Investing for the Long Term in a Volatile Market
George Maris, Co-Head of Equities – Americas, discusses finding long-term value when short-term trends and rising rates disrupt markets in this second in a two-part series on volatility.
- Investors’ increasing focus on correlation, headlines and other short-term noise is likely contributing to market volatility.
- Rising interest rates have also caused dislocation, as some investors used low-cost, short-term financing to buy assets at high multiples.
- Such market disruptions have made equity multiples more attractive, in our opinion. That, in turn, could create value for fundamental, long-term investors.
George Maris: We’ve seen a dramatic change in the constituents that make up markets over the last decade. When I first started in the industry, the vast majority of investors tended to be fundamentally oriented. There was a bottom-up debate over what the value or growth of a company merited in terms of its stock price. Now, we’ve got a greater proportion of folks who are trading based on things that don’t have anything to do with bottom-up fundamentals: they have correlations they’re looking at, trends, headlines. We do have a market that’s focused so much on this near-term noise that it creates a lot more daily-type of volatility.
The creation of all of these market actors who aren’t focused on economic value but are focused on correlating assets … they’re using different tools to express those views. So, whether they’re RPAs (the risk parity accounts) or a whole host of other folks who are trading in a very blunt manner, those folks frequently take leverage. When you get leverage at 1%, you can do a lot of different things than you can if leverage now costs you 3% or 4% or 5%, and their positions change and it creates a lot more disturbance among them. And so we’re seeing some of the dislocation when folks have taken on a lot of short-term financing at very low rates. We’re also seeing the worries with respect to rates going up: Private equity players that have bought assets frequently at pretty expensive multiples and took in a lot of debt on those assets to make it work. Well, as rates go up, a lot of those deals become stressed. That, coupled with a greater proportion of folks who are trading on factors that we don’t think matter fundamentally, will create volatility.
The sell-off over the last quarter-plus has created an opportunity across the board. One great example would be Celgene, which was just acquired by Bristol-Myers at a substantial premium to its share price. That deal made sense primarily from a financial return perspective, i.e., public equity markets had gotten so pessimistic with respect to Celgene and missed the economic value part that a competitor, Bristol-Myers, could pay a substantial premium and still make that deal work tremendously well financially.
We think that that situation persists in a number of places around the market, and as you see more and more real economic actor money come into play – whether they be other companies through acquisitions, whether it be the private markets where you see people taking the company private, or whether you see private equity capital come in in different forms – that will catalyze a lot of this pricing. When you’re starting to see free-cash-flow yields get to be at double-digit levels for a variety of good quality companies, then you’re likely to see folks with real money come in there and take advantage of the arbitrage public equity markets are providing.
This real economic actor money … what it does is it provides a change in the framework of the markets to being more focused on the economic value of the asset as opposed to the headline or the tweet. And that change is what unlocks value, and that’s where we, as fundamental investors, are focused on, and so that really does play to our strengths.
The opinions and views expressed are as of 01/11/19 and are subject to change without notice. They are for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. No forecasts can be guaranteed. Opinions and examples are meant as an illustration of broader themes and are not an indication of trading intent. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. Janus Henderson Group plc through its subsidiaries may manage investment products with a financial interest in securities mentioned herein and any comments should not be construed as a reflection on the past or future profitability. There is no guarantee that the information supplied is accurate, complete, or timely, nor are there any warranties with regards to the results obtained from its use. Past performance is no guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value.
On January 3, 2019, Bristol-Myers Squibb Company and Celgene Corporation announced that they have entered into a definitive merger agreement; the transaction is subject to approval by shareholders and is expected to be completed in the third quarter of 2019.
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