Ultimate Stock-Pickers: Active Management Not for All
Plus, Yacktman, Lynch, and Harriman share the importance of position sizing and insight on current holdings.
This analyst blog is part of our coverage of the 2016 Morningstar Investment Conference.
Three of our Ultimate Stock-Pickers--Stephen Yacktman of Yacktman Funds, Dennis Lynch from Morgan Stanley Investment Management, and Michael Keller with Brown Brothers Harriman--joined us for a panel discussion at the Morningstar Investment Conference. While much can be gleaned from their quarterly commentaries and past investing activity, there is always a little extra to be learned from live discussions. We gleaned many interesting tidbits and picked the brains of these top investors.
On the overall theme of passive versus active management, Yacktman believes it bodes well for those active managers who are providing the alpha that justifies their fees. If you deserve what you're asking for, you'll be fine. If you're not providing value, you should be, and likely will be, squeezed out over time. Yacktman also believes this potentially could make his job easier, as more people go to passive there are less competitors, and the opportunities to generate outsize returns could paradoxically increase just as people are more fully buying into the argument that there is no alpha left to be had. Lynch thinks the current trend makes perfect sense and that making the categorical argument for active management is difficult given the evidence. Combine this with the behavioral tendency of many investors to abandon ship at exactly the wrong time, and it becomes clear that being invested with actively managed funds isn't right for everyone. Lynch and Keller said there are common patterns exhibited by those managers who tend to outperform, and these included lower turnover, and its corollary, investing with a long-term view.
These managers also shared some insights regarding their current holdings as well as current stock picks. Yacktman and Keller both own and like Oracle (ORCL). Keller stated it is one of his favorite large-cap tech companies because what they sell is so foundational to other businesses, and it is very hard to displace them. He said the industry is changing and there is going to be some leakage, and while this does affect short-term sentiment, it's this short-term sentiment shift that they aim to take advantage of, as they believe it will likely dissipate as fundamentals win out.
Lynch shared a little more of his thesis surrounding Zoetis (ZTS). He contrasted the many risks that normally exist for a healthcare stock, such as regulatory risk, dependence on a single product, IP risk, and reimbursement risk, and how these don't quite apply to Zoetis to the same extent since they deal with animal products. This makes the stock more attractive in his view. Keller had also purchased the name, but had sold off much of the stake as it has been up roughly 45% since his initial ownership.
Yacktman highlighted 21st Century Fox (FOX) and Samsung as two of his favorite current stock ideas. Yacktman specifically has his Samsung position concentrated in the preferred shares, and believes there is nothing priced as cheaply right now. Regarding Fox, he thinks the fears surrounding the disruption of the business are overblown right now. This, combined with the transient depression of earnings by increased capital investment as well as some currency headwinds, makes Yacktman believe that shares are likely underpriced, and in the long term the company will do fine.
Keller likes Discovery Communications (DISCA) for many of the same reasons Yacktman likes 21st Century Fox. Keller put it succinctly when he stated that content is the valuable asset, not distribution, therefore he believes the content providers will still maintain their value over the long term. He also highlighted Novartis (NVS), as a lot of price pressure and regulatory concerns have weighed on the shares, along with the issues with the Alcon segment. Keller said they are a great innovator, they have a good generics business, and the Alcon issues will be worked out, one way or another. Once this happens, he believes the fundamental value of the company will become more apparent and investors should be rewarded.
Lynch said if there was one stock he could buy, it would be Amazon (AMZN). Lynch believes that Amazon has a great capital allocator at the helm, and Amazon has built an all but impenetrable competitive advantage through its network and distribution system.
Finally, while picking the right stocks is part of the puzzle, these managers also said being disciplined with position sizing is also extremely important. Poor position sizing can make a bad position worse, and can also make what would have been a good investment bad as well, and fortunately for investors, position sizing is always within their control.
Eric Compton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.