Against the herd
In times of volatility, heading for safety is often the wrong investment decision, says Tye Bousada of EdgePoint Wealth Management.
When fear and volatility rise on markets, a handful of safe sectors almost always benefit.
Nervous investors are quick to flock to utilities because, no matter how badly the economy does in the next year, people will still buy electricity. They flock to telecoms – people will still pay their phone bills. And they flock to consumer staples – people will still brush their teeth. But if buying into such sectors seems wise when markets have fallen, such a strategy rarely makes money, argues Tye Bousada of EdgePoint Wealth Management.
“When we look at those sectors during periods of fear, we don’t see a lot of opportunity to buy growth and not pay for it,” says Bousada. “In fact, we see those sectors as the opposite of safe because it appears a lot of people take comfort from hiding there, which drives up the valuations.”
Bousada gives the example of 11 February this year, when markets around the world reached a multi-month low following a period of heightened volatility. At that time the best-performing sectors since the start of 2016, Bousada points out, had been the utilities sector (which stayed flat), telecoms (down around 2%) and consumer staples (down around 3%). The index itself had fallen by close to 11.5%.
“This bout of volatility seemed to follow the same playbook as previous bouts – we believed it presented an enormous amount of opportunity,” says Bousada. “If you look at the names that we added during that period of volatility, a number were in the worst-performing sectors, such as industrials and energy.”
One such name was TEAM Industrial Services, a billion-dollar company that maintains and inspects businesses in the refining and utilities sector. Among other work, TEAM inspects piping to ensure good functionality. Bousada says the company has two main sources of growth.
“The first is organic – when the company, say, visits a refinery to inspect pipe, it will notice other services that are required and offer them to the owner – today they offer some dozen different services and control about 30% of the market,” says Bousada. “The second way the company grows is through acquisitions, typically to access a specific technology. TEAM has actually acquired its largest two competitors.”
The result, Bousada points out, is share earnings growth of around 15% a year. Yet despite these strong qualities, the stock suffered as the price of oil plummeted. A few weeks ago EdgePoint was able to buy stock in the company at ten times earnings.
“Today it’s closer to 12, and even at 12 it’s very attractive, given the growth opportunities ahead,” says Bousada. “Over the next five years, this is a company that could even double its size and its earnings. If that happens, investors are likely to experience very strong returns.”
The price of popularity
Bousada’s contrarianism was also in evidence in a recent stock sale. As the oil price went down, offering airlines a boost, Bousada sold a stake in Ryanair that he had held since 2008.
“When we started buying Ryanair at below £3 in 2008, we saw a business that was going to be able to grow for years even if the economy was very weak,” says Bousada. “This was a low-cost airline whose techniques its competitors just couldn’t copy. Moreover, we actually thought a tougher economy would be better for Ryanair as people would typically trade down from high-cost alternatives like BA and Lufthansa.”
Once you add in special dividends, that long-term holding quadrupled in value, offering a significant boost to the portfolio. Crucially, the market was slow to pick up on Ryanair’s strength.
“But at the end of last year, we no longer saw something that others didn’t,” he says. “That’s a fancy way of saying that, if we can no longer buy growth for free, we’ll sell the business and move the money elsewhere – which is exactly what we did.”
For long-term investors, knowing when to leave is almost as important as knowing when to step in.
Tye Bousada of EdgePoint is a co-manager of the St. James’s Place Global Equity fund. The opinions expressed are those of Tye Bousada and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
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