|Socker and Leibforth with Artio Global Investor Portfolio Managers|
On Wednesday, September 28, two AIM students (Aaron Socker and Dan Leibforth) had the opportunity to interview and lunch with portfolio managers Andrew Barker and Sam Debio of Artio Global Investors. The following articles are written by Aaron and Dan to describe their interviews. These articles also will be appearing on the CFA Society of Milwaukee’s web site.
This time is completely different. Those were the words spoken by Andrew Barker, Senior Portfolio Manager at Artio Global Investors during the CFA sponsored lunch-in at the Milwaukee Athletic Club. He was referring to the current economic conditions that our global markets have found themselves compared to the financial crisis of 2008. He believed that in 2008, it was a very dangerous time to “stick your neck out” due to the unpredictability of both the markets and the actions of policy makers. Now, he argues, is time to take a completely different approach.
One of the main focuses of Barker’s presentation was on emerging markets. Emerging markets have been a popular investment location, but Barker argues that we have been focusing in the wrong area of the emerging markets. He believes that we need to be looking at domestically focused companies in the emerging economies. The trend that he points out is that consumer growth has been the largest area of market expansion and an area where we should be focusing. Emerging markets in the past were held “hostage” by consumers in the developed economies. There was too much emphasis on exports and not enough on domestic growth and infrastructure spending. Specifically, he mentioned a number of countries whose consumer growth stories present areas of future investment. China is the most appealing because of the sheer size of the domestic market and the rapidly growing population. Additionally, Barker argues, the Chinese have the most capable policy makers in place who have already made strong structural improvements to the Chinese economy and have the lowest risk of making a policy mistake when compared to other emerging markets. While China does present potential upside, Barker criticizes the Chinese because they are still a long way from becoming innovators within the global marketplace.
Other areas of the global economy that he believes present strong opportunity are Russia, Africa and India. Of these three, Africa appears to be the most intriguing due to extremely high growth as well as high barriers to entry. There has finally been a development of the middle class which presents opportunities for businesses and in turn, investors. Barker focused on the development a supermarket business which has proven to not only be sustainable, but has created quite an economic moat versus competitors. One of the reasons for their success is the extremely high barriers to entry, which, Barker argues, will remain in place well into the future. Barker also believes that India could potentially be stronger than China in the long run, but currently has structural issues that must be addressed. India needs to focus on manufacturing to support their already established service export industry.
Finally, Barker, who manages the international equity portfolio, gave his thoughts on the situation in Europe and how to best position your portfolio. He believes that people didn’t fully understand the implications of grouping all of the European nations together and the amount of structural challenges that would lie ahead. He believes that the current situation was an inevitable outcome that people are now finally beginning to realize. Barker claims that there needs to be clarity to the prevailing solvency issue and that injecting liquidity will not solve the problem. He continues by saying that we need to look through the short term noise and focus on the near term (3 – 5 years). Portfolios should avoid any exposure to domestic Europe and focus on finding companies that have a sustainable business and a technological edge versus competitors. Furthermore, one should find a company that provides a strong dividend and has a strong management team that can direct the company through the current environment and emerge as a market leader in the near term. Barker concluded by constructing a hypothetical portfolio that he believes would outperform in the next 5 years. The portfolio contained direct exposure to emerging markets and large cap names with a strong reputation, proven history of success and a sustainable business model.
Aaron Socker Interview
We are seeing a flight to quality. These are the words of Senior Portfolio Manager, Sam Debio, of Artio Global Investors during the CFA-sponsored lunch-in at the Milwaukee Athletic Club on September 28. Mr. Debio has been with the firm since 2006 and manages a small cap core equity portfolio with the ability to tilt the fund’s investment style towards growth or value stocks based on market conditions and fundamental bottom-up analysis. With the ever increasing economic concerns on a macro and micro level, the portfolio manager is seeing “short term volatility”, but as a long term investor, sees potential upside to current valuations over the next 3-5 years.
One of the key components of Debio’s presentation revolved around micro-economic trends and the future outlook of domestic equities. He states “corporate earnings are growing, but stock prices are declining”, which begs the question, why? The market is telling us that valuations are going lower and there is poor appetite for riskier assets as investors are moving into safe haven assets, with less volatility. There has been a trend over the past 6-8 months of money being pulled out of micro, small, mid, and large cap stocks, respectively, as this asset allocation shift plays out. This is the natural process of investors curbing their risk appetite and allocating elsewhere. This has been the trend over the past several quarters, but he feels on a long term horizon stocks are starting to look cheap at current levels as media coverage has created a negative feedback loop and spooked investors as negative sentiment has overwhelmed the markets.
The next portion of Debio’s presentation focused on the fed and inflation. He talked about how the fed may want higher inflation because nominal debts are repaid with inflated dollars. Additionally, nominal wages and tax revenue should rise as a result, leading to increased sales growth for corporations. This would lead to a positive wealth effect which should be good for stocks in future quarters. As this scenario may play out, investors should start to diversify and not try to time the market as it is very difficult to make market timing bets.
Overall, in the short term Debio expects short term volatility, but feels stock valuations are starting to look cheap at current levels. This could be attractive entry points for long term investors with a 3-5 year investment horizon. Further, the CFA society and all in attendance would like to thank Mr. Debio and Mr. Barker for presenting at the CFA event and for their insight into current market conditions.