Return of the Stock-Picker's Market

Multiple Authors | 03/04/2018
Return of the Stock-Picker's Market

Summary

Many equity investors are grappling with how to invest in today’s market, when volatility has increased yet valuations are still high. For answers, we asked Portfolio Managers Lucy Macdonald and Karen Hiatt – two of our most experienced stock-pickers – to share their thoughts on active investing in turbulent times.


Key takeaways

  • With correlations among global equities relatively low today, there is more scope for divergent performance among different names; this plays directly into stock-pickers’ strengths
  • High-tech disruptions across sectors are opening up opportunities for active investors to discern among different equity names
  • Rising rates could help stock-pickers: As valuations are adjusted to reflect growth outlooks, cash flows and balance sheets more accurately, performance variation should increase
  • With more participation from passive and quantitative investors, the markets could see bigger swings and more pronounced dislocations; this helps enable active investors to select opportunities one by one

How do you feel about the current market environment – particularly given your focus on active stock selection?

Lucy: The environment for active global equity investing has been fantastic during the past year, and we believe it’s likely to continue. Correlations are relatively low today, meaning stocks aren’t moving in lockstep as much as they were in the not-too-recent past. As a result, there is more scope for divergent performance among different names, which plays directly into our ability to look for the right stocks in a range of areas. Moreover, technological improvements are causing huge disruptions across sectors, opening up additional opportunities for stock-pickers like us.

Karen: The growing dispersion evident in today’s market is a positive factor for us. The rising interest-rate environment appears likely to increase how much performance varies among equities, as valuations are adjusted to reflect more accurately the differences in companies’ growth outlooks, cash flows and balance sheets. This allows active managers like us to select companies that may be better-positioned to outperform in this environment.

Stock Correlations Have Been Lower Overall, Creating Divergence and Opportunity
S&P 500 Index stock correlations (January 1991 to February 2018)


Source: FactSet as at 28 February 2018.

Historically, when the largest stocks in an index lead the market, the environment has grown more difficult for stock pickers. Are the FANGs making things harder for you?

Karen: The major responsibility of a stock-picker is to aim to forecast future earnings when they aren’t anticipated by the broader market. So despite some fears of a market driven by the likes of Facebook, Amazon, Netflix and Google – the “FANG effect” – big is not necessarily bad. The market has a tendency to lean on the largest companies with the greatest transparency, but if these companies have the competitive advantages to drive outsized earnings growth, then it is our responsibility to capitalize on them by positioning our portfolios accordingly.

How does the recent increase in volatility impact a stock picker’s ability to outperform?

Lucy: Periods of normal volatility create more opportunities for stock selection, whereas high-volatility periods are generally accompanied by high correlations – and that isn’t the best time for stock pickers. When volatility is high, it’s a good time to buy into long-term names. Fortunately, the spike in volatility that we saw in February has subsided significantly. Still, it’s a good reminder that when the level of noise in the market clouds how performance is coming through, it gets harder to determine if underlying fundamentals are driving a stock. Over time, however, the alpha generators should become clear.

Karen: We’re seeing more players in the passive and quantitative space participating in the markets. That invites greater potential for big swings and pronounced dislocations. In times like these, we focus on trading around core positions while looking to take advantage of what happens in quant-driven volatility spikes – we look to pick off opportunities one by one as they present themselves.


Has the growth bias in the marketplace affected the ability for stock pickers to outperform – and if there’s a tilt to value, how would that change things?

Lucy: There can be sharp low-quality rallies in any market, but they don’t tend to last long. If you stay true to your philosophy, you will likely come through. Karen and I have been doing this long enough to know how to take advantage of buying opportunities.

Karen: In my view, secular trumps cyclical. Certain underlying building blocks favour growth investing – factors like acceleration of technological advancements and long-term competitive advantages – which is why we believe if we pick secular stocks, they should outperform over time. Cyclical outperformance, on the other hand, requires a perfect cyclical environment that can be fleeting over time.




Some or all the securities identified and described may represent securities purchased in client accounts. The reader should not assume that an investment in the securities identified was or will be profitable. The securities or companies identified do not represent all of the securities purchased, sold, or recommended for advisory clients. Actual holdings will vary for each client. FANG is an acronym widely used on Wall Street and among many investors; it stands for four high-performing large-cap technology companies – Facebook, Amazon, Netflix and Google (now Alphabet) – that are also household names.

Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Lucy Macdonald

CIO Global Equity
Lucy Macdonald is a portfolio manager and Chief Investment Officer (CIO) Global Equities with Allianz Global Investors, which she joined in 2001. She heads the Global Equities team and manages the Global Equity High Alpha strategy. Lucy Macdonald is also a member of the firm’s Global Policy Council, which is responsible for setting company-wide macroeconomic and strategic policy. Before joining the firm, she was a director and a senior portfolio manager at Baring Asset Management, where she managed high-alpha funds. Lucy has a degree from Bristol University. Ms. Macdonald is an associate of the Society of Investment Professionals.
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Karen Hiatt

Managing Director, Senior Portfolio Manager
Ms. Hiatt, CFA, is a senior portfolio manager, a managing director and CIO Focused Growth Equities with Allianz Global Investors, which she joined in 1998. She manages all focused-growth strategies. Prior to joining the team, Ms. Hiatt served as a senior research analyst, sector head of the US Consumer team and US Director of Research. She has 22 years of investment-industry experience. Ms. Hiatt was previously a vice president and analyst at Bioscience Securities, a boutique investment bank. She has a B.S. in finance, cum laude, from Santa Clara University.

