Ashley Pittard: How to position a global shares portfolio for the recovery
The pandemic reminded us that you can never truly know the future. But with the right strategy investors can come out the other side well positioned.
Here Pendal’s Head of Global Equities Ashley Pittard (pictured) explains why his Concentrated Global Share Fund has outperformed the index since the market’s pre-Covid peak. Reported by portfolio specialist Chris Adams.
- Our Concentrated Global Share Fund process is conceptually simple: we buy great companies when they are out of favour
- This works particularly well in market slumps. The fund has outperformed the index since the market’s pre-Covid peak.
- Now it is ideally positioned to benefit from the current change in market leadership.
AT THE end of February the Pendal Concentrated Global Shares (COGS) Fund is up 10.14% (after fees) for the previous 12 months. This is 2.36% ahead of the index.
We are pleased with the COGS fund’s outcome in an environment of such high uncertainty. We believe it is very well positioned to perform in the current investment environment.
Dealing with uncertainty
Uncertainty is a given in investment. We do our best to understand the outlook for companies, industries and the global economy. But we are also mindful that you can never know what truly lies around the corner.
The market crash in 2020 was an extreme reminder of this. But as with previous episodes such as Brexit, the Euro Crisis, the GFC and the Asian Crisis, the strategy behind COGS ultimately used the market impact to the advantage of investors.
We deal with uncertainty by buying the very best one or two companies in industries where we have confidence in the long-term fundamentals.
While it sounds simple, this approach offers two important aspects:
- It’s a great way to make money in global equities. These companies and industries periodically fall out of favour due to short-term headwinds or the market focusing elsewhere. If you’re paying attention and know the companies well, at times you get the chance to buy them at material discounts to long-term intrinsic value. Over time this drives outperformance.
- It gives you confidence in times of uncertainty. The companies we own are the largest in their industry with dominant competitive positions and the strongest balance sheets. When macro stress arrives these companies are best set up to survive. Smaller competitors can falter, which means our companies often emerge in an even stronger position in a consolidated industry.
Investing in the epicentre of 2020
Several of our companies were in the epicentre of the crisis, including casinos (MGM, Las Vegas Sands), energy (Total, Exxon), regional banking (Lloyds, Wells Fargo) and aircraft manufacturing (Boeing, Airbus).
We did the work and concluded that these companies could weather an extended downturn and emerge on the other side. This gave us the confidence to add selectively to these great companies at bargain prices.
We also moved quickly to identify the companies facing the highest levels of balance sheet risk. As a result we sold the position in Eurotunnel operator Getlink and property developer Howard Hughes.
Growth stocks outperformed as bond yields fell in the early stages of the crisis. We took some profits here, notably pharma (Pfizer, Merck) and we lightened the position in tech (Facebook, Alphabet). This freed up more capital to take advantage of depressed prices.
We added new positions in several companies with compelling assets which we have been tracking for a while and were now available at attractive prices. These included Zurich Flughafen (Zurich Airport) and Japanese office property play Mitsubishi Real Estate.
Performance in 2020
Our holdings in the epicentre stocks fell and this weighed on performance for a period. The rebound was driven by richly-valued tech growth stocks, where the COGS fund was underweight. This weighed on the fund’s performance in the second quarter of 2020.
But then the market began to look through the near-term uncertainty to recognise longer-term fundamentals —particularly late in the year as vaccine optimism rose.
This has driven a surge in the COGS fund’s performance and it has now outperformed over the entire Covid period.
The key element here is maintaining discipline and trust in the process. This trust is grounded in the success we have seen in previous environments.
We believe the Pendal Concentrated Global Share Fund is well positioned to continue its recent strength. Investors are looking for companies with pricing power, earnings visibility, strong balance sheets and cash flow.
This is in our wheelhouse. These are the kind of companies we buy — and there are many examples of them at very attractive valuations.
Several of the COGS fund’s epicentre stocks have strongly rebounded in recent months. But unlike the broader market, many still remain well below their pre-Covid levels.
Boeing, for example, is still 22% below where it was trading in mid-February 2020. Oil producer is Total is 18% below. Wells Fargo is 16% below.
The portfolio has many positions that have lagged considerably during the rebound — but conditions are now in place for them to catch up. In the context of our process, several of our stocks have more than 100% upside to reach our intrinsic valuation.
Rising bond yields and higher inflation expectations are seeing multi-year tailwinds for large cap growth stocks recede. Instead we are seeing a rotation to cyclicals and financials.
We do not see this as a matter of simply buying value and selling growth.
Plenty of value companies remain structurally challenged. We see signs that the market is differentiating between profitable growth companies with good cash flow — and longer-duration, more speculative names.
This trend helps a strategy that is grounded in idiosyncratic stock risk rather than betting on the macro environment.
We do not hold speculative growth stocks. Where we have growth exposure, it is in dominant cash-generative companies. Meanwhile some of our more cyclical exposures are well positioned to capitalise on pent-up demand as economies re-open.
Our ability to maintain discipline during crises and market volatility is a key part of our strategy’s long-term success. This has typically led to strong performance in the period that follows.
This time we expect the same result.
Pendal Concentrated Global Share Fund has done well in recent months. Macro headwinds have faded and our companies are primed for current conditions, with significant valuation upside to drive outperformance from here.
About Ashley Pittard and Pendal Concentrated Global Share Fund
Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.
Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.
Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.