This content is from: Innovation
Identifying Value, No Matter Where It Is
From the Jan 2021 Artisan Partners Finding Innovation
Beyond being just numbers, anniversaries speak to sustainable excellence and a commitment to staying focused on the goals that matter. That’s especially true at Artisan Partners, which this year marks the 25th anniversary of its Non-U.S. Growth Strategy, and 10 years of its Global Equity Strategy. The core members of the portfolio management team for the funds – Mark Yockey, Charles Hamker, and Andrew Euretig – have worked together for more than 15 years. They have compiled a remarkable track record, as you’ll see in this report. The PMs are supported by a deep and experienced team of research analysts, each of whom has significant knowledge within their sectors and regions of expertise. The now time-tested investment approach blends deep company-specific research and secular themes to identify companies that exhibit sustainable growth and are priced at reasonable valuations. In fact, a saying among the team is, “Growth at a reasonable price, not any price.”
Yockey started the ball rolling when he joined the firm 25 years ago, and II’s conversations with him highlight what you’re about to read.
1 Identifying Value, No Matter Where It Is
In an Institutional Investor profile of Mark Yockey five years ago, the esteemed Julie Segal had this to say about her subject:
For investors it pays to be early, as long as you’re right. Just ask Mark Yockey, a managing director at Milwaukee-based Artisan Partners, who has been investing globally for more than three decades. In 2012 the 58-year-old portfolio manager started buying up shares of European cable companies – including U.K.-based Virgin Media, Belgium’s Telenet Group Holding and Ziggo in the Netherlands – which had been languishing as the industry struggled with discount pricing. Yockey, who grew up in a small town on the east coast of Lake Michigan, had watched U.S. cable companies profit from offering broadband Internet access bundled with television and phone service and hooking Americans on apps, games and streaming video. He was confident European cable would follow the same playbook.
“These stocks had been clobbered for the past five years – for the past ten years, really,” Yockey says with a distinctive Midwestern twang … As it turns out, London-based Liberty Global started acquiring Yockey’s European holdings, becoming the largest international cable concern as it expanded its footprint, giving Artisan a tidy profit…
As II learned when we caught up with Yockey recently, his and the team’s enthusiasm for identifying good companies loaded with potential hasn’t waned one bit.
You joined Artisan Partners to launch the firm’s Non-U.S. Growth Strategy in 1995. Based on that it would seem you took a global view of the investment world when few others did. What appealed to you about that perspective then – and presumably still does today?
Mark Yockey: You can invest in the best companies no matter where they are in the world, and we think that’s a great thing to be able to do. Each country has certain strengths and certain weaknesses. Being global allows us to pick any company we find attractive, so the universe of companies we could potentially invest in is very large.
What are some of the key themes currently expressed in the Global Equity and Non-U.S. Growth strategies?
Mark Yockey: We want to invest in value added companies that are doing things that everybody else can’t do. That means they can make a profit on whatever they’re selling, whether it’s a product or a service. The more value add you see in the company, the more you can price it accordingly. The big themes in the portfolio now for some time now have been e-commerce and technology. Another area that we find really attractive on a daily basis is healthcare. There’s a lot of new things going on in healthcare and technology that are making people’s lives better, and people are willing to pay for them.
You and your team were talking about sustainable growth before anyone had ever heard of ESG.
Mark Yockey: And it’s still a focus for us. We spend a lot of time looking for companies that make sense that will make the earth a more sustainable place to live for the 7 or 8 billion of us who occupy it. That’s a consistent theme in our portfolios. In our Non-U.S. Growth Strategy, we own names like Linde, the U.K. industrial gas company because they’re big in the production of hydrogen, which we think is one of the fuels that’s going to get us off of fossil fuels in the future.
How does the idea of sustainability tie into your valuation process for stocks?
Mark Yockey: The first and the most important thing we do is analyze a company’s business model to determine if the product or service that they’re selling is sustainable. We don’t want to invest in a company that’s going to have one good year, then two good quarters, and then blow up. We want to invest in companies that are going to grow for a long time and also have the potential for their valuation to go up a lot. Analyzing the business model and understanding how companies make money is one of the keys to the investment process for us. Once we analyze a company’s sustainable earnings potential and consider its valuation relative to its peers and its own history, we compare that to the price that we have to pay. So, if it’s a 7% or 8% grower, for example, we don’t want to pay more than two times the growth rate for a company like that. There are other factors involved, of course. For example, we look for companies that tend to generate a lot of cash. In other words, how much of the money can be kept by the company, as opposed to having to reinvest it in the company to keep the wheels from falling off? Those are some of the key metrics we look at, but price versus growth is the key metric we’re looking at.
So, what’s your outlook as we close a challenging year and head into the new one?
Mark Yockey: I’m pretty optimistic, and I think the rest of our team is, too. I hate to sound trite, but the vaccine is probably a game changer. In fact, not probably – it is a game changer. It’s going to give people confidence that the nightmare of the pandemic is going to be dealt with at some point in the next 12 months. I think that’s going to give investors a lot of confidence. At the same time, given all that’s happened, corporate profitability around the world has held up pretty well. In the U.S. and in some of the companies in Europe, profitability has remained extremely high. There are certain sectors that have been destroyed. If you’re in the travel sector your business basically evaporated, for example. But in the industrial sector in the U.S., and technology companies, healthcare companies, earnings have been enhanced, not hurt. Interest rates are extremely low and corporate profitability is going to rebound. We may be a little choppy going forward, but we’re quite optimistic.
