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Amber Sinha, senior portfolio manager, CIBC Global Asset Management.
Growth has been the clear winner for a few reasons. One being that, frankly, we’ve had sub-optimal GDP growth across many jurisdictions in this cycle. So we’ve not really had a strong, booming economy. Instead, we’ve had one where the economy seems to be functioning a little bit below its potential. So I think that certainly helps growth stocks because growth is hard to find, I think, in that environment. The other thing that has definitely helped growth is the low [interest] rates. So the biggest and most lasting response to the financial crisis of 2008/9 was lower rates across all jurisdictions. So that also tends to kind of supercharge growth stocks because we’re eventually discounting their future cash flows at lower and lower interest rates, so that tends to help growth stocks also.
And the third [factor], I would say — another very powerful reason — would be technology. So technology, globally, has been the leader in this cycle. If you look at the big technology stocks, whether it’s in the U.S. or, more recently in China, they have clearly been leaders. They have been winners in the stock market and these fall under the growth umbrella, so to say. Yeah, so I think put these three things together, it’s been a fairly powerful trend where growth has outperformed value consistently over many years. Value, I would say, would work if we had stronger economic growth on its own, as opposed to a growth driven by stimulus. And when that time comes, I think these trends might change a little bit.
What our style is, is to get adequate representation from all sectors, from all geography, so [we] run a truly globally diversified portfolio. And in that sense, you cannot really be either fully growth or fully value. What we are trying to do is quality. So what quality does for us is that it makes available all sectors, all geography, because in the large universe of the MSCI world, there’s obviously lots to choose from. So while a value manager might not buy technology stocks, we want to buy some. While a growth manager would not want to buy energy or financial, we might want to buy some. So again, we are trying to shake off the growth and value buckets, and instead trying to go with the overarching quality theme.
Now quality also tends to benefit in a low interest rate regime. So some of the trends that help growth stocks will help quality stocks as well. And I’m sure our portfolios have benefited from that. If you look at our portfolio today compared to the end of 2019, it would not look that different. And I think that’s a good thing because we are ultimately trying to build a core portfolio of high-quality stocks for the long run. So it wouldn’t be in our interest to be constantly churning the portfolio towards the flavour of the month or the flavour of the quarter. So we want to build a portfolio that doesn’t look very different every two to six months. So, that is one comment.
Despite that, we have obviously been making some changes. Some areas where we have been looking to add exposure is outside the U.S.. Now, we’ve seen a very strong recovery in the S&P 500, where the markets are actually higher now than they were at the end of December 2019. At the end of December 2019, think of where we were: there was no recession in sight, Covid was going to be a small problem, limited to China. In reality, things are very different. We’ve seen a coordinated global recession and Covid has still, even if we have passed the peak, it still continues to impact our daily life.
So, based on that, I think the U.S. recovery in the stock market has probably run a little bit ahead of itself. For that reason, we are spending more of our time looking at ideas non-US, so that would be one change. And the other thing I would say is that the election is also upon us in the U.S. So we are trying to steer clear of names that could be controversial around an election or stocks that could have a binary outcome depending on whether Trump wins or the Democrats win. So again, in our business, we tend to shy away from taking such risks, and as a result, we’ve tried to clear the portfolio of some binary type of outcomes that could result from an election.
Some of the stocks that we have been looking at through the quality lens — and I can give you an example of something that we’ve been recently doing work on. It’s an American company called TransUnion. It’s one of the bigger credit bureaus in the U.S.. Again, I would say it meets a lot of the things that we look for in stocks, in terms of a higher quality, which is strong management, sustainable competitive advantages, a healthy balance sheet and higher returns. And TransUnion tends to check all those boxes. Now, with this example, there are obviously some questions like there are with every stock on TransUnion as well, which would include what is the impact of housing? What’s the impact of lending of the Covid-related recession?
So our view on TransUnion is that it’s a very high-quality franchise, and despite the near term disruption, we are able to and we are willing to look beyond that towards the actual value of that franchise. And that’s the kind of angle that we look at for stocks. So again, TransUnion wouldn’t typically be a growth stock or a value stock; it’s just a good company. It’s a great company where we see the longer-term opportunity as being worth taking the risk at this point.