The second part of a two-part series, this episode discusses how some of the investment teams at Wells Fargo Asset Management have navigated the ups and downs of 2020 and how they plan on approaching the continued uncertainty for the rest of the year.
Brian Jacobsen moderates a conversation between Harin de Silva, Portfolio Manager for the WFAM Analytic Investors team; Terry Goode, Senior Portfolio Manager with the WFAM Global Fixed Income Municipal team; and Bryant VanCronkhite, Senior Portfolio Manager with the WFAM Special Global Equity team.
Brian Jacobsen: I’m Brian Jacobsen and you are listening to On the Trading Desk®. This is part two of a two-part series. Today we’ll be continuing our conversation on how some of our investment teams at Wells Fargo Asset Management have navigated the ups and downs of 2020 and how they plan on approaching the continued uncertainty for the rest of the year.
Joining us again are Harin de Silva, Portfolio Manager for the Wells Fargo Asset Management Analytic Investors team; Terry Goode, Senior Portfolio Manager with the Wells Fargo Asset Management Global Fixed-Income Municipal team; and Bryant VanCronkhite, Senior Portfolio Manager with the Wells Fargo Asset Management Special Global Equity team. Welcome back to the program!
Harin de Silva: Happy to be here.
Terry Goode: It’s good to be here.
Bryant VanCronkhite: Thank you for having me, Brian.
Brian: So picking up where we left off, let’s talk about uncertainty. It’s an inherent part of investing since we don’t know with certainty what the future holds, and maybe it’s a little bit of recency bias on my part, but it seems like there’s radical uncertainty today.
And so starting with you, Harin, how does your process help you address uncertainty when you don’t know over the near-term or possibly even over the long-term which factors will win, which companies will thrive, or which issuers of debt will make good on their promises?
Harin: Brian, you can actually measure the level of uncertainty using, for example, the dispersion in stock returns, or the level of implied volatility in stock returns, or the level of correlation in stock returns. So we use all these different measures and what it universally points to is really two things.
One is you need a portfolio that’s more diversified than average. So if you look at our portfolios, you’ll see portfolios that have many more stocks in them than they have historically. So if we had 100 stocks in the portfolio, we now have around 150 stocks in the portfolio.
And you also see the portfolio being diversified from a sector and a factor perspective. So we realized both recently and through historical analysis that in times like this, it’s hard to pick convincingly what winners are going to be, so you do need to have tilts in the portfolio, but also we need to recognize that things have changed very rapidly and make sure that those tilts themselves are small. So we have a lot of different tilts to different industries and different factors, but they’re smaller than they are historically and there’s more of them.
Brian: Harin, thank you for that. That was really useful information. And so Terry, how about you? What are your thoughts on uncertainty and how your process addresses it?
Terry: Great question. Our investment process and philosophy is ingrained in our team and allows us to be successful in various interest rate environments. Our process focuses on duration, yield curve positioning, sector and credit quality considerations, and security selection.
Historically, we have not made huge duration bets and with this extremely low interest rate environment with rates at or near record lows, we find it prudent to be neutral to slightly long the benchmark in most portfolios.
The excess return or outflow we generate generally comes predominantly from security selection, sector and credit quality, and yield curve position—generally, in that order. Our process allows us to be somewhat early in our positioning in one of those attributes but still provide good risk-adjusted returns over a cycle.
We believe security selection and focus on fundamental credit research will be even more important in this environment. Our deep bench of credit analysts, as well as our portfolio managers—many who have credit backgrounds—allows us to select the bonds that are likely to perform well in this environment while avoiding those bonds that may ultimately face payment issues or even default.
Finally, our focus on relative value within and across municipal sectors will also help us to navigate this unique and uncertain environment.
Brian: And Bryant, how about you? What’s your perspective on this?
Bryant: Yeah, uncertainty and, I’ll throw in there, emotion is what creates investment opportunity. Without it, we’d have perfect information and complete information priced into stocks, creating an efficient market and therefore no alpha for active managers and investors.
Once you appreciate the concept that uncertainty is good for you and you learn to stop fearing it and you embrace it, you can start to create value through stock selection through investing. But in order to embrace it, you need to have confidence in your system or your process for navigating uncertainty.
