Investors are missing a trick in equity markets

Mia Kwok

Livewire Markets

Global equities are being tested on both sides of the equation. On one side, you have low-interest rates while on the other side, you have the risk of inflation. 

But Lazard Asset Management portfolio manager Warryn Robertson doesn't believe this is a TINA (There Is No Alternative) moment. There are options in markets if you know where to look. Equities might be under pressure, but Robertson believes people are "missing a trick" in the market. 

"And I think what markets fall into the trap of doing is believing that there are more than just a handful of those great businesses like Microsoft and Alphabet that can continue to grow in a world that's low growth to no growth in some economies, and I think that's where people are missing the trick," he said.

It's the TINA moment, Robertson said in this video below, and he's shying away from that belief in order to find better opportunities with strong fundamentals in which to invest. 

This transcript has been lightly edited for clarity. 

Mia Kwok:
Why are prices so high at the moment? Why are valuations being stretched?

Warryn Robertson:
Yeah, look, if I was a value guy, and I wasn't saying prices were stretched, you you'd say, "Take that mask off, you growth manager." To me, at the point we're at now, there's a bit of a mis-anomaly going on we think in equity markets and it's driven by this really the last five plus years of having record low interest rates. It's the experiment of modern monetary theory, which has driven interest rates incredibly low. And that's meant that really investors have largely speculated into asset classes and asset class markets and haven't really produced a lot of productive generation. So, more companies on the New York stock exchange today are buying back shares then they are investing in growing their businesses. And I think the relevance of that is really important in terms of what we're seeing in terms of markets.

There are great companies, like Alphabet and Microsoft that can grow for sustained periods at quite a click, quite reasonably high discount rates. But in a world where bond yields are going to be very low, what that is telling you is that central bankers believe that economic growth is going to be low. 

And so you can't break that nexus. You have to link those two together, and we do that deliberately in our valuations. We link the cashflow earnings growth to the discount rate and to the risk-free rate that we're using. 

And I think what markets fall into the trap of doing is believing that there are more than just a handful of those great businesses like Microsoft and Alphabet that can continue to grow in a world that's low growth to no growth in some economies, and I think that's where people are missing the trick.

The other argument could very well be that those overlords that sit over the top of the asset allocation decisions are looking at where do they put equity? And it's the TINA moment: There is No Alternative to listed equities. Bonds look hideously expensive and so the next best alternative is to buy a modestly expensive equity. We're shying away from that. We're still trying to focus in on businesses that we think will generate attractive returns. But as you pointed out earlier to do it, we have to concentrate the portfolio.

So how do you know when to sell a stock? When do you let go of it?

Yeah. You've got a valuation when it reaches valuation and you can find something better, you redeploy capital. We run what we call a value rank process. So each of the 230 companies that sit within our global equity franchise universe we have a valuation. The team's arrived at what we think is a fair value based around its earnings and a multiple or the cashflow and the discount rate. The team agrees then it goes into our value rank and it generates for us an IRR. And we rank them from the most attractive to the least. And essentially what happens is their share prices move and stocks... Let's say a share price goes up by 10-15%. It will move down our value rank and that will then trigger a selling of that stock, if we can find another one whose share price has fallen and moved up.

We got out of consumer staples and we exited Anheuser-Busch at around about 70 Euro per share. It's now under 50 euro a share, it moved from about stock number 40 in our value rank, up to stock number 18-19. So it moved into the Buy territory. And then we initiated a trade. Likewise, in the month prior to that, it accelerated because of a good quarterly result and the stock price moved down, we sold it. So it's a matter of just redeploying capital where we can see those attractive names within the universe that we've constructed.

You've also got a heavy weighting in utilities as well. I was wondering if you could touch on that.

It comes down to one of the five sources of economic franchise, natural monopolies, which is really infrastructure. And normally when people talk about a franchise fund, they talk about the big brand names and companies that produce high returns on capital well above their cost of capital. And they're the types of businesses people associated with that. In our definition, we include infrastructure, because what we're looking for is predictability and a regulated infrastructure asset, be it a utility network, or a toll road, water networks and the like, are incredibly predictable. And so that enables us to be able to say, okay, well, these are businesses we want to own at the right price. Today, what we're finding is that increasingly, probably over the last six to 12 months, a number of the utility regulated utilities, such as National Grid, who I mentioned earlier and Consolidated Edison Inc of New York - these stocks have become relatively more attractive to us.

And in the frenzy that the market's had in terms of the COVID recovery, these boring predictable companies have been left behind and that's created a buying opportunity for us. So that's why, as I said, healthcare is a favoured sector of ours at the moment. But also, as you mentioned, utilities is another one. And we're not afraid to move wildly against an MSCI index weight. I mean, for us, the MSCI is an alternative people have to invest in, it's not a way to build a portfolio. We're just trying to find the best, most attractively priced economic franchise stocks in the world. And today utilities make up a large portion of those.

Mia Kwok:
You've also rotated out of consumer staples in the last six months. What's the rationale behind that?

Warryn Robertson:
Good question, because you would think when I talk about predictable businesses, the brand names, I mentioned Colgate-Palmolive earlier. Consumer staples are traditionally a happy hunting ground for a strategy like ours, and we're happy to own them, but just not at the current prices. So, we did rotate out of consumer staples, in the last three months entirely. We our last remaining position was Anheuser-Busch, which we saw back in June, at over 60 Euro a share going close to 70 Euro a share. I think we exited our last bid. Funny, you should mention that we've only actually been started buying it back again, the stocks down, something like 20, 25%, it's below 50 Euro a share. We see some value there again now. So we've stepped back in. But again, it really comes down to the greatest business in the world, doesn't make a great investment if you buy it at the wrong price. So for us, it's all around the price we pay, for the level of financial productivity that we get.

Learn more

Warryn's invests in global listed companies which he considers to have an “economic franchise”, meaning companies which possess a combination of high degree of earnings forecastability and large competitive advantages. Find out more by visiting the Lazard website

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Mia Kwok
Livewire Markets

Mia Kwok is a former content editor at Livewire Markets. Mia has extensive experience in media and communications for business, financial services and policy. Mia has written for and edited several business and finance publications, such as...

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