Take-Aways from May 20 Public Equities Deep Dive Webcast

Thanks to everyone who participated in the Public Equities Deep Dive (click to launch audio recording) and related to the high conviction theme of the Deep Dive, we highly recommend listening to ARS’ most recent macroeconomic outlook call which was focused on: What Matters Now, and Why Today’s Greater Complexity Demands Higher Conviction. Below are the takeaways from the Public Equities Deep Dive:

Obviously there’s a lot going on in the world right now and equity markets are reflecting that through volatility and dispersion. With that in mind, we thought it would be valuable to bring together a panel of 6 institutional investors to discuss the topic of “Why a High Conviction Public Equity Strategy Makes Sense Now.” Our panelists shared their insights on how they are positioning their portfolio and how they’re utilizing concentration to generate alpha and differentiated returns. 

We opened the discussion with a macro backdrop provided by Stephen Burke, Managing Partner at ARS Investment Partners, an institutional equity manager who manages over $1bn in AUM and has been in business for nearly 50 years. Stephen noted the challenges of investing in a bifurcated market, with the 5 largest companies having a combined market cap of over $5 trillion, which is equivalent to the bottom 350 companies in the S&P 500. These top 5 companies, Google, Amazon, Microsoft, Apple, and Facebook create free cash flow that is equivalent to nearly 70% of the S&P’s free cash flow.  

Burke explained that in this type of market, concentration is key to outperformance and highlighted how they’ve positioned their portfolio to concentrate on sectors and themes across healthcare, technology and defense. Technology represents a signifiant portion of their exposure as tech continues to permeate various sectors, our economy and society. 

Eric Lindberg, CIO of the Knowlton Foundation questioned whether or not active managers were able to outperform over the long run and if investors were better in passive strategies. 

Stephen Burke responded that a combination of active and passive was the appropriate approach. Eric Anderson of Milltrust, an emerging markets specialist with $600mm in AUM highlighted the need for concentration in emerging markets which can often be misunderstood markets with barriers to entry caused by language and location, which creates opportunity for active managers. They’re heavily focused on property management service providers in China, due to the high earnings power and stable recurring revenue stream in a highly fragmented market. 

Narges Zamani, CIO of Pactolus, a multi-family office based out of Virginia explained that Pactolus has been less invested in public markets recently, but they’ve been utilizing concentration in their private investment portfolio and it was an important factor in their portfolio construction. 

Samuel Sheinin, Managing Director and Portfolio Manager at the single family office of Thomas H. Lee, manages a concentrated equity portfolio of long and short positions focused on US software and service businesses. Sam touched on risk management and believes that having a strong understanding of the risks inherent in a portfolio comes down to understanding the bottoms up fundamentals of the companies in your portfolio. 

Andrew Randak of Fieldpoint Private, a multi-family office / RIA based out of Greenwich, CT explained how they employ concentration through their underlying investment managers. Andrew said "when return dispersion is wide like it is at the moment, we prefer concentration, but during quantitative easing they shifted the portfolio to be predominantly beta driven. In general, we want high conviction and concentrated active managers, we want the managers to be corporate experts on the companies they’re buying, not just the sectors. We take the same approach in corporate credit.” 

During the Q&A, topics of discussion included the upcoming election and its impact on China / US relations and tax policy.