For us, our confidence comes in our team’s expertise in evaluating companies in a very unique way. We evaluate them through their balance sheet and, importantly, how a company can use their balance sheet over the next one to three years to create shareholder value.
So that analysis clears the clouds of uncertainty that exist in the near-term and provides a picture of a much brighter future, ideally, for us in the long term.
And when you marry that balance sheet work we do and that potential with a company that has a unique competitive advantage and a good management team, it really reduces that uncertainty and, for us, has resulted in good investment success over time.
So uncertainty is not a bad thing, but you need to understand to embrace it, appreciate the process to navigate it, and then trust it to make the right decisions.
Brian: That’s some really wise words there, so thank you. And I appreciate all of your comments on this. And to finish off our series, let’s speak directly to investors.
Some investors might find it difficult to act or make changes in this type of environment. Could you all provide words of wisdom about how to take action despite the cloud of uncertainty that persists? So Terry, maybe you can kick us off.
Terry: Yes, uncertainty brings opportunity, and astute investors should be in a position to take advantage.
Market dislocations have historically presented excellent entry points within the municipal fixed-income market. It’s an opportunity to invest and put money to work at attractive levels.
Our investing approach has remained the same over various cycles, and we have been successful in navigating uncertainty to generate good risk-adjusted returns, whether it was the 2008/2009 financial crisis, the 2010 prediction of sizable municipal defaults by Meredith Whitney, the 2013 surge in yields from the taper tantrum as the Fed surprised the markets, the unexpected 2016 presidential election outcome, or the current COVID-19 pandemic. Volatile times are when we can really add value and take advantage of dislocated markets. It’s when a good team can really make its mark.
Brian: And Bryant, how about you?
Bryant: So I recommend three pieces of advice that I tend to think about when I talk about how to invest going forward and one is just let go of the emotion.
So often we understand what the right thing to do is, but fear paralyzes us. And as an investor, you want to use everyone else’s fear to your advantage. So the best way to do that is focus on intermediate- to long-term and let go of the fear of the short-term and don’t follow the daily gyrations of the market.
Second, I would say staying diversified by style, by market cap, by factor exposure. Overconfidence typically results in bad investment success or lack thereof, actually, and staying diversified gives you exposure to many ways to win over time. It keeps you from being overconfident in any one theme or any one idea.
And finally, I’d say remember that the only way to really create alpha through investment is by having a different opinion or perspective than others. And so I recommend finding managers that procedurally exploit market inefficiencies through a unique process. In my mind, in my opinion, that process should be easy to understand, easy to articulate. And if it isn’t, go find another one,. because they’re out there and they’re very valuable when you can find them.
So if you follow those three things, the weight of uncertainty that exists within investing will lift and your investments will work for you, as opposed to the other way around.
Brian: And Harin, let’s finish up our conversation with your thoughts.
Harin: Yes, in some ways, you’ve got to recognize that the COVID crisis has probably just accelerated some of the changes that were happening in the economy to begin with, right?
We’ve seen the beta of the energy sector go up, and that’s partly due to COVID, but it’s also partly due to the fact that people are moving away from carbon and towards more greener technologies.
We’ve see the beta of the tech sector come down and that’s partly because we realize that technology is an essential ingredient in our life. If you have a kid, you know your kid’s been telling you for years that an iPhone is a consumer staple, and this probably reflects a little bit of that.
So I think we are seeing an unprecedented opportunity in markets to position our portfolios and exploit some of these changes. And I think it’s important to see the opportunity and realize that this is probably something you’re going to see only once in a decade.
Brian: Yeah, that’s fantastic, and I definitely agree with you about kids and with technology becoming a consumer staple. So thank you all so much. This has been a great discussion, and one that I think will really be beneficial for investors as we all plot our course for the rest of 2020 and beyond. So Bryant, Harin, and Terry, we appreciate your time and insights over these two episodes.
Bryant: Thank you.
Harin: Thank you.
Terry: I appreciate the opportunity to be here.
Brian: For our listeners, you can find more of our perspectives about creating and managing resilient portfolios by visiting wellsfargoassetmanagement.com and navigating to the page called Confidence Starts with Portfolio Resilience. Until next time, I’m Brian Jacobsen; stay informed.
Diversification does not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
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