Altrinsic Global Advisers, Portfolio Specialist, Simon Blanchflower discusses value investingover the last 10 years, why it can be expected to perform better in a rising interest rate environment and the importance of stocks with little to no correlation risk.
Jason Hazell: Hi, thanks for joining us. Today, I'm talking with Simon Blanchflower from Altrinsic Global Advisors about the current portfolio positioning. Welcome, Simon.
Simon Blanchflower: Good morning, Jason. Thanks for having me here.
Jason Hazell: Altrinsic is a global value manager. What does value actually mean for Altrinsic?
Simon Blanchflower: Value for us is really finding ideas that trade at discounts at intrinsic value, so margin safety is very important to us. I guess in terms of where we're a bit different, though, is that we don't compartmentalise value. We invest right across the value, or the quality spectrum. We hold positions that are of high quality. We’re (our) return on invest capital is greater than cost of capital, for example, so highly productive companies as well as those that have more cyclical features, profit normalisation stores, which are much deeper value type situations.
Jason Hazell: How has value really performed over the last few years?
Simon Blanchflower: It's been difficult for value now. Probably 10 years. There's been periods in between where you've seen some value outperformers, but generally speaking, you could quite easily argue it's been a growth super cycle.
Jason Hazell: 2016, I think, was a particularly good year for value. Is that right?
Simon Blanchflower: Yeah. Actually, 2016 was the first year we had a substantial recovery in value which was largely driven through cyclicals in emerging markets.
Jason Hazell: Do you see that outlook for value changing over the coming years?
Simon Blanchflower: Well, this year, actually, although we had a great year last year, that year has completely snapped back now, so that super cycle I spoke about with growth is well and truly entrenched, it seems. I think the key thing for value...is probably a couple of areas. One is a normalization of volatility because risk expectations are incredibly low right now, and that should normalise. The other is the pathway for interest rates. If interest rates stat to normalise higher, that should also be a good environment for value.
Jason Hazell: We've seen the US Fed come out and talk about rate rises this year and next, and plus the QE program is starting. It's slow. Do you think that that will be a tailwind for value managers?
Simon Blanchflower: It could be. I think central banks reducing the size of their balance sheets and reversing QE, that certainly, as you say, coming along. I guess the key question we're all asking ourselves is whether you'll start to see wage inflation or not, because if you look at share of profitability, in recent times labour’s not seen much of that, so wage inflation is something to keep an eye on.
Jason Hazell: Within the portfolio, where are you seeing value at the moment?
Simon Blanchflower: Well, the markets are elevated, so it's not an easy environment to find ideas that trade at discount intrinsic value, but nevertheless, we have a portfolio that reflects that and we're pretty comfortable with that. The key thing with the portfolio, though, is find those ideas that are idiosyncratic, ideas that are not correlated to each other or not correlated to the market, so very business-specific ideas. That's the important thing for the portfolio.
Jason Hazell: What do you think investors should be focusing on over the coming months or year?
Simon Blanchflower: Well, the key thing that we all need to watch is whether if earnings growth continues to come through, because we would we argue that markets are quite elevated and earnings need to play catch up, so we've certainly seen that this year. Earnings results this year have been quite positive, particularly in the United States and Europe, but you need to see that continue to justify where the valuations are today.
Jason Hazell: Great. Well, many thanks for your time, Simon.
Simon Blanchflower: Thanks for having me.
Jason Hazell: Thanks for joining us.
