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AAA rated manager: how to identify mispriced stocks

AAA rated manager: how to identify mispriced stocks

Understanding accounting and finance won’t make you a successful investor.

Staying ahead of the pack in the unforgiving global equities market requires something you can’t learn from a book: imagination.

This is according to David J. Eiswert, Citywire AAA-rated portfolio manager at T. Rowe Price.

‘Imagination and even the ability to daydream are essential for growth investors,’ he says. ‘You have to imagine a future that others cannot. Some of the most successful growth investors I know are avid science fiction fans.

‘You also have to understand people and what motivates them. Growth investing is often about picking the right management team.’

The CFA charterholder and University of Maryland economics postgraduate says an ability to see the facts from different cultural perspectives is also essential in the diverse global equities market.

‘The trouble with finding talented young investors is that so many have fantastic CVs but lack life experience and flexibility of thought.’

The most important lesson Eiswert has taken from his three biggest mentors – Brian Rogers, Jack Laporte and Bill Stromberg at TRP – is to always be humble and grateful. ‘I take to heart TRP’s slogan that if we do well for clients we will do well.’

Eiswert’s enduring fascination with the human side of the investment world means his favourite book doesn’t come as a surprise: The Little Book of Behavioural Investing by James Montier.

‘Millions of years of evolution have ingrained survival behaviours into humans. It is often in the interest of investors to fight our impulses. Understanding your emotions is critical to successful investing.

It is about patience, patterns and people.’

Based in Baltimore, Maryland, Eiswert joined TRP in 2003. ‘I began my investment career as an assistant to a technology portfolio manager at Fidelity Investments in Boston. I had tech and telecom industry knowledge, but was naïve about investing.

‘The environment was exhilarating. Highly skilled people competing on a global scale to figure out complex puzzles. I was hooked. I came to appreciate the importance of putting clients first and the responsibility of helping individuals reach financial goals.’

Eiswert is now the sole portfolio manager running the T. Rowe Global Focused Growth Equity fund, which is registered for sale in Singapore and Honk Kong via Luxembourg. The fund was launched in March 2003.

Over the three years to the end of May 2016, the fund has returned 32.5% in US dollar terms against a gain of 18.3% by its Citywire benchmark, the MSCI AC World TR USD.

Seize the day

Following a challenging start to the year for equity markets, Eiswert is on the lookout for mispriced growth companies. ‘We believe that there are good opportunities in the market to acquire growth at cheaper levels than a year ago.

‘Given our robust research platform and collective experience, we think there is enough growth in the world to allow our portfolio to add alpha by making concentrated bets in stocks that are gaining share and on the right side of change.’

This idea of finding stocks that will benefit from fundamental changes in the economy is a theme that crops up a number of times during our conversation, and it’s clearly one of the driving forces of the fund. ‘Globalisation increased exponentially over the past two decades. It’s probably the largest driver of change.

‘While globalisation creates higher correlations in the market as global economies become more interconnected, at the same time, this makes our ability to understand the meaningful, differentiating fundamentals of companies even more important to finding growing companies.’

Technological advances have transformed the world and markets significantly, including nearly all sectors, industries and regions, he says.

‘From e-commerce in consumer discretionary; to production efficiencies in US energy leading to a global glut; to mapping the human genome and biotechnology advances in health care; to rapid market leader shifts and disruptors in information technology helping drive growth and change, particularly in emerging economies; there are very few areas where technology has not made a meaningful impact.’

Joining the dots

Eiswert’s investment philosophy is to find quality companies that are undervalued by the market.

‘The key is discovering the insight,’ he says. ‘To do that, we work with over 100 equity research analysts at TRP to run their recommendations through our specific investment framework.

'We look for companies where the business fundamentals will improve over the next few years, which we believe will drive returns higher.

‘This could be a management change, an expanding end market, a new product cycle, industry consolidation, or any number of developments where our global research team has connected the dots to discover a real insight not embedded in the stock price.

‘These are the opportunities with the potential for extremely positive outcomes that we seek to invest in.’

Eiswert has made some sector changes over the past few months.

‘Our biggest sector weighting movement over the past six months was in information technology, where we added to our weight,’ he says.

‘Most of the increase came from taking advantage of weakness or opportunities, particularly in the first half of the first quarter of 2016, when the technology sector experienced a severe correction.’

