The Brandes Global Value fund, a strategy which nailed the tech bottom in 2022, is bullish on bond proxy names.
“We are fundamental value investors with a contrarian bias,” Brent Fredberg (pictured), a portfolio manager of the $4bn strategy, told FSA in an interview.
“We typically look to invest in companies that are at significant discounts, but oftentimes those discounts arise because of a problem the company is incurring,” he explained.
“Our job is to determine whether that problem is short term and fixable, or long term and secular. So, a lot of the names are inherently controversial.”
One of the more recent trades that’s helped the strategy outperform in recent years was betting on technology names during the 2022 downturn.
Rising inflation, interest rates and a slowdown in earnings growth in 2022 saw technology stocks experience a significant drawdown, with the Nasdaq 100 index down over 30% from its peak.
“That’s when we found a lot of opportunity in the technology space,” Fredberg explained. “There were some stumbles in technology company fundamentals, but there was a significant increase in interest rates which tends to be more damaging for longer duration stocks.”
“We bought and added to a large number of technology companies in 2022 when they were being significantly discounted and out of favour by the market.”
Since then, the Nasdaq 100 index is up over 70% from its December 2022 low. Fredberg said that they still find many of their purchases made during the 2022 to have upside, but they have been trimming a lot more recently as they have rallied and become more expensive.
“I’d say US tech appears fully valued, but the interesting thing about tech is that it’s the valuations are very bifurcated,” he said.
“There’s the glamorous tech at very high multiples, the Nvidia’s of the world and a lot of that ilk, and then there’s more pedestrian growing tech, which is in many cases where we find opportunity.”
The bond proxy opportunity
One more compelling area for the strategy Fredberg revealed is in the low volatility consumer staple names, which unlike tech stocks, have yet to recover from the 2022 downturn.
Prior to 2022, during the low interest rate regime, high quality, lower growth consumer staples companies that delivered low but steady earnings growth were trading at fairly rich valuation multiples.
“A lot of the staples companies were fairly expensive over the past decade, as they were considered bond proxies,” Fredberg explained.
“They benefited from that abnormally low interest rate environment that they were in and we didn’t find many opportunities within staples at the time.”
“However, more recently some of these staples have become increasingly more attractively valued, especially the staples outside of the US.”
This is because higher interest rates have hurt the bond proxy names in the same way that they have hurt long-duration bond asset values.
However, the decline in asset values has come alongside companies also grappling with the inflationary shock of 2022, which saw raw material costs and freight costs increase – hurting profit margins.
Brewers trading at low multiples
But despite these near-term headwinds, Fredberg is bullish on two particular brewers that are considered bond proxy names: European-listed brewers Heineken and Ambev.
“Both of these companies are leading global brewers that should be long-term structural growers, but as a result of that margin compression both have seen their multiples compress significantly to the point where both are now trading materially below the market multiple overall,” he explained.
“But both should benefit from margin expansion going forward as input costs normalise as they benefit from cost improvement plans and a mix shift to more profitable premium beers, which are gaining share in developing countries.”
He also added that the industry has also seen some consolidation, which is a positive to those that have remained.
“Competition is less intense and both should be able to grow penetration outside the US,” he added. “So we’re left with high quality growing companies that are currently trading at less than a market multiple.”
“That’s kind of the types of companies that we look to take advantage of when they are at this kind of dislocation.”
