PARTNER REPORT -- Geopolitical unrest. Contentious government policies. Brexit. The list of topics goes on. As the world of digital media expands, financial information and opinions – both credible and otherwise – are overwhelming investors like never before.
In many cases, this relentless flow of economic and market news causes confusion and drives ill-advised investment decisions, putting client portfolios at risk. That's why it's crucial for advisors to rise above the "noise" and remain steadfast in the face of short-term market fluctuations resulting from news "overflow."
Riding out market cycles by seeking value
The key to rising above market noise is maintaining a disciplined approach and adhering to a strategy that looks beyond market cycles. "Macroeconomic news and short-term economic uncertainty may make stock prices move, but they don't typically impact the intrinsic value of a business," says Jebb Tether, Product Specialist at Natixis Investment Managers in Boston. "If you can stay focused on a long-term and sound investment plan that is based on your specific financial situation and needs, you can ride out the ups and downs of financial markets and benefit from longer-term market gains."
This approach is especially important for clients invested in asset allocation models that target specific goals. Irrational reactions to macroeconomic news can throw investors off course and hinder these models' ability to capitalize on the most attractive opportunities available.
Focused on fundamentals, regardless of market sentiment
What determines the most attractive opportunities for clients' portfolios? At Harris Associates (an affiliate of Natixis Investment Managers), investment professionals seek out companies trading at substantial discounts to intrinsic value, regardless of what certain benchmarks or headlines may indicate. In other words, they believe that if a stock is trading well below its estimated worth and a number of key fundamentals are in place, there is likely an opportunity for long-term gain.
"Harris focuses on company fundamentals and thinks long term by seeing through cycles and avoiding market distractions," says Tether, who specializes in Harris' strategies. "They measure value by understanding what a stock will be worth in three, four, five, six or more years."
Alignment with strong company management is another fundamental tenet of Harris' investment philosophy. They look for teams that seek to grow the long-term value of the business by running efficient operations, maximizing free cash flow and allocating capital wisely. Interacting with the senior leadership team of a business is a critical component of Harris' approach and helps their analysts assess whether they believe management has a high level of competence and a solid capital allocation track record.
If a company still looks promising after management has been vetted, the research is presented to Harris' Stock Selection Group and voted on by committee members to determine whether the company's stock should be added to the firm's highly concentrated list of approved securities. A stock must be included on this approved list before it can earn a place in any of Harris' portfolios.
A private equity approach to public securities
Carefully assessing fundamentals is part of a rigorous analytical process with patience at its core. "You have to take a private equity approach, like you're buying a piece of a business," Tether explains. Once an investor commits to a business, he or she should remain patient in the belief that the stock's intrinsic value will rise over time, while not being swayed by fleeting market trends.
To identify the most attractive opportunities, it's important to generate ideas from a variety of sources, while relying less on mainstream media and Wall Street research. "Harris' research is proprietary and unconstrained by benchmarks," Tether says. "Analysts are generalists, which helps facilitate debate and provides perspective across sectors."
Lloyds Banking Group: Strong fundamentals amid Brexit clatter
Lloyds Banking Group is a prime example of how Harris identified an opportunity in the face of conflicting media messages. Despite all the news surrounding Brexit, the U.K.-based bank is on Harris' approved list and has become a top holding in its international portfolio.
"With Lloyds, all the right fundamentals are there," Tether says. "Lloyds is a premier retail bank with a high-net-worth business and a lower cost of funding than its peers. The company also has a strong balance sheet, which means it can ride out any economic volatility in the U.K. amid the ongoing Brexit process." Tether adds, "Post-Brexit, the stock price came down quite a bit but not as much as business value. That price-value discrepancy is precisely what Harris seeks."
In addition, Harris believes the financials sector has been trading at a discount, despite appealing long-term prospects. Therefore, they have been overweight the sector for years and have patiently waited for valuations to improve. Looking longer term, Harris views the low interest rate environment as a challenge but not a permanent situation. In turn, they think earnings in the financials sector should pick up. In addition, the risk of owning bank stocks is mitigated by regulatory constraints that require banks to hold significant levels of capital.
While news headlines may tell one story, stock fundamentals can reveal another. Market dislocations create an attractive investment hunting ground for Harris, and the firm's current portfolios are well positioned to take advantage of these opportunities over the long term.
To learn more about how Natixis and Harris Associates uncover value amid market noise, view the Oakmark International Natixis Funds.
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The information, data, analyses, and opinions presented herein (including current investment themes, the portfolio managers' research and investment process, and portfolio characteristics) are for informational purposes only and represent the investments and views of the author and Harris Associates L.P. as of the date written and are subject to change without notice. This content is not a recommendation of or an offer to buy or sell a security and is not warranted to be correct, complete or accurate.
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