A contrarian manager sees potential upside in downside volatility

Hollie Briggs and the Loomis Sayles Growth Equity Strategies Team are not overly concerned by the current market volatility. In fact, they see it as potentially an exciting opportunity to buy high-quality companies at discounted prices, which are then less risky than they were previously. The Team has been working together since 2006, successfully navigating the Global Financial Crisis and Covid pandemic, which both turned up many more buying opportunities than normal. In this podcast, I talk to Hollie about:

• How the Team views this period of volatility compared to times past
• Why investors need to ‘look through’ the current volatility and focus on fundamentals to benefit from it
• How some measures of diversification can give investors false comfort and the measure which Hollie prefers
• Why they continue to back their portfolio holdings, including 6 of the Magnificent 7
• Why they first bought Amazon in 2006 and continue to hold it today

Podcast recorded on 1 April, 2025.

Lightly edited transcript

Louise Watson: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I'm Louise Watson, and today I'm joined by Hollie Briggs from Loomis Sayles. Hollie is the Head of Global Product Management for Loomis Sayles' Growth Equity Strategies team. She's based in Boston, where she works closely with Aziz Hamzaogullari, and the rest of the investment team, but also travels a lot to meet up with clients and investors all over the world.

Hollie is currently in Australia, and we are very grateful that she's agreed to spare some time to come on to the podcast today. Hollie, welcome.

Hollie: Thank you, Louise.

Louise: I understand you're quite an adventurer, Hollie, and you even tackled our Blue Mountains whilst you were in New South Wales. But can you tell us a bit more about some of your other adventures that you've been on? I remember your story about an epic canoe trip.

Hollie: Well, thank you. Yes, the Blue Mountains are certainly spectacular, and what a wonderful few days we spent there. Just a beginning of an introduction to the grand country that is Australia. But the canoe trip you're referring to is when my husband and I, and our yellow Labrador Retriever, paddled the length of the Missouri River, which starts on the eastern slope of the Rockies in Montana and goes all the way over to the confluence with the Mississippi in St. Louis, Missouri. It took us about three months. If I ever write a book about that, it would be titled "87 Days, Nine Nights in a Bed." We paddled for 87 days, finding a place to camp each night, and just saw the glorious countryside throughout the Missouri River. We were actually retracing part of the trip of the Lewis and Clark Adventure. At its 200th anniversary, we did it in 2003, and they had done it in 1803.

Louise: Wow, that is spectacular! That all that time has passed, and you're still able to retrace those steps in such beautiful countryside, I would love to do that one day. But let's get into investing and find out a bit more about what's been happening with the team. We had Aziz on this podcast last year, and Aziz, as we all know, is the founder, Chief Investment Officer, and PM of the Growth Equity Strategies team that you're part of. Your team has had tremendous success since it started back in 2006 and now manages around US $90 billion in assets. Can you tell us what it's like working as part of this team and how has it changed over the years?

Hollie: You know, it's really been, I'd have to say, an honour to be on this team. I joined the team myself in 2008. The team was founded in 2006, so we've been together for almost 19 years now. As you know, Aziz is a long-term investor, and he's a long-term investor because he's a long-term thinker. That includes the vision he has for our team. We really demand no less of ourselves than what we require of the high-quality companies in which we invest. We have a cohesive team, we've been together for nearly nineteen years, and we have a strong track record of alpha generation, which is a difficult-to-replicate competitive advantage. That's the first thing we're looking for in companies that we want to invest in.

So when we're looking for team members and new analysts, we're first looking for people who are passionate about investing. We want individuals who are independent thinkers. I mean, to generate alpha, you need a differentiated point of view, so you need to be an independent thinker, not someone who just goes with the herd mentality. Last, but not least, we also want people who are comfortable working as a team. One of the ways we guard against different behavioural biases, like confirmation bias, is to take our research work and vet it fully through the entire team. We really try to prove or disprove the alpha thesis, looking from the very beginning at what could go wrong and being just as concerned with downside risks.

