Who doesn’t love a bargain? Scoring something sought-after at a discount can be as thrilling for shoppers on Main Street as deal-hunters on Wall Street. Ferreting out finds takes time, though, and not everyone has the patience—or the resources—to do that legwork. But Katrina Dudley, portfolio manager with Mutual Series® , is a savvy stock shopper with ample amounts of both. Read on for a taste of her stock-picking approach as inspired by the Mutual Series’ guiding principle: “buy a dollar’s worth of assets at a discount.”
- Macro considerations are important, but they don’t change our stock-by-stock selection process
- Volatility is here to stay, but it can create opportunity
- We’re looking at the company-level impact of macro influences like eurozone austerity
- Many European companies are readjusting their cost base, becoming more competitive
Phrases like “new normal” and “historic event” have grown common in the last few years. Aside from being disconcerting—which they are—they may also cause investors to question old strategies. What if what we think we know is no longer true? For the past 60 years, Mutual Series® has been guided by this strategy: look to buy assets that are trading at a discount to their intrinsic value. Is this strategy still viable in the markets today? Absolutely, says Dudley. However, macroeconomics can’t be ignored.
“Recently, we’ve had to devote more time to factoring in macro considerations into our investment conclusions. We are now taking a look at things such as the austerity measures that are impacting the European economies, and obviously impacting companies operating in Europe, and we need to factor in how that impacts a particular investment. We are also looking at debt rollovers and a contraction in lending that is impacting companies that have bank debt or bonds that they need to roll over.
Those are two specific ways that macro issues are impacting our investment decisions, but it’s not changing the basic way that Mutual Series® invests, which is picking stocks on a stock-by-stock basis.”
On Volatility and Europe
Market volatility is something investors had to cope with in 2011, and in Dudley’s view, it’s “here to stay.” Dudley, like other managers whose remarks readers have seen on these pages, sees volatility as an opportunity in her search for stock bargains.
“As we look forward over the next five to 10 years, we increasingly see that there’s going to be a dispersion of growth throughout the world. We will have one market that’s growing and where things are going well, and you will see another market where maybe things aren’t going quite so well. From an investment perspective, we see it as an opportunity.”
The eurozone is a market that’s been particularly volatile as the drama there unfolds. Recent forecasts calling for the possibility of negative growth in the region in 2012 probably aren’t helping matters. Dudley recognizes many investors are likely to completely steer clear of the region. In keeping with her mission, she examines how new austerity measures many countries in Europe are facing could play out on an individual stock-by-stock basis.
“We believe that investors may say, ‘I don’t want any exposure to Europe’ and not look at any European investments. But they would overlook, for example, companies which have global franchises and operate in not just European markets but operate in developing markets as well as the U.S. market, for instance.
I think one of the factors that we are considering and spending a lot of time on is how austerity is going to impact companies going forward. I think austerity is going to result in one-time re-basement of a number of economies.
But what we see as promising is that a number of these economies are taking all measures to readjust their cost base and become more competitive within Europe or within the global competitive set. You just need to look over to Italy and look at what [Prime Minister Mario] Monti has done in four weeks that has not been achieved in 40 years, in terms of the reform measures he has put through.
So, in these situations where we think that there has been a structural change, we are looking at companies that can benefit from those opportunities. We’re taking up our pencils, fine-tuning our numbers and then looking at an appropriate valuation at which to step in.”
In the words of the late bargain-hunter Sir John Templeton: “Search for bargains. You should try to buy that particular investment whose market price is lowest in relation to your estimate of its true value.”
For another perspective on the search for value in stocks, read “Chua Spans the Eurozone and Beyond for Value.”