When to trim troubled positions

When companies in your portfolio no longer exhibit the fundamental drivers that led you to purchase them in the first place, it’s time to sell, says Chris Ibach, a portfolio manager for Principal Global Advisors in Des Moines, Iowa. “When we decide to sell or trim a stock, it’s really the opposite of the buy case.”

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Earlier this month, Ibach discussed how he will buy or add to names that exhibit positive fundamental change as well as have attractive relative valuations and expectation gaps in how they’re perceived by his firm versus the rest of the market. His firm manages the Renaissance Global Equity Private Pool.

When re-evaluating holdings, “we’re looking for the fundamental story; is it still intact? If it is, in many cases we will hold the stock. If the valuation has moved up significantly and there’s not a lot of surprise left, then we tend to move away from those into better relative alternatives.”

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Ibach looks at each individual holding daily. Factors like “the environment, fundamentals [and] the valuation that we see [influence] whether or not we ultimately sell the stock.” For instance, “If the company is down, say, 20% in a day, but we think it should be down 30% because of some fundamental news that came out, we will sell the stock and move […] into a better relative alternative.”

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However, he might tolerate some decrease in share price. “If a company sells off 20% in a day and we think it should only be 10%, we might be more inclined to buy. […] It depends [on whether] the stock is really having difficulty,” says Ibach.

But, he adds, “if we have a large active position in a company and it continues to deteriorate in fundamentals—and maybe it’s a bit [unclear] as to what exactly is causing that—we may trim a bit, just because the active position may be a bit too high.”

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Once a security is trimmed or dropped, he looks for a replacement. “We have a lot of different alternatives, with our alpha process, that we can rotate into to find those types of characteristics, and get the portfolio positioned heavily into those fundamental change-and-surprise categories with attractive valuations.”

Capgemini was one company Ibach dropped in Q4 2016. He says for years the technology and services company benefited from the growth of cloud business and increased IT spending. But, “for the last several years, we’ve seen the valuations move higher, and the cloud part of the business — the areas that were the most attractive in growth — are becoming more competitive. And we’re seeing margins come down.

“So the fundamental outlook, combined with the valuation and expectations, led us to move on into better relative alternatives.”

Read:

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How to capitalize on market fear

How to manage a portfolio amid ‘radical uncertainty’

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