Trying to disprove a thesis is really like a scientific approach. I would also say that we deeply respect one another, and we are each committed to the fiduciary duty to generate long-term shareholder value for our investors. Our culture has been very consistent over the years, and it seems to be working. Since 2006, we've had no departures from our team.

Louise: I think that's an incredible statistic and so rare in our industry these days. You certainly need that deep respect and cohesion to weather the volatility and the many cycles over those 19 years. Markets are volatile at the moment, and we've seen drops in U.S. markets recently. How does the team view this latest bout of volatility versus volatile periods in the past?

Hollie: You know, markets are always changing, right? As much as investors may try to explain and forecast market volatility, it's really unpredictable. So our approach today, as in other times in the past, is to look through the current market volatility. We ask ourselves whether or not there have been any changes to the long-term investment thesis of any company in our portfolio, and then we proceed rationally.

So I think it really bears repeating that markets are volatile. It's inevitable, but it's unpredictable.

The reality is that the worst-case scenario can and will happen; we just don't know when, right? Given this scenario, we believe we must be ready every day.

We patiently maintain research until all three aspects of our quality growth valuation investment thesis come together simultaneously. We've waited more than five years in some cases for this moment. The moments are rare, and they're unpredictable. The point is being prepared well in advance of the opportunity to invest helps us avoid many of the pitfalls of irrational fear that often takes hold in moments like we're experiencing right now.

What happens is we’ve found that when investment decision-making is driven by factors other than valuation, efficient dynamic price discovery breaks down, and this can create opportunities for us. We're an active manager with a long-term-oriented valuation-driven process, and we believe our disciplined process and our patient temperament are what differentiates us.

Louise: Waiting for that right moment and being prepared is key, but can you tell us about a time in previous years where a market drop created great buying opportunities for you?

Hollie: The most recent one would have been when the work-from-home bubble burst in 2022. And of course, there was the COVID crash in 2020. In both of those scenarios, we saw correlations go to one in the marketplace. Before that, you'd have to go back as far as 2008 and the great financial crisis. In these moments, you have a wide swath of companies that are selling at a discount to intrinsic value. So we will look very carefully and identify those companies in our research library where we see the most attractive discounts to intrinsic value. More often, we have the opportunity to make these investments on a case-by-case basis. Maybe we buy one or two companies in a calendar year, but in these moments, we have many more choices happening simultaneously. For example, in 2022, we bought five new companies, and in 2020, we bought six new companies. So should there be a scenario where the market pulls back, we would use that as an opportunity to perhaps make some key changes to buy high-quality companies that have never been on sale before.

Louise: Managing through these periods of volatility also requires strong risk management. While we've seen a recent dip in the US, global equity markets have had a fantastic run, hitting multiple new highs. Does this increase the risks in your view, and how do you and Aziz and the team manage risk in your portfolios?

Hollie: So it really comes down to how you define risk. For us, we define risk as a permanent loss of capital. That means we're defining risk in absolute terms, not in terms relative to the benchmark. So when it comes to assessing valuation and the risk of valuations, we prepare bottom-up fundamental valuation models that are 10 years forward-looking to determine if a company's stock is under or overvalued.

We will then compare our estimate of intrinsic value to the stock price. We do not compare valuations by looking at recent highs or multiples such as P/E ratios.

We only want to invest in companies whose share price is selling at a discount to intrinsic value. In fact, we find the risk of investing in high-quality companies is actually lower after the stock price has dropped.

One of the ways we measure how well we're doing in terms of meeting our objective of owning companies at a discount to intrinsic value is to measure the overall portfolio discount to intrinsic value. We do that every quarter, and as of the end of 2024, the discount to intrinsic value in the global growth strategy was 44%. So, we believe buying companies at a significant discount to intrinsic value creates a margin of safety on the downside, and this is one of the factors that helps us protect in down markets.

Louise: When it comes to managing risk through diversification, the Growth Equity Strategies team takes a different approach by diversifying its exposure to business drivers. Could you tell us a bit about this approach?

