rowe Price Global Equity Fund.
Instead, he says investors should be prioritising diversification. “There are a group of people who are just investing in energy, cyclicals, financials, and the old economy and would never consider Tesla or Amazon,” says Berg, who won Morningstar’s 2021 Global Equities Fund Manager of the Year. "On the other side, there are people who only believe in innovation or disruption and they’d never consider energy, cyclicals, and financials. But the whole art of portfolio management is going beyond that.”
T. Rowe Price Global Equity Fund has returned 28.2% over the 12 months to March and Morningstar analysts like that its portfolio crosses so many borders. Berg supplements giants such as Amazon (AMZN) with meaningful holdings in emerging markets. And while the portfolio tilts to growth, value stocks also find a home. For Morningstar analyst Christopher Franz says it's the fund’s broad bottom-up research that makes this variety possible.
“[In normal times] Berg travels extensively, spending roughly 50% of his time on the road to meet with company management, suppliers, and competitors to ask questions about market and business conditions, strategy,” says Franz.
To illustrate the importance of diversification, Berg points to six very different companies – a mix of old and new industries – which the fund has bought and sold. They encompass southeast Asian ecommerce and entertainment and more stalwart industrial powerhouses such as General Electric (GE) and Boeing (BA). Let's take a look at these names:
Etsy (ETSY)
Covid-19 has helped some firms and Etsy is an American retailer of handmade goods, vintage items, and crafted goods. The business model is based on sellers listing products on Etsy's platform. Speaking about Etsy and others, Berg says: “They were business models that weren’t proved pre-Covid, that suddenly got absolutely turbo-charged in terms of their scale, margin, and outlook.” Etsy shares have soared from $35 a year ago to more than $200 today.
General Electric (GE)
Tech companies might have hogged the headlines since Covid-19, but there is still value in stocks that might seem old-fashioned, according to Berg: “When we find average companies at average prices we’re willing to have bits of that.”
GE’s roots go back to Thomas Edison and his light bulb. Today it is a global leader in air travel, precision health, and the energy transition. Its industrial base includes aerospace engines, gas and steam turbines, onshore and offshore wind turbines, as well as medical diagnostic and mobile equipment.
Narrow moat GE trade at around $13 currently, slightly below Morningstar’s fair value estimate of $14.10. At three stars, Morningstar’s analyst Joshua Aguilar thinks CEO Larry Culp is engineering a successful turnaround of GE that the market has yet to fully appreciate.
Brookfield Asset Management (BAM.A)
The post global financial crisis era of low interest rates has hurt financial stocks and the Covid-19 induced economic downturn means central banks are likely to continue keeping interest rates “low for longer".
But Berg thinks there are still opportunities if investors look beyond traditional large banks. Blue-chip alternative asset managers like Brookfield Asset Management benefit from low rates, and have little credit exposure. Brookfield owns and manages commercial property, power, and infrastructure assets. Its investment focus includes Real Estate, Infrastructure, Renewable Power and Private Equity.
Underperformance of global financial stocks relative to global equities.png)
Source: Morningstar
Tesla (TSLA)
A long time Tesla fan, Berg believes you must be willing to exit stocks you love once the price gets too extreme. Despite having sold 90% of his Tesla position, he remains bullish about electric vehicles and has invested in EV start-up Rivian, one of several emerging players breaking into the market.
Morningstar analyst David Whiston shares Berg’s concerns about narrow moat Tesla’s price, which rocketed 700% last year and is currently nearly double the fair value estimate of $349. The bull case rests on Elon Musk’s commitment to sell 20 million vehicles a year in the late 2020s—about twice the number Toyota and Volkswagen make today. “It is important to keep the hype about Tesla in perspective relative to the firm's limited, though now growing, production capacity,” says Whiston.
Sea Ltd (SE)
Covid-19 has not slowed down Sea Ltd’s momentum, whose shares are up from $43 a year ago to $223 today. The company operates three segments: digital entertainment, d-commerce, and digital financial services, in growth markets across South East Asia. Its Garena platform is widely used by the region’s gamers and is the global leader in eSports. Listed on the NYSE in 2018, it returned 394.90 per cent in 2020.
“Sea is the single best performing large-cap stock in the world for the last two years, outperforming even Tesla," says Berg.
Boeing (BA)
Berg has dropped troubled aircraft manufacturer Boeing, although not due to high valuations. Wide moat Boeing trades just under Morningstar’s fair value estimate of $257.
“I went into Covid owning Boeing, Airbus, Rolls Royce - the trifecta of airplane and engine manufacturing. These are examples of companies that went down a lot and we sold. The industry has changed, the dynamics have changed post Covid,” says Berg.
For Morningstar analyst Burkett Huey, Boeing’s wide moat means it’s likely to achieve excess returns over the next 20 years. Put simply, building aircraft is difficult, expensive, and highly regulated. Boeing employs 1,500 people just to ensure regulatory compliance. The same goes for Boeing’s profitable defence business—Boeing has built US presidential aircraft since Franklin D. Roosevelt.
