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  • 07/05/2016

Legg Mason’s Hench not afraid to go small and micro for a prudent bargain


US Small-Caps: Back in the Spotlight

By Kerry Smith

Small-caps were undoubtedly back in play 2016, and leading the way was the Legg Mason Royce US Small Cap Opportunity Fund, which has landed a Best-in-Class award in the US Small-Cap Equity category.

Bill Hench, Portfolio Manager at Royce & Associates in New York – a US smaller companies specialist and subsidiary of Legg Mason – commented: “As is usually the case in a good year, most of the portfolio’s successes in 2016 resulted from opportunities we pursued in 2015 or earlier. This was a time when valuations looked attractively low, and the potential for earnings recovery was promising. And as is always the case, we were prepared to wait for catalysts, usually in the form of earnings improvement, to take effect. It helped that 2016 was a terrific year for small-cap stocks in the US, especially the kind of inexpensive small-cap stocks that we focus on.”

“Our investment process has been the same for as long as we’ve been running the Fund,” said Hench. “We look to buy companies that are cheap, based on book value and price to sales, and we try to see if over time that can be corrected to the point where they are starting to be looked upon as potential growth stocks, and therefore start trading at a higher multiple. If we’re successful in doing that, we can get good performance over the long term.”

Remain Diversified

While the Fund’s managers are fundamental, bottom-up investors who assess the market on a stock-by-stock basis, Hench admits to a long-term bias towards the technology and industrial sectors as areas of perennial interest. The small-cap specialist knows he can often find the kinds of bargains he likes to invest in among these broad and diverse sectors.

What’s more, stocks in cyclical sectors such as tech and industrial are perfectly poised to benefit from an uptick in American economic strength, about which, at least for now, Wall Street seems to be fairly confident. Consequently, in addition to inexpensive valuations and the potential for a turnaround, Hench and team are looking to identify catalysts for improvement with these companies, especially those that are likely to benefit from a stronger economy.

So are there any sectors that Hench deliberately avoids? Not as such: “We don’t avoid sectors as much as we simply don’t find the kind of bargains we like in particular areas of the small-cap market. We’re driven by our approach, which steers us to inexpensive small- and micro-cap stocks, and we are very much bottom-up investors. That said, the fund is usually underweight in consumer staples, energy, financials, healthcare, real estate, telecommunication services and utilities, but we do remain diversified throughout sectors.”

Mindful Research and Risk Management

The team at Royce believe its dedication to research provides an edge when it comes to uncovering hidden gems. As Hench told us, “We’re very careful readers of research and industry journals. We want to be on top of all of the news in our industries because we want to have a sense of where buying opportunities are coming from and when turnarounds look likely to begin. We think our relentless approach to information gathering definitely helps us.”

At any given time, approximately 60% of the Fund’s assets are invested in micro-cap stocks, which can be far riskier than their larger-cap counterparts. That is why Hench must ensure the Fund’s exposure to risk is managed effectively. There are three primary ways he goes about this. First, he keeps the Fund very diversified across sectors and industries; second, he begins to trim positions when they exceed or drop below targets (no more than 1–1.5% of total assets); and third, he buys stocks when they’re very inexpensive based on book value and sales. This helps to ensure that the share prices don’t have much further to drop, though that’s not always the case, of course, so the team also sell or reduce holdings when the price falls to dangerously low levels or when it becomes apparent that the anticipated turnaround is not materializing.

Distinctive Themes

The management team also ensure that each of the Fund’s holdings falls within one of four distinctive themes: unrecognized asset values, turnarounds, undervalued growth and interrupted earnings. Hench’s disciplined value approach means that he is usually looking for stocks that trade at discounts of 50% or more to what he estimates their value to be, as a business that also has the potential to reverse their downward trend. It’s an approach that’s clearly worked for Hench during this small-cap rally, but how is the Fund positioned for the uncertainty on the horizon?

What Does 2017 Hold in Store for the Small-Cap Investor?

The new administration in Washington and the Republican-controlled Congress are expected to ease business regulations, which could have a significant impact on the smaller-company market. For his part, Hench thinks there may be increased momentum of business improvement, combined with a release of pent-up demand from the inhibited environment of the six months before the election.

“In addition,” he added, “employment is strong, and consumer balance sheets are in better shape. What’s more, expansionary fiscal policy should ultimately be implemented at a reasonable pace –assuming the conservative Congress restrains spending so as not to balloon the federal deficit. Along with a lower corporate tax rate, these changes would mean good things for small-cap companies.”