Eiswert’s team has confidence in the IT sector – where rapid market share shifts happened despite the macroeconomic environment.

‘We look for innovative companies with the potential to be true market disruptors.’

Another large sector movement came from consumer staples, where he reduced its position in the portfolio.

‘We have some concerns that staples have become broadly expensive as investors have flocked to higher-yielding stocks in recent years.

‘Premium growth is relatively scarce in this area, and as interest rates begin to rise, investors may find better yield alternatives elsewhere.’

Stock picks

In the technology sector, Eiswert is upbeat about Amazon. ‘We feel Amazon has a competitive edge in online retail through its discounting strategy, dominant brand and superior technology.

‘Amazon also holds a very strong position in cloud computing services. The firm’s investment into its business has weighed on earnings in the short term, but we believe it will lead to substantial margin expansion over the long term.

Eiswert also picked up infrastructure and service-layer technology company Juniper Networks from the communication equipment sector.

‘The firm is a leading vendor in the router market and we believe it is well positioned to benefit from a new, internally promoted CEO who is committed to focusing on the firm’s successful core businesses.

‘We expect these changes to accelerate return on capital. The company also has an impressive balance sheet, and valuation is quite compelling.’

Rolling with the punches

The Global Focused Growth Equity fund reflects Eiswert’s team investments across all sectors, regions and market capitalisations. Since he took over in September 2012, he says there have not been many periods of underperformance.

The largest period of underperformance was the first quarter of 2016.

‘The first three months of 2016 began with a spike in volatility and a meaningful sell-off in many of last year’s strong performers.

‘A significant defensive rotation driven by growth fears surrounding the global economy, followed by a commodities-led rally, represented an unsympathetic market environment for our approach and positioning.

‘Our holdings in information technology detracted the most from relative performance during the period.

The sector, one of the strongest performing in 2015, experienced a broad-based sell-off in the first six weeks of the year, partly due to a flight to defensive sectors, and partly due to the inevitable mean reversion after having such a strong performance the previous year.

‘Our significant overweight to the sector and meaningful position in LinkedIn, which lost nearly 50% of its market value over the period, were detrimental to relative performance.’

Despite market volatility, Eiswert took the opportunity to upgrade his portfolio, picking up high-quality, high-conviction names at discounted valuations.

‘Several positions we added to at the peak of weakness, and several new positions we initiated as valuations pulled back, showed real strength during the sharp turnaround in the second half of the quarter. This helped erase half of the underperformance we saw in the first six weeks of the first quarter.’

Eiswert says 2015 was another period of significant outperformance for his portfolio, despite a challenging macroeconomic backdrop and the return of volatility to the market.

‘Our holdings in the consumer discretionary sector contributed the most to relative performance. Our positions in Amazon and Chinese online travel vendor Ctrip International were the largest relative contributors in the sector.

‘Both of these represent highconviction names leveraged to the growing use of the internet. Stock selection in materials was another source of relative gains, most notably our holdings in European stainless steel producers Aperam and James Hardie industries, which make construction materials and have beneficial exposure to the US housing recovery.

‘Information technology names also helped, with positions in Facebook and Alphabet, two highly innovative, well-run companies where monetisation of various projects is ongoing.

‘From a regional perspective, exceptional stock selection in North America and developed Asia ex-Japan contributed the most in 2015.’

White heat of technology

Taking a broad market perspective, Eiswert believes investors appear beholden to central bank policy, which has long distorted asset prices.

‘On a more positive note, I have been surprised by the acceleration of disruptive technologies that are being applied almost simultaneously and universally.

The pace is amazing. That is where real opportunity is, even when overall growth looks stagnant.

‘On the other hand, one thing that has been disappointing is the path towards economic and rate normalisation in the US since the global financial crisis has been slower than I anticipated.’

Eiswert also spoke about the biggest risk in the global equities space.

‘Geopolitical risk is probably one of the largest risks given the rise of populism or terrorism. But overall I feel very positive about the fundamentals of the companies we own, and I think there is little near-term risk of a global recession due to a lack of structural or fundamental reasons.

‘For instance, a period of significant and rapid economic advancement would have to be present for a recession to take place, which we have not really seen.’

The article was originally published on the July / August issue of Citywire Asia magazine.

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