- Stocks are no longer cheap
- Avoid simply looking for momentum
- Opportunities are in mid and large cap range
- Being strict on investment principles is key
- Beware of bubbles in the market
Stock markets that have hit record levels in recent months present a challenge for investors in avoiding the value trap, says award-winning fund manager Chris Hart.
Chris Hart, manager of Robeco Global Premium Equities strategy, warns that chasing those companies which are perceived to be higher growth than others can lead to overpaying for stocks that are already expensive. Instead, Hart prefers a more disciplined approach that is based more on finding those companies that are undervalued relative to their prospects. This avoids simply looking for momentum, where a company is able to grow but much of the potential is already priced in. “A drawback of both the bull market and the low-growth economic environment that we are in is that investors chase growth – and sometimes at a price that isn’t really worth paying. The market is currently paying high prices for momentum, top-line and earnings growth. Small cap stocks globally (under USD 2 billion) seem to be somewhat expensive. The portfolio currently has the smallest percentage of small cap names over the past six years. We’re now finding more opportunity in the mid and large cap range.”
‘A drawback of the bull market is that investors chase growth’
Such is his skill in finding the best stocks that Boston-based Hart has won the Morningstar Awards for the best fund a record nine times in Europe. His fund has consistently outperformed its benchmark, and Hart says this is due to strict adherence to what he calls the ‘three circles’ approach. This targets companies that have a low valuation (relative to peers and company history), positive momentum (the ability to grow) and good fundamentals (the ability to generate free cash flow).
Dislocation, dislocation, dislocation
“What we’re really looking for is that dislocation between valuation and fundamentals, and earnings,” says Hart. “Over the last five to six years we have been able to find pockets of opportunity at the industry level – names that were generally cheap. We’re now not really finding pockets any more, but one-off names. For example, advertising as an industry was undervalued for a while. There would be 2-3 advertisers that might be interesting, and now it might be one. So it’s even more security- selection driven because of where we are in the market, and what the market is paying for. Being as disciplined as we are with the application of our three circles philosophy and process, the portfolio will always maintain a quality bias and always own companies that have earnings momentum that is better than the market, with valuation support.” And being strict on principles is key. “We are not going to throw away our discipline and chase momentum and give up our valuation criteria,” says Hart. “The portfolio today has become more value orientated. The level of relative valuation to the universe that we look at is almost as wide as it’s ever been.”
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