HEAD-TO-HEAD: Stewart versus T Rowe Price

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Investment approach

The Stewart portfolio selection approach is based on bottom-up, fundamental stock research that often has defensive tendencies, according to Genderen.

“A buy-and-hold process seeks high quality companies that can deliver sustainable and predictable growth. A review system to identify these characteristics reduces the investable universe to a watchlist and ultimately a portfolio of about 25-40 stocks,” he said.

The team evaluates companies from three angles: quality, earnings growth, and valuation.

The quality perspective includes factors such as management, franchise, corporate governance, and balance-sheet strength. The team pays careful attention to drivers of earnings growth such as franchise/brand, capacity cycles, industry structure, and pricing power.

Yet, “the team has a flexible approach to valuation,” said Genderen. Their favoured metrics include price/sales, price/book, and earnings value/earnings before interest, tax, depreciation, and amortisation.

However, “nonfinancial metrics such as capacity considerations are equally important,” said Genderen.

The result is a portfolio that is quite concentrated and predominantly invested in large-cap stocks. “This larger-cap bent, however, should smooth performance over time, and the global universe is wide,” he said.

However, “strict quality and valuation criteria usually steer Stewart’s sustainable funds group away from hot market sectors,” said Genderen.

For example, this strategy was for a long time underweight technology, instead favouring more defensive areas such as consumer staples — though its technology exposure has tripled since mid-2019 and healthcare has more than doubled.

Country positioning also looks quite different from the MSCI ACWI growth category benchmark and fund peers. The strategy has typically invested around 20% to 30% of assets in the United States, compared with above 50% for the benchmark, and has at times invested 15% in emerging markets such as India.

Also, while the team places a high degree of emphasis on sustainability and stewardship, this isn’t a pure ESG strategy, according to Genderen.

The approach of the T Rowe Price team is quite different.

“This strategy looks for underappreciated growth potential, and fund manager Scott Berg wants to own firms that can increase the value or productivity of their assets,” said Genderen. “He’s agnostic about where those opportunities are found, hunting across developed and emerging markets alike with little regard to the strategy’s MSCI ACWI benchmark.”

Berg keeps the sector weightings roughly in line (around five 5 percentage points) with those of the strategy’s MSCI ACWI benchmark, but “he takes more liberty with the country exposures,” said Genderen. Generally, Berg invests around half of the portfolio in US names, a quarter in developed ex-US stocks, and another quarter in emerging markets. He’s also willing to invest in stocks further down the market-cap spectrum.

Diversification is a preferred risk-management tool, and the portfolio typically holds about 160-180 individual stocks. “Berg spreads positions across many countries and stocks and even buys some value stocks for further diversity,” said Genderen.

Bottom-up research is the primary driver of stock selection, and in pre-Covid times, Berg travelled extensively, spending roughly half of his time on the road to meet with company management, suppliers, and competitors to ask questions about market and business conditions, and to get a feel for local economic conditions and consumer sentiment.

Berg’s analysis has a two- to three-year perspective, although he is happy to trade the portfolio if conditions change, according to Genderen. Turnover is typically upwards of 80% a year, but most of it comes from adding to or trimming positions, which Berg does as valuations change.

Fund characteristics

Sector allocation:

Source: Fund factsheets, 31 July 2021

Regional allocation:

Source: Fund factsheets, 31 July 2021

Top 10 holdings:

Source: Fund factsheets, 31 July 2021

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