Eileen Riley is co-Portfolio Manager of the Loomis Sayles Global Equity Fund, which manages over $250 billion of assets across equity and fixed interest markets, and she was recently named one of Citywire’s top 20 female portfolio managers in the US for the second year in a row. We reached out to Eileen to share her perspective of global markets, and to hear how the portfolio has evolved through the crisis. She told us:
In terms of managing the portfolio, we are accustomed to using periods of market volatility to build positions in what we believe are high-quality companies. This period is no different.
In this written Q&A, Eileen discusses the outlook for credit and equity markets, the sectors and stocks benefiting from COVID-19, some recent changes to the portfolios, and a message to investors feeling anxious about the rest of 2020.
Q: The US has been very badly hit compared to Australia, so as a US-based manager, how has social distancing /isolation affected your daily routine and ability to manage the portfolio?
The current pandemic, including the global response, continues to cause huge disruptions to the daily lives of most populations globally.
Here in Boston, we have been working remotely for about two months. We are grateful for our technology infrastructure that has made this transition effective. We start each day with a team video call, and collaborate throughout the day via frequent phone and video conversations, and more formal stock discussions. Having a dedicated team that's fully aligned and committed to one investment philosophy has helped mitigate the challenges of working remotely, and I believe we have been able to sustain a collaborative culture.
In terms of managing the portfolio, we are accustomed to using periods of market volatility to build positions in what we believe are high-quality companies. This period is no different. Our portfolio actions help demonstrate the value of our tracking lists that include companies we have researched where we have conviction around their quality characteristics and ability to grow their intrinsic value – we were just waiting for a better valuation opportunity - which this correction has provided us with.
Beyond that, it is very much business as usual. We depend heavily on technology in this environment and are fortunate that Loomis Sayles has robust systems in place, and thus the transition to working remotely has been smooth.
Q: With $250 billion of assets under management across equity and fixed interest markets, you have insights across both sides of the balance sheet. What are fixed interest markets telling you about the outlook for the global economy over the next medium-term? How does the flow through to the outlook for equities? What are some of the risks and opportunities based on this outlook?
Loomis Sayles is well resourced with around 300 investment staff (including over 170 research analysts) spanning global equity and fixed income markets, and the firm has a long history of producing deep insights across asset classes. We are able to draw on these extensive capabilities, which include sovereign, credit and quantitative research groups. In times such as these, where balance sheet strength is paramount, it can be powerful to leverage fundamental fixed income research and a close view on liquidity and access to capital when investing in global sharemarkets.
Loomis Sayles’ base case is a downturn in the credit cycle over the medium term, to which we give an approximately 90% probability. Although, central banks have been aggressive in responding and governments have been supportive with massive stimulus packages which should limit the severity of the downturn. With this backdrop, we do expect continued volatility for equities.
That said, we remain long-term investors, and believe our portfolio of companies have durable competitive advantages and the balance sheet strength to navigate the economic uncertainty.
Q: You sidestepped the crash in oil, with no exposure. Do you think an opportunity has emerged there now?
Heading into this period of extreme volatility we had no exposure to the Energy sector as we have not recently found companies that meet our targeted alpha drivers of quality, intrinsic value growth, and valuation. While valuations have declined for some energy stocks, opportunities must meet all three of our alpha drivers in order to be considered for the portfolio.
To say it a bit differently, it takes much more than a swing in the commodity price cycle or a significant stock price sell-off for us to invest.
Q: What have you been doing in the portfolios during the crisis?
As I mentioned, recent volatility has created what we believe are attractive entry points for a number of new companies in various industries including financial payment technology, internet oversight, and the automotive end market focused on value conscious buyers.
We are avoiding the hospitality industries – cruise lines, airlines, restaurants and hotels – as the downside to these names is difficult to quantify, with forecasts clouded by potential government aid and its associated restrictions.
We have also made adjustments to position sizes of our existing holdings as we quantify the longer-term impacts of the COVID-19 pandemic (and oil shock) into our scenario analysis.
Q: Where have you trimmed the most through the downturn?
As part of our process, we continually recycle capital into what we believe are more favorable risk/reward opportunities across existing names in the portfolio.
Our trims have included a chemical processing company, where there have been challenges in forecasting volatile end-market demand; a financial services company making longer-term changes to its capital allocation structure; and a hotel business which will be clearly impacted by what will be a challenged travel sector for some time.
Q: Are there any stocks or sectors that have been positive beneficiaries from changes brought on or accelerated by COVID-19?
Amazon has continued to outperform in this environment, as the COVID-19 pandemic has brought in-person shopping to a virtual standstill in many geographies, driving an increase in on-line purchases. We believe increased adoption rates (both in new users and Amazon's Prime membership) will also have durable effects, benefitting Amazon's core e-commerce business as well as its advertising business.
We believe Peloton will also likely emerge a beneficiary as social distancing measures will mean a substantial rise in people working out at home. The company has the leading position in the interactive at-home fitness market and we believe it is well placed to continue to capture a large share of demand moving forward with an established brand synonymous with at-home fitness and lifestyle.
The stay-at-home orders in the company’s key US and UK markets has been a short term catalyst on adoption of at-home fitness, which we believe is a long term trend. As the company grows its community - currently over 2.6 million members - its network effect will also grow; with members interacting via live or on-demand classes, a Peloton membership becomes more attractive the more one's family and friends join. Moreover, the company’s subscription based class application has a clear value proposition relative to a physical gym or on-site boutique classes.
Q: What would be your key message to investors anxious about how to invest through the rest of 2020?
Whether we have a V, U or W shaped recovery depends on the trajectory of COVID-19, much of which will be determined by the emergence of an effective anti-viral therapy, the development of a vaccine or widely accessible testing capabilities. While we are mindful of the current environment, our focus remains on investing in companies we believe can create value over the longer-term.
Ultimately, we believe companies with sustainable competitive advantages and strong balance sheets will prove resilient. As we move forward, we anticipate continuing to leverage volatility to build long-term positions in high-quality companies and trim or sell positions at what we consider attractive levels.
Rather than try to predict macro events, we continue to focus on companies with durable business models and an attractive valuation.
Learn more about Eileen and the team
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