Some investors plug their ears when the stock markets get noisy. Ramona Persaud likes to listen. And in today’s environment, given the heightened chatter around trade wars and recession fears, the Fidelity Investments’ portfolio manager is more attentive than ever.
"We are in a period of heightened market noise,” says Ms. Persaud, who’s based in Boston. “It’s confusing, it may even be unsettling, but ultimately it’s an opportunity. Noise increases the inefficiency in how stocks are priced.”
Ms. Persaud says investors are vulnerable to noise and can get emotional, which is human nature. “It’s that emotion that mostly drives price inefficiencies,” she says. “That’s what active investing takes advantage of."
Ms. Persaud manages about US$18-billion across various funds. One of her main funds is the Fidelity Global Dividend Fund, which has returned 14 per cent year-to-date as of Sept. 30. That compares with the MSCI All Country World Index, which returned 12.6 per cent over the same period. (All returns in Canadian dollars, net of fees of 1.18 per cent for the fund’s F-series, which is generally available for fee-based advisers). The Fidelity Global Dividend Fund has seen a compound annual growth rate of 9.7 per cent over the past five years, as of Sept. 30.
The Globe and Mail recently spoke with Ms. Persaud about how she’s investing in today’s high-pitched markets.
Describe your investing style.
My goal is total return with downside protection. Total return is price appreciation and income, the latter of which is important for dividend-oriented funds like mine. My funds are designed to do well in market drawdowns and to do okay in up markets. This return profile over a full market cycle tends to produce a strong total return with downside protection. I get there by owning high-quality companies and focusing on what I pay.
What do you look for when investing in the markets?
I like apathy and controversy. Apathy is when something is forgotten because another part of the market is more interesting to investors – for instance, the allure of tech stocks when growth is in favour. In this scenario, low-growth, boring companies become forgotten [and the valuation lags], which creates price inefficiency. That’s my kind of situation. Over time, companies like these – which are often cash-flow machines – [can] produce strong investment returns, especially if given credit for their often lower risk profile. Apathy often occurs in sectors like consumer staples and communication services.
Controversy is when an investment is polarizing: One part of the market thinks it’s a dying business and the other part thinks maybe not, or that ‘death’ is more than priced in. When most of the market becomes negative on a historically quality company, this can be an opportunity. Sectors that are interesting to me here are health care and parts of retail. It doesn’t mean I’m stepping into these sectors, but there are more opportunities for stock pickers to find interesting long-term opportunities in areas with high apathy and controversy.
What’s your take on where the markets are heading in the short term?
I try not to have a take on the short term. The shorter your time horizon the more random the outcomes are. There’s a lot of data, very little of it is meaningful. An example is the market’s reverence for many definitions of the yield curve, whereas only a narrow definition of it is actually predictive – and even that has been volatile enough to not yet be meaningful. What I like about this low signal-to-noise setup is that it creates more market volatility, and therefore inefficient pricing and therefore opportunity. I can use sharp sell-offs to buy the companies I want to own long-term, for cheaper. Or, in a rally, to take profits sooner. That’s how I view the short term: It’s more of a trading environment. I’m not a natural trader, I tend to hold companies for a long time, but I’ve been trading more because of the opportunity presented by heightened market noise.
What have you been buying lately?
I try to wait for periods of time when the stock of high-quality companies get cheaper. There are some examples in consumer staples. You can find businesses here with limited competition, high stability, low capital requirements, and therefore lots of cash generation, which then funds strong dividends. Typically, in a market drawdown, they perform well. When they have a hiccup, like a difficult quarter, I step in and buy. An example is McCormick & Co. Inc., the spice company. They had a rough quarter earlier this year [the stock hit a 52-week low of US$119 in January and has since recovered to around US$165].
What about selling?
When stocks get expensive I sell them, even if they are good companies. If my goal is total return and downside protection, attractive valuation is what improves my odds of good return, while quality drives the downside protection. For any given stock, I need both value and quality to meet my goal.
Name some stocks you wish you hadn’t sold.
Rating agencies MSCI Inc. and S&P Global Inc. are two companies that I sold too soon [because the stocks keep rising]. They are high quality, growing businesses that I bought at slightly below-average valuations and then sold at much-above-average valuations. To me, much-above-average valuation means a stock becomes ‘priced for perfection’ and therefore can’t withstand any imperfection – such as weak earnings or bad macro scenarios. My goal of strong investment return with downside protection means my funds have to be able to shine in a wide variety of outcomes, so I sell stocks when they price in only very narrow, highly positive outcomes.
This interview has been edited and condensed.
Special to The Globe and Mail