Demographic shifts. Persistent low growth. Geopolitical tensions. You’ve seen these phrases a lot over the last year, and may have thought about how the issues impact your portfolio. But be warned: while keeping an eye on such broad trends can be helpful, it can also be distracting.
James Burron, COO of the Alternative Investment Management Association of Canada, says short-term worries, not secular trends, tend to take center stage in the hedge fund and alternative space. Rather than mull over how political moves or global challenges might weigh on a company over the long term, such managers are more likely to focus on dealing with near-term, company-specific hurdles, he says, which can include issues like overleverage or falling profitability. Managers also consider how to deal with the mispricing between different securities (e.g., through shorting when stocks are overbought *), says Burron.
In contrast, traditional long-only managers tend to buy and hold, and may consider secular trends, he says. And, for traditional bottom-up managers, macro analysis is also on the back burner; currently, they’re focusing on adjusting their portfolio positions (see “Tackling tough markets” for more).
Yet good managers don’t ignore macro trends, even if they primarily perform security analysis. As markets have become more correlated, says Burron, many managers are finding they must dig deeper to find opportunities. Also, he’s seen more over the last few years of what he calls “light hedging,” which refers to managers considering concepts like alternative beta and strategies like factor investing. Their goal, he adds, is to “provide value [by] delivering something to investors that’s better than buying a long-only fund and hoping things go up.”
Here are three tips for considering macro when managing a bottom-up portfolio.
Tip #1: Stand by your strategy
Walter Posiewko often makes portfolio moves based on what’s expected over the next quarter—at most, over the next year. “We use a longer-term outlook to cut through short-term noise from a strategic point of view,” says Posiewko, senior portfolio manager, global fixed income and currencies at RBC, who oversees both long-term and short-term income portfolios. However, “tactically, our timelines are much shorter. They can be as short as one month. If there is a fundamental change in the market, our moves are made immediately.”
For that reason, he says, “there’s no point in worrying about something that’s going to happen five years from now because that won’t have an influence on markets’ perception of risk and valuations in the here and now.” When investing, Posiewko considers factors such as interest rate risk and how that will be driven by monetary policy decisions, as well as the shape of the yield curve and credit spreads.
Still, he keeps tabs on whether we’re in an economic growth or slowdown stage, which is more of a macro consideration. One reason to follow—but not necessarily act on—both micro and macro trends that could weigh on your portfolio, says Posiewko, is “whatever you buy, you have to have an eye toward getting out of that product,” especially if liquidity becomes an issue.
Tip #2: Don’t get sidetracked by tangential news
For most bottom-up managers, figuring out the effects of long-tail macro trends isn’t the main goal. This is true for Veronika Hirsch, senior portfolio manager with Arrow Capital Management in Toronto, who has a six-month view when it comes to her portfolios.
Hirsch, who manages Canadian- focused and performance-driven funds, says her strategy involves investing in industries which fit into the current stage of the economic cycle as well as picking individual businesses across North America “that have reported growing sales and earnings numbers.” Since she focuses on the near-term, “[longer-tail trends] tend to go into the mosaic,” she says.
Felix Narhi, chief investment officer and portfolio manager at PenderFund Capital Management in Vancouver, generally falls in the same camp. He doesn’t typically make moves based on macro calls, but he does review commentary and monitor trends that might impact businesses he’s invested in.
Says Narhi: “We get informed about the macro from bottom-up [analysis] […] but we’re not wired to be top-down.”
Whether or not he monitors macro trends depends on the business he’s investing in. “A mining company is typically less predictable than a consumer packag[ing] company,” he says, noting that the success of the former type of business typically depends on its access to high-demand natural resources.
But more importantly, success lies in the macro factor of where that commodity stands in the cycle. For example, you need to determine whether they’re in the “early, middle or late inning of a cycle.” Typically, he adds, cyclical stocks tend to be “attractive at one price and dear at another, yet, higher price. But held over the long term, such stocks often don’t make much headway.”
In contrast, consumer packaged goods companies like Unilever are more predictable. They have consumers who “tend to buy in all economic cycles, good and bad, which provides valuable recurring revenue streams,” Narhi notes. That makes it easier to predict performance over a longer term (e.g., five years out).
Tip #3: Don’t ignore key trends
Macro trends can be hard to measure and plan around, but keeping an eye on major developments can lead to opportunity.
Ron Schwarz, an independent portfolio manager and consultant in Toronto, says even though he invests with a time horizon of 18 to 24 months, he reviews global and domestic economic trends every week.
“I do weekly refreshes on the Canada and U.S. 10-year, on oil prices […] and natural gas, [and] gold and general industrial commodities to get feel for if a trend is happening, for example. I also look at the U.S., Canadian and euro currencies because so many companies have global exposure,” he explains.
One reason for this is he invests in market disruptors—even though his main focus is dividend-paying GARP stocks. When he plays on thematics, he’ll monitor related trends to make sure they don’t play out in ways that “break a thesis or really cause me to change my tune [about the prospects for a company],” says Schwarz.
He says water shortages, disruptive technology growth and aging populations are examples of secular trends he’s watching that lead to investment ideas. Those could include water distribution stocks and retirement residence real estate.
*A previous version of this story stated that managers could short when stocks are overbought or oversold. Return to the corrected sentence.
Katie Keir is Content Editor of Advisor Group.