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US Companies Expect to Spend More on Travel

Aggie Wong | 03/04/2018
US Companies Expect to Spend More on Travel

Summary

A new Grassroots® Research survey of corporate travel managers and travel agents showed that US companies plan to increase their travel expenditures this year -- in line with Allianz Global Investors’ outlook for strong US economic growth.


Key takeaways

  • Grassroots® Research recently conducted the latest in a long-running series of surveys with corporate travel managers and other travel experts: 64% plan to spend more on corporate travel in 2018
  • Not everything is looking up for travel trends: 12% of respondents to our business-travel survey said they will decrease spending in 2018 vs 2017, the second-highest year-over-year reduction since 2012
  • Our new Grassroots® study confirms a trend we’ve seen taking shape since 2013: convention attendance seems to be flattening out, if not falling slightly overall

In today’s competitive global economy, companies watch their travel budgets closely. When the economy is strong, travel costs frequently go up as well – but the opposite is also true. That makes business travel a bellwether for a region’s economic outlook.

A February 2018 study by Grassroots® Research – Allianz Global Investors’ proprietary in-house research division – showed that overall, US companies expect to spend more on business travel this year compared with last year. This is in line with Allianz Global Investors’ outlook for strong US economic growth.

Higher hotel costs and more-frequent international travel were cited by our survey respondents – a group that included US corporate travel managers and travel agents – as top reasons for increasing their budgets.

The Grassroots® Research team has conducted similar travel surveys over a multi-year period, which allows us to spot other developments:

  • 64 per cent of respondents plan to spend more on corporate travel in 2018; this is consistent with the upward trend seen in previous years
  • 24 per cent of respondents expect their travel expenditures to remain flat in 2018, down from 32 per cent the year before
  • 12 per cent said they will decrease travel spending in 2018 vs 2017, the second-highest year-over-year reduction since 2012

Most Companies Plan to Spend More on Travel This Year
Question: What is the outlook for your 2018 corporate travel spending vs 2017?


Source: Grassroots® Research. Data as at February 2018.

Our new Grassroots® study also confirmed another notable trend: convention attendance seems to be flattening out, if not falling slightly overall.

  • Fewer respondents plan on sending additional employees to conferences in 2018 (4 per cent); this number has been moving consistently lower since 2015
  • Conversely, more respondents plan on sending the same number of employees to conferences in 2018 (88 per cent); this is a marked increase over the 24 per cent who gave a similar response in 2015
  • Every year since 2013, 8 per cent of respondents have told us they plan to cut convention attendance by their employees

Signs of Constrained Attendance at Meetings and Conferences
Question: How does the number of employees expected to attend business meetings & conventions in 2018 compare to the number attending in 2017?


Source: Grassroots® Research. Data as at February 2018.

For the latest 2018 survey, our Grassroots® Research team also examined whether heightened global security concerns are having an effect on corporate travel.

  • Approximately four-fifths of our respondents told us they have not made any specific policy changes stemming from security concerns
  • At the same time, around one-fifth of sources said they are examining their “duty of care” programs – which cover their companies’ obligation to take care of travelling employees’ health and safety – or hiring global risk managers and consultants

Senior Consumer Analyst Jon Wolfenbarger said he found this survey helpful in confirming his expectations for improving lodging demand in 2018: “This research suggests that corporate travel budgets could increase by 4 per cent, aided by a stronger global economy and US tax cuts. Employee safety is also another interesting theme, with 20 per cent of corporate travel managers looking closely at duty-of-care programs that help guard employees’ well-being and reduce liability.”



Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security. The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is used only as supporting material to the offshore investment products offered by commercial banks under the Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations. This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424, Member of Japan Investment Advisers Association and Investment Trust Association, Japan];and Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan.

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Expert-Image

Aggie Wong

Research Associate
Ms. Wong is a research associate with Allianz Global Investors, which she joined in 2015. She is a member of the GrassrootsSM Research team, a division that commissions proprietary and customized investigative research, where she manages market research projects for asset-management professionals. Ms. Wong has four years of investment-industry experience. She was previously a research associate at Dow Jones. Before that, Ms. Wong was an undergraduate instructor and lecturer at San Francisco State University; she also held a variety of research roles at UCSF Medical Center, UCLA and San Francisco State University. Ms. Wong has a B.A. in psychology and sociology from UCLA, and is a master’s degree candidate in developmental psychology at San Francisco State University.
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