Global equities specialist Patrick Ryan, a director and portfolio manager with Lazard Asset Management in New York, has strong opinions on where money should be going these days – and where it shouldn’t. He and his colleagues look for what he calls “pockets of resilience” – whether individual stocks or markets. Emerging markets are high on his list. Most Canadian stocks are not even on his radar.
What’s your prognosis for the United States in the wake of the automatic budget cuts?
The economy can absorb some headwinds and continue to grind forward. If it does, that’s really a very good outcome. We’re not macro people. We don’t forecast. We don’t have an economist. We do it [investing] very much on a bottom-up basis, looking at individual stocks. So we’re not going to say: “Let’s get long U.S. stocks because housing has bottomed.”
In fact, You have noted that the obvious plays on the U.S. housing recovery, like the homebuilders, are done.
Toll Brothers has retraced 80 per cent of its [stock] decline off its peak. Is it ever going to get back to the old peak, which after all was a bubble?
Which other market stories are over, or overdone?
The biggest are those big-cap, blue-chip bond-proxy stocks. Tobacco is the poster-child for this phenomenon. We had 10 per cent of our fund in tobacco in early 2009 [when those stocks traded at eight times earnings and yielded 8 per cent]. In an environment like that, they certainly were attractive. I never thought I’d see tobacco reach a premium to the broad market. It’s a great example of people overpaying for stability.
Any markets to avoid entirely because of political or other risks?
We don’t exclude anything, but we explicitly adjust our target prices for corporate governance, political and macro risk. So [for] a company operating in Russia, we’re going to say it’s worth $10 broadly. Since it’s in Russia it’s worth $8. So if it’s at $6, we’ll buy it.
But you do hold Russian stocks, don’t you?
We’re actually pretty positive on Russia. It’s unloved and it’s cheap, and as a result, we’re finding opportunities there.
Let’s look at some key sectors, like financials.
We like the financials, but in very targeted areas.
And those would be?
Emerging market banks, REITs in the U.S. and European insurance companies. There’s no starker contrast than meeting with the management of an emerging market bank and then a developed market bank. It’s night and day. One is looking at loan growth of 15 to 20 per cent as people get access to credit for the first time [in certain markets]. Their biggest problem is how to find the money to [lend]. It’s a high-class problem to have. Chinese banks are still yielding between 4 and 5 per cent; Brazilian [banks] are holding over 5 per cent. We think those are attractive opportunities.
I notice that you don’t own any Canadian banks.
We have not had much exposure to Canada historically. We have not owned the banks. We have owned the telecoms at times. ... The banks always looked expensive to us. And then the financial crisis came, and we realized they were better-quality businesses and that’s maybe why they were a little more expensive. We’re not finding a lot of value there.
Why European insurers?
They are better, more resilient businesses [than the banks]. They have paid dividends throughout the financial crisis. Yet, they get tarred with the same brush [as the European banks].
And the U.S. real estate investment trusts?
They have been good performers, although we have been reducing [exposure]. They are tangible businesses with tangible assets. They’re financial plays without being banks.
Is tech more appealing now that more companies are issuing dividends?
For a long time, U.S. tech, in particular, was kind of a wasteland for the dividend-focused investor. That is beginning to change. It’s good for the industry. One of the reasons I like dividends is because they instill capital discipline in managements. It’s hard to be disciplined when you have $100-billion in your pocket. It’s like going shopping with your wallet full of hundreds. You know you’re going to make dumb purchasing decisions.
This interview has been edited and condensed.