Learn more about Artisan Partners’ Global Equity and Non-U.S. Growth Strategies.
2 How Factors Can Help Reduce Risk in Corporate Bond Exposures
Finding sufficient bond income has become harder, leading portfolio managers to take on more risk by extending duration and reducing credit quality. The average fund in the peer group allocated more than half of its fixed income sleeve/allocation to corporate bonds (see Figure 4, below), a meaningful difference from the aggregate bond benchmark.1 The investment grade and high yield bonds contained within those corporate bond allocations may be of lower quality to achieve income targets, which adds risk to portfolios.
Fixed income factors like quality and value can offer risk diversification and help investors manage downside risk while maintaining similar or higher levels of yield. iShares Investment Grade Bond Factor ETF (IGEB) and iShares High Yield Bond Factor ETF (HYDB) seek to target these two factors in the corporate bond space.
The quality factor screens out bonds with a higher probability of default, tilting a portfolio towards corporate bonds with higher default-adjusted spreads. This lower average probability of default could be accompanied by lower yield. This is why the quality factor is complemented by the value factor, which screens for bonds that are cheap relative to their fundamentals.
The aforementioned iShares ETFs exhibit lower probability of default and similar or higher yield (see Figure 5, below) than their traditional counterparts, helping managers continue to allocate to IG and HY corporate bonds in pursuit of higher income with potentially less risk.
“With factor ETFs, there’s tremendous scope for quality and minimum volatility in equities, and quality and value in fixed income, to help meet income needs with increased diversification and potential for additional protection on the downside.
– Andrew Ang, Head of Factor Investment Strategies, BlackRock
“Factor behavior has helped clients understand how assets are being priced during this period of economic uncertainty caused by COVID. The result is more clients systematically measuring the factor exposures across their equity program to better understand their risk exposures and to re-position the portfolio to express their investment views. The uncertainty caused by the pandemic has made it harder to evaluate company fundamentals, coupled with the high concentration in US equities, has favored technical factors like momentum for much of 2020. However, clients are asking whether pro-cyclical factors like value may strengthen as the 2020 market recovery morphs into an economic recovery.”
– Mark Carver, Managing Director, Global Head of Equity Factors, MSCI
1Benchmark is the Bloomberg Barclays US Aggregate Bond Index.
3 A Focus on Energy
Among the themes and subthemes that are a focus of the Global Equity team at Artisan Partners, energy is one that has a meaningful effect on both investment portfolios and the world at large. II asked Mark Yockey for a few examples of companies and subthemes he and his team like in the energy space.
- Gas Turbines/Siemens Energy (Germany): “Siemens Energy recently announced they’re getting out of coal. We thought they would, and that’s a positive thing. The stock is trading on, we think, three or four times earnings, if you look out a year or two. They compete with GE in the gas turbine business. Natural gas is a way better fossil fuel than coal or oil. We think natural gas will play a big part in cleaning up the planet over the next 20 years, especially in places like China and India.
- Windmills/Gamesa (Spain): “Through Siemens Energy, we are invested in Gamesa, which is one of the two leading windmill producers in the world. That business is quite strong and should remain so because it’s a non-polluting renewable source of energy. It’s not going to produce all the energy in the world, but it’s going to produce five or 10% of the energy going forward.”
- Industrial Gas/Linde (Germany/U.S.)/Air Liquide (France): “There are three major industrial gas stocks in the world. We own two of them. Oxygen and hydrogen are essential for many things, but the potential for using hydrogen as an energy source, especially for trucks, is outstanding. Batteries are unlikely to work in big trucks because the battery would have to be enormous, and that creates a weight issue. We think they’re going to solve the safety issues around hydrogen on trucks, and that’s going to be the solution for getting trucks off the road that are blowing diesel fumes all over the place. Linde is best in class, in our minds. They were just telling investors recently that they think their margins can go up from where they are now. That’s music to our ears, because that means that profitability going forward is probably better than what people think it will be at this point.”
- HVAC/Midea (China)/Carrier (U.S.)/Johnson Controls (U.S./Ireland): “One sub-theme of energy in both funds is that we think much of the world will want to upgrade their HVAC systems to significantly more energy efficient models. Somewhere near 20% of the energy consumed in the world is to make the air inside buildings hotter or colder. So, we think that’s going to be a 10-year cycle. Midea, Carrier, and Johnson Controls have long-term business models, and they’re going to help clean up the earth.”
- Not energy, but…E-Commerce/Reliance (India): “We own stock in a company called Reliance in India, which historically is known as an oil refiner. But they actually have the biggest cell phone network in India, the biggest e-commerce platform in India, and they’re the biggest retailer in India. We think they’re really just getting started on all they can accomplish in India. The prices for cell phone service are extremely cheap, and the market for e-commerce in India is underdeveloped. We think over the next three or four years, Reliance could double. Facebook recently invested $5 billion in Reliance. We think that the partnership potential for companies like Facebook and some of the other e-commerce companies in the U.S. is very significant if they partner with Reliance.”
Learn more about Artisan Partners’ Global Equity and Non-U.S. Growth Strategies.