HEAD-TO-HEAD: Alliance Bernstein versus MFS

123456

Investment approach

For the AB Select US Equity Fund, lead manager Kurt Feuerman applies a discretionary and not overly formalised approach that aims to be responsive to changes in the market environment in order to limit downside risk, according to Wolfstetter.

“Whereas each team member has their own distinctive approach to generate ideas, common characteristics include businesses with potential to grow earnings faster than market expectations over a three- to five-year horizon, strong cash generation, and reasonable valuations,” she said.

The manager will adjust the sizing of a position based on short-term considerations. The manager’s macro and thematic insights, derived from both top-down and bottom-up research, also inform the beta positioning of the portfolio and its sector and stylistic exposure, tilting the portfolio to either defensive or more cyclical sectors.

As a result of such portfolio shifts, the fund’s turnover at 300%-500% annualised is significantly higher than most of its peers’.

Active share relative to the S&P 500 has typically not been outsized, at 60%-70% historically. However, it has fallen below 60% since 2018-19. That can be partly explained by increasing index concentration as the manager has been reluctant to take more active risk in the largest benchmark names, except for Tesla, which he has not invested in, Wolfstetter said.

The MFS Meridian US Value Fund separates itself by identifying threats to a company’s business. Wolfstetter pointed out that co-managers Nevin Chitkara and Katie Cannan look for undervalued stocks with robust business models and strong track records of generating returns on capital.

“Their goal is to avoid value traps. The managers spend a lot of time focusing on analysing a business’ durability; they want to ensure the business is not at risk of obsolescence or major disruption,” she said.

This risk focus in the research phase allows the managers to confidently stick with their stock picks through turbulence and add to them if and when valuations drop further. This means that they often wait years for a thesis to play out.

Given the strategy’s patient investment approach, it is not surprising that the portfolio sees little turnover on a year-over-year basis. The average holding period of the current portfolio is nearly eight years, Wolfstetter explained.

In order to make such long holding periods work, the managers look for financially sound companies with durable advantages, and this portfolio reflects that. This fund’s typical holding has higher margins, higher returns on capital, and lower debt than the average Russell 1000 Value Index constituent.

Wolfstetter pointed out that this strategy’s size is worth watching, as it eclipsed over $100bn in assets. While there are not yet any signs of increased portfolio sprawl or reduced active share, which tends to be around 70% or higher, the continued accumulation of assets could force the managers to water down the portfolio in the future.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 30 November 2021

Top 10 holdings:

Source: Fund factsheets, 30 November 2021

123456