Lessons for Long-Term Investors from Active Stock Pickers

Many DC retirement plan participants have saved large sums without ever actually picking a stock, but that doesn’t mean their advisers can afford to lose touch with the latest market trends. 

Some of the best-performing mutual fund portfolio managers in the business came together for a mini investing summit Wednesday in New York, put on by SunStar Strategic to highlight its money manager clients that have had strong success navigating the market turbulence of the last year.

Following breakfast, a lineup of seven portfolio managers and analysts each made their 10- to 15-minute case for what they see as the most compelling opportunities in the equity markets today. While their opinions ranged in terms of which corners of the markets might do best in coming years, it’s fair to say that they all see compelling evidence for staying broadly invested in equities for the foreseeable future—but also for being increasingly picky about risk amid stubborn global headwinds.

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Eric Marshall, manager with Hodges Capital Management, focused on making the case for small caps, arguing a “bottoms-up approach makes a lot of sense in the current environment, particularly within the small-cap universe.” He believes the current market turbulence, especially when one zooms in on the difficulties driven directly by major oil price fluctuations,  has caused an increasing amount of inefficiency in the markets, “most notably among small caps that are not as heavily analyzed or closely followed as their larger capitalized counterparts.”

According to Marshall, opportunities range from small southern regional banks with manageable exposures to the oil production sector, which have seen their stock prices perhaps unfairly tarnished, through to companies that will feel a tailwind from the big federal highway funding bill passed last year. 

“At a high level, we have had success from our conviction that we should not try to anticipate or preempt the macroeconomic trends,” Marshall adds. “Instead we look at individual public stocks, and we analyze them almost in the way of a private equity firm sizing up an opportunity. We deploy our research team out into the field to make thousands of points of contact with the managers of the companies we are thinking about investing in. We search out the company’s own clients and suppliers to get their input as well.”

The idea is to really go beyond the equity price and get a handle on the true upside potential versus the downside risk of individual stocks, explains Robert McIver, manager with Jensen Investment Management. Thinking about his own firm, McIver says one way to put this thinking into action is to “think very deeply and critically about the cash flow characteristics of stocks that are going into our portfolio.”

“In our most high-conviction and defensive equity portfolios, for example, we will only admit stocks that have a proven track  record of maintaining very heathy and stable cash flows, even though periods of recession,” he explains. “In terms of actual stocks, this may, for example, favor disposable goods companies that manufacture products that do not see demand fluctuate in line with changes in GDP. There are many ways this thinking can play out, but they key is to reduce uncompensated risk by digging deeper into the data that is available on companies and their operations.”

NEXT: Other outlook opinions 

One of the more unique arguments for how to invest wisely during periods of uncertainty came from portfolio manager Andrew Adams, with Mairs & Power, who argued that having a home-regional bias in an equity portfolio can actually be turned into an advantage. In one of the firm’s portfolios, for example, 40% of the stocks come from within Minnesota (the firm’s home state) and another 50% come from the upper Midwest region.

“One may at first think that this would represent an unnecessary concentration of risk, but it’s actually been a really powerful way for the firm to boost transparency and understanding of the holdings in its portfolios,” Adams explains. “In other words, one can really come to a deep understanding of the performance characteristics of a company by being present in its home marketplace.”

Another portfolio management expert, Janet Brown, with Fund X, highlighted the way managers are increasingly blending the benefits of active and passive management to bring greater efficiency and affordability to all parties involved in this conversation.

“One thing we can be sure about in this uncertain environment is that markets are always changing and that they will keep changing,” Brown says. “We can also be pretty confident that clients will continue to desire lower fees and will continue to desire capital preservation, even within funds that are meant to be pursuing growth.”   

Fielding a question from PLANADVISER, the experts all agreed with the idea that retirement plan participants probably aren’t going to be all that interested in bottom-up stock picking or the esoteric debate between, say, growth- and value-oriented investing. “But that doesn’t mean these issues aren’t of critical importance for DC plan advisers and sponsors,” Brown suggested. “In many cases it will be up to the adviser or plan providers to put a lot of this thinking to work on behalf of participants.” 

Sponsors Fail to Measure Retirement Readiness Success

Yet 91% say it is very or extremely important to help employees have a secure retirement.

There is a disconnect between what retirement plan sponsors believe their plans should be delivering to participants and their willingness to measure retirement readiness, according to a new report from American Century, “Understanding Plan Sponsors’ Perceptions Around Plans, Participants and Partners.”

There is also a disconnect between what sponsors think participants want from them and how much more proactive participants would like their employers to be.

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Ninety-one percent of sponsors say it is very or extremely important to help employees have a secure retirement, and 67% say that when measuring the success of their retirement plan, it is very or extremely important that participants are retirement ready. However, just more than one-third, 36%, of sponsors measure how ready their employees are for retirement.

Furthermore, while sponsors believe they are doing a good job of helping their participants manage their retirement plan, participants would like them to do more. Eighty-nine percent of sponsors are confident that they are doing a reasonable job of executing their defined contribution (DC) plan, but 58% think they should have done more to encourage workers to start saving sooner.

When it comes to encouraging employees to save for retirement, only 5% of sponsors think employees would prefer “a kick in the pants,” yet 13% of participants would appreciate this. And while only 15% of sponsors think their participants would welcome “a strong nudge,” in fact, 27% of participants between the ages of 55 and 65 would welcome this, and 28% of those between the ages of 25 and 54 would do so as well.

A full three-quarters, 75%, of sponsors think that participant education is important, yet only 46% think the education they offer is either very or extremely effective.

While nearly 70% of participants would like their employer to automatically enroll them in the plan at a 6% deferral rate, only 48% of sponsors have automatic enrollment in place. Seventy percent of participants say they are fairly interested in their employer boosting their contributions by 1% a year, yet the same amount, 70%, of employers do not have automatic increases. As to why, 46% of sponsors say they just have not considered it yet, and 33% fear employee backlash.

The report also found that 79% of sponsors work with an adviser, and 63% of them are very satisfied with their adviser. Sixty-six percent of advisers say their advisers’ integrity, and 65% say their expertise are important qualities.

American Century’s report is based on a survey of 2,031 participants and 498 sponsors.

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