So far in 2016 the investment environment has been volatile: markets started the year with a dramatic sell-off only to rebound significantly from mid-February, with some of the sectors and regions that were most aggressively ditched rallying the most.
Against this backdrop we believe being able to select from a global set of opportunities is crucial. The benefit of such a wide-ranging approach is the ability to adapt if the world changes (as it always does).
In our view, there is lots of unprofitable growth happening at the moment with companies accessing very cheap debt to leverage up, either to buy back shares or make acquisitions that with time we think may prove misguided. Income compounders and growth compounders both have disciplined capital allocation, with the former group favouring external distribution of that capital, while the latter uses it to fund further growth. Investing in companies with strong management teams and a good track record of capital allocation at attractive prices requires patience – but valuation opportunities do inevitably arise.
Another set of opportunities – based more specifically on the valuation – is made up of companies which have fallen out of favour and, we believe, market sentiment towards them is unduly negative. These stocks can sometimes be the most exciting because they have the opportunity to return to fair value and the potential to become growth or income compounders in time. And even if they don’t reach that status, we can still reap good rewards with relatively low risk when the market overreaction corrects.
Raj Shant – Newton, a BNY Mellon company