Hollie: Diversification is really important to us as a component of risk management.

We believe diversifying by sectors can give investors a false comfort because the underlying stocks, although in different sectors, can nevertheless be driven by similar factors.

Instead, what we do is we look to diversify the business drivers. So what is a business driver? For us it comes from our bottom-up model, and it's the driver of growth that has the largest impact on our estimate of intrinsic value.

Let me give you an example. In Visa, which is a company we've owned since the inception of this strategy, there are three drivers of growth for Visa. One of them would be simply the increase in discretionary spending. That's a driver of growth, as e-commerce continues to grow. That's a driver of growth for Visa because payments are made digitally. But the largest driver of growth for Visa is the pace of the shift from paper to digital forms of payment. So we've identified the digitisation of payments as the business driver for Visa.

We own two other companies that have that same business driver in this portfolio: one is Adyen and the other is Block. Combined, they have a total weight of about 8% in the portfolio. We look to manage the business driver exposure to no more than about 20% for any single driver. We have about 38 different business drivers among the 44 companies that we own in this portfolio. It's an effective form of diversification because the correlation among these drivers is about 0.3, which is similar to the diversification among all the stocks in the S&P 500. So when one goes up, another goes down, and it really helps us manage that volatility.

Louise: A big topic of conversation recently amongst our investors has been the Magnificent Seven, and investors have been telling us that they're concerned about valuations in the US, particularly amongst this group, the Magnificent Seven. What is your team's view of the concentration risk currently in markets?

Hollie: So, you know, regardless of the market or benchmark concentration, we're going to stay focused on our quality growth valuation investment process. Our portfolio is driven solely by valuation in terms of the timing of investment decisions as well as position sizes. The deeper the discount to intrinsic value, the larger our position size, so therefore I would describe any concentration you may perceive in the portfolio as active concentration. We're making that decision based on the reward-to-risk of our valuation analysis. On the other hand, when you look at a cap-weighted benchmark, that is simply passive concentration driven essentially by price momentum. So that makes the benchmark itself a risky asset. We're trying to move beyond that type of risk and manage it.

Louise: That's great. This group of stocks, the Magnificent Seven, are household names now, and that hasn't always been the case. So how long have you been holding these companies, and how do you dig up a winner before everyone else gets on board?

Hollie: Well, you know, the performance of the Magnificent Seven in 2023 invariably overlooks the fact that they were substantial underperformers in 2022. They experienced enormous declines between 26% and 65%, and in fact, were the seven largest detractors from the Russell 1000 Growth in 2022.

Investors owning an equal share of each of these seven companies over the two-year period of 2022 and 2023 would have earned a cumulative 8% return over the two years. That's the same as the long-term average of the equity markets, right? So how magnificent were these returns when you look at them over a longer time period?

It may be even surprising to some people that three of those Magnificent Seven companies ended that two-year period with cumulative negative returns. That would have been Alphabet, Amazon, and Tesla. When you look at the behaviour of investors, we find that most investors did not own these companies during the full two-year period. It comes back to the behavioural biases again, driven by fear. In 2022, investors turned the perception into reality by selling these names after significant price declines. So investors who began 2023 with 0% exposure to these companies were unlikely to have benefitted fully from the returns of the Magnificent Seven in 2023.

I can tell you the story of Meta as a great example. It started 2022 with just over a 3% position in the benchmark, and by the end of 2022, it was merely 39 basis points. Investors who sold Meta in fear in 2022 ended the year with a 0% position in Meta. We, on the other hand, looking through that volatility, added to Meta in each quarter of that year because our long-term investment thesis remained intact. So when the recovery started at the beginning of 2023, our position size was over 4%. You can see the difference in being a contrarian investor—buying these great companies at a discount actually reduced our risk and increased our returns over the long term. To answer your question specifically, as of the end of 2024, we've owned six of the Magnificent Seven on average for nearly thirteen years.

