Trump administration biggest macro threat for investors

Glenn Freeman  |   05/06/2017 Text size  Decrease  Increase   |  

Glenn Freeman: I'm Glenn Freeman for Morningstar. I'm joined today by Coleen Barbeau, senior vice president, director of equity portfolio management with Franklin Templeton.

Coleen, thanks for joining us today.

Coleen Barbeau: Thank you for having me.

Freeman: Now, Coleen, you are speaking at the Morningstar Investor Conference, which, this year, has a theme finding order in the new disorder. Can you just talk about how the current global environment is impacting individual investors?

Barbeau: It's kind of interesting because there certainly has been a lot of macro events swirling around the markets. In our perspective and the way that we position our portfolios is not to try to position for those macro events, but rather to continue to focus on the bottom-up, finding good sustainable businesses that generate sufficient cash flow to reinvest in their business over time for growth going forward.

If you try to manage your portfolio from a tail risk perspective, at some level, you are going to try to avoid so much risk that you are not going to take on any risk to produce excess returns.

And so, to us, while there is a lot of noise in the macro environment, it tends to be fleeting and short-term in nature in terms of the impact on the markets and we try to look through that noise and focus on the fundamentals of the companies that we invest in.

Freeman: And within your global growth portfolio, what are some of your favourite sectors and even companies at the moment?

Barbeau: I have to say that probably the sector that has the most exposure today is technology, because it impacts in so many different areas, it's becoming something that companies have to invest in to stay in a competitive position within the industries that they operate in.

And so, I would say there definitely is a focus there. And it's not just in the technology sector but it's in companies like Just Eat, which is an online payments and ordering service for takeaway food. Another example of that would be a company like TAL Education, which is in the consumer space. It operates a tutoring service in China for grades K through 12. One of the things they've done very effectively is to utilise technology to stay ahead of the competition in terms of making themselves relevant in the market.

I guess, another example moving away from consumer and technology would be in the materials space. We often get asked as a growth manager why we would have an overexposure to materials.

And the answer to that is that it's not in the materials that you would typically think of. Like, we are not owning mining companies, but rather, we are looking for companies that are adding some sort of technological expertise that allows their profitability to move up the range in terms of offering that technology.

So, one company we've owned for a long period of time is a company called Umicore. They actually have three lines of business. The first is, they have developed a proprietary technology where they can take in waste materials, extract something like 19 base and precious metals from those waste materials and resell them on to the market.

Their second business is involved in manufacturing catalytic converters. And then final segment they are involved in is rechargeable batteries. So, it's a very unique business model that resides in the materials space, doesn't have the same degree of cyclicality but rather sustainability to their earnings stream and definitely up the chain in terms of profitability.

Freeman: And Coleen, can you talk us through your approach to stock selection, particularly within the mid-cap range?

Barbeau: So, we operate technically in the large-cap space of the market. However, when you look at the average market cap of the companies that we own in the portfolio versus the benchmark, it's just about half in terms of market cap.

The reason for that is that there's kind of a two-pronged approach here. Number one, it's key for us, really the crux of that we do, is trying to find companies that, as I said earlier, have sustainable business models.

But together with that, finding those companies earlier in their growth phase so that we can own them over long periods of time. The turnover in our portfolio is relatively contained at about 30 per cent to 40 per cent a year. And the reason for that is that we're investing for the long term.

I think our average holding period is four to five years, but there are many stocks in our portfolio that we've owned in excess of that, upwards of 10 years as a matter of fact.

On the other end of the spectrum, we have kind of an aversion to conglomerates. We're not interested in buying other people's books of businesses but rather buying companies that are more focused, that have one or two lines of business that, as I said earlier, are definitely earlier in their growth phase and riding them all the way through.

I think a second benefit to taking that type of approach is, there is no doubt that companies that are down further in the market spectrum are less oftentimes discovered, less-researched and so, there is an opportunity to get into companies that still have good upside valuation support in addition to having good growth profiles alongside of that.

Freeman: And just lastly, again on the macro side of things, what do you see as the biggest risk facing investors going forward?

Barbeau: Yes. So, I would say that from a geopolitical perspective, probably the biggest risk that we're facing right now is the unproven administration that's currently in place in the United States, mainly by virtue of the fact that there just isn't a high level of experience. And so, I think that there is uncertainty associated with that and I think that is a risk.

I think from--if I look out over what's gone on in Europe in terms of the populist movement, I think the French election has definitely deflated that a bit. I think that looking forward to the German election, we don't really expect any surprises there. We've seen some local elections that seem favorable to the current administration. So, I really think it's focused more from a political perspective on what's happened in the United States and the administration that's in place there today.

I think from a macro perspective one of the things we worry about is that clearly after the global financial crisis, we had an enormous concerted effort on the part of the three largest central banks in the globe, including the BOJ in Japan, the Fed in the U.S. and the ECB in Europe in terms of injecting liquidity into the system in the form of quantitative easing. I think it's the largest concerted effort we've ever seen historically.

And so, now, we're there and you have the US beginning early signs of starting to unwind that. But I think therein lies the risk. Where do we go from here? How does that fall out?

We have all this liquidity in the system, now we've got pull some of it back out again. And so, I think that just by virtue of the fact that there is a degree of uncertainty about that because we've never been there before historically, I would probably pick that as my biggest macro risk.

Freeman: Thanks very much for your time today, Coleen.

Barbeau: Sure. Thank you for having me.

Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.

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