In this series of short profiles, we ask leading fund managers to defend their investment strategies, reveal their views on cryptocurrency, and tell us what they'd never buy.
This week our interviewee is David Zhao, co-manager of the BlackRock Sustainable American Income Trust (BRSA).
Which Sector Shows the Biggest Promise in 2023?
We see the healthcare sector as one that is showing particular promise across the rest of the year. Company earnings in the healthcare sector have historically proven to be recession resilient, and we expect that precedent to hold in the next recession. This is important in a year in which stock performance is more likely to be driven by earnings, versus last year when multiple contractions drove returns.
Pricing for healthcare stocks is also compelling, with valuations below the market average. Particularly compared to other defensive sectors such as consumer staples and utilities which were bid up in price last year as investors sought stability and have valuations that still sit at or above the broad market. Healthcare also boasts a long-term international tailwind as ageing populations and increasing health-related needs worldwide set the stage for attractive growth prospects across the sector.
What's the Biggest Economic Risk Today?
The biggest risk to the global economy is a failure of central banks to effectively bring inflation under control. We believe there is a chance that central banks reduce rates before bringing inflation under control. In this scenario, there is a risk that we repeat what happened in the 1970s when governments cut interest rates too quickly and inflation spiked higher again.
Describe Your Investment Strategy
Our strategy focuses on high quality companies that have superior ESG characteristics at a reasonable price. The core tenets of our investment philosophy include owning quality sustainable businesses, disciplined application of value investment principles, dividend & earnings growth, and a long-term investment horizon. Ultimately, we believe a portfolio of attractively valued quality companies with compelling dividend and earnings growth potential can deliver superior risk-adjusted returns over the long term.
Which Investor(s) Do You Admire?
I would have to say Ajit Jain of Berkshire Hathaway. I have always appreciated his sensible investment approach, and he has an incredible story too.
Name Your Favourite 'Forever Stock'
At our core, we seek companies that can maintain their earnings growth throughout market cycles. It’s impossible to say whether a stock will always stay in our portfolio, but a prime example would be Microsoft.
It is companies like this, that compound their earnings by reinvesting them into revenue growth, margin improvement or share count reduction and effectively compounding returns for shareholders that we like. We also look for solid balance sheets and positive free cash flow (essentially a buffer against shortfalls) as additional key signposts.
What Would You Never Invest In?
Businesses that are unprofitable, within super competitive industries and come with expensive price tags. Especially as we enter a higher interest rate world, we think these types of companies will be some of the ones who really feel the pain of a high cost of capital
Growth or Value?
As our process incorporates finding quality characteristics (such as earnings and dividend growth) at attractive valuations, I’d have to say value.
House or Pension?
House! You need a place to live…and you have more control over it.
Crypto: Brilliant or Bad?
I prefer investments that have cashflow or earnings growth, so I’ll stick with asset classes like equities.
What Can be Done to Improve Diversity in Fund Management?
The key is to undertake more training to drive awareness. I am a big proponent of attracting, hiring, developing and retaining a diverse talent pipeline and cultivating an inclusive, equitable work environment.
I believe it is vital that all employees feel connected to the culture and supported by the business in pursuit of their goals. From here, individuals can identify with the culture and be part of the development of solid business foundations.
Have you Ever Engaged With a Company and Been Particularly Proud (or Disappointed) of the Outcome?
We engage with a large number of companies on an annual basis it’s hard to pick out specifics. However, given our scale, these companies tend to be receptive of our views.
What's the Best Advice You’ve Ever Been Given?
Don’t sweat the small stuff.
What Would You be if You Weren’t a Fund Manager?
Software developer. The incorporation of technology and data into our processes is something we do in many different ways and is a deep passion of mine.