Louise: It reminds me of that saying that the market has a short memory, but you've actually owned some of these names for a very long time, including stocks like Amazon. What was the process for first buying into that name?

Hollie: So we first bought Amazon in our portfolios at the inception of our longest-dated portfolio, the Large Cap Growth Strategy, in 2006. At the time, broadly speaking in the market, 30% of the shares were shorted. So

in 2006, there was concern that Amazon's business model of selling books had a limited future. It seems obvious today, but at the time, it was a unique insight to recognise that the model could transfer to many other types of product categories.

We were able to take an investment in the company when the sentiment was negative at the time. Being a long-term investor means we also have to continuously review our investment thesis. Certainly, in 2006, we didn't know AWS was going to become a business, right? But as that starts to emerge and we start to have more information, it gets put into our model and it changes our estimate of intrinsic value. That’s how we can own these companies over the long term—having leaders who are thinking in terms of decades, investing the free cash flow growth that their company is generating to sustain and extend their competitive advantages.

When you look at the visionary leadership at Amazon, it wasn’t just AWS that they invented; they also today have a larger last-mile footprint in the United States than UPS. They continue to focus on their proposition to investors to have better selection, better price, and better convenience. They continue to innovate to deliver on that. So Amazon is still a position in our portfolio, and it’s still selling at a significant discount to our estimate of its intrinsic value.

Louise: That’s amazing! Not many people would recall that Amazon once started out as a bookselling platform and is now a multinational e-commerce company. You certainly need a long-term view to manage those positions in order to realise the value.

There’s been a great deal of talk about the differences in the long-term outlook for the US and other economies, particularly Europe. Are there any key differences in the types of opportunities you're seeing in the US versus those that you're seeing in other parts of the world?

Hollie: You know, our philosophy and process applies globally. Location doesn't change the type of opportunity that we're looking for, right? We have a single philosophy and process for all of our strategies, whether they're US-focused, global, or international growth, because the qualities that make a business great are universal in nature. So regardless of the domicile location, the structural drivers for sound investing remain the same. We're looking for quality companies. It doesn't matter if they're in Australia, China, South America, or France; we're going to be looking for those quality characteristics. We're going to be looking for those companies that are able to sustain growth for a decade or longer—very rare. Maybe 1% of the companies globally can do that. And then, of course, valuation drives the timing of all of our investment decisions. Our sector weights as well as our country weights are a by-product of the bottom-up stock selection.

Louise: And I've heard it said that the hardest part of investing is doing nothing. I know your team are very long-term holders in many stocks. Can you share some of the conversations your team has had in the past to keep you disciplined when the best thing to do for your portfolios is doing nothing?

Hollie: That's really a great question. You know,

low turnover in our portfolio sometimes makes investors wonder, "What are you doing? How do you spend your time?" In fact, resisting that siren song of herd mentality, the fear and greed that invariably whipsaws markets requires a significant amount of work.

For us that's our deep fundamental research, which is continuously maintained and prepared well in advance of any opportunity to invest. We want to be positioned to make rational investment decisions based on our long-term assessment of valuation.

The goal is to buy low and sell high. It sounds easy, but it’s really not. So we have an alpha thesis that encapsulates a deeply held system of beliefs, a rigorous, repeatable investment process and we also offer substantive proof points, right? So we say we’re long-term investors, and the proof point of that would be our low turnover, which is 9% for this portfolio.

For alpha generation, we believe that the pursuit of greater upside potential and managing absolute levels of risk are inextricable goals. I hope you've heard me explain that through these questions and answers, and each tenet of our alpha thesis is designed individually and collectively to promote the dual objective for our investors.

Louise: I think if it was easy, everyone would be doing it. In order to deliver those strong risk-adjusted returns, my key takeaways are resisting the siren song and deep fundamental research. Thank you so much, Hollie. It's been wonderful to understand more about how you, Aziz, and the rest of the investment team are thinking about markets and equities right now. If you enjoyed the episode, please tune in again to hear more from our global collective of experts.