While there are still some unknowns about how the new administration’s policies will play out, certainly the performance of small-cap stocks in 2017 will depend on a growing economy and higher earnings. Hench is staying focused on areas that should ultimately benefit from economic tailwinds, including non-residential construction, industrial companies and technology companies—many of which were strong in 2016. Domestically focused companies may also stand to benefit from President Donald Trump’s “Buy American” theme, and the Fund is being positioned accordingly.

Hench believes the biggest headwind in 2017 will likely be higher interest rates, which as he put it, “is essentially a tax on consumers that reduces spending and creates higher interest costs for the government, which will increase the federal deficit.” A headwind may also result from uncertainty around federal spending: as Trump settles into the presidency and begins to enact legislation, it will be at least the second half of the year before specific spending plans start to be implemented. Lastly, there could be subdued international trade as the various participants hesitate until US policy is more clearly defined.

However, these headwinds should be more prevalent in the first part of the year, before giving way to a better environment in the second half, in Hench’s view. If anything, facing down the uncertain investment climate only reinforces his commitment to seeking out companies that are prudently managed, with consistent earnings, and inexpensive valuations. “In my opinion,” Hench said, “it is a good thing that investors are showing renewed appreciation for the fundamentals.” BM

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美國小型股:再度成為觸目焦點

Kerry Smith 撰文

2016年的小型股無疑重回戰場,令美盛銳思美國小型資本機會基金獨領風騷,更獲得美國小型股同級最佳表現獎。

美盛旗下的銳思投資主攻美國小型公司,而位於紐約的投資經理Bill Hench評論:「跟以往豐收年的情況一樣,基金組合在2016年獲得的盈利大部份是源自2015年或之前所作的投資部署。當時的股價實在低得無法抗拒,而且復蘇機會極高。就像過往那樣,我們磨拳擦掌,等待刺激股價的催化劑(通常為盈利增長)。這方法萬試萬靈,尤其是我們專注於廉宜小型股,而美國小型股在2016年表現非常理想。」

Hench說:「我們管理基金的方法始於如一,藉低價買入股票,透過分析其賬面價值和市銷率,同時觀察它們能否隨著時間而轉為潛力增長股,然後以高價進行交易。如果能成功做到這點,我們將可長期獲得良好的表現。」

保持產品組合多元化

當坊間的基金經理逐股分析、由下至上做基礎研究時,作為小型公司專家的Hench卻承認自己長期對科技和工業板塊情有獨鍾,全因他們廣泛且多樣化的選擇,並且蘊藏大量投資機遇。

更重要的是,週期性行業的股票,例如科技和工業股,極有望受惠於美國經濟增長,至少目前華爾街對此還相當有信心。因此,除了低價和反彈潛力外,Hench及其管理團隊正在努力發掘目標公司的增長動力,尤其那些可望從經濟轉強中受惠的公司。

Hench是否有意避開某些行業呢?他不這樣認為:「我們沒有刻意避開任何行業,只是在某些類別的小型股市場內並沒有我們尋找的機遇。基於由下至上的股票策略研究,我們傾向選擇便宜的小型股和微型股。即使我們對部份行業持偏低比重,如基本消費品、能源、金融、健康護理、房地產、電訊服務和公共事業,基金依然保持分散投資於不同行業。」

謹慎研究及管理基金風險

銳思投資相信,認真投入研究,可發掘隱藏的潛力股。正如Hench所說:「我們謹慎閱讀各種研究報告和行業期刊,試圖掌握行業的所有消息,藉此了解下一個投資機會以及預測反彈週期。這種堅持不懈的資料搜集,絕對幫了大忙。」

無論什麼情況,基金投資約六成資產於微型股*,其風險遠遠大於大型股。正因如此,Hench必須有效地管理基金的風險。管理模式主要分為三種:一、基金保持分散投資於各板塊及行業;二、當股票高於或低過目標價時(不超過資產總值的1-1.5%)開始進行調整;三、只有股票的賬面價值和市銷率非常低時才買入。這些方法能避免股價進一步下跌所影響,當然有時還是事與願違,所以當股價跌至危險水平,或預期的反彈明顯無望時,管理團隊亦會選擇沽售或減持。

宗旨明確 作風獨特

管理團隊還確保基金內每個成份股,均符合以下四個條件之一:資產價值被忽略、經營轉機、增長潛力被低估以及盈利受阻。根據謹慎的價值型選股方法,Hench鍾情的股票一般低於估值50%或以上、股價具反彈潛力。顯然,此方法助Hench在小型股基金組合上取得成功,但基金又如何在未來的不確定性中定位呢?

2017年小型股投資策略

美國新政府與共和黨為主的國會預計將會放寬對美國企業的監管,無疑對小型企業的市場環境帶來巨大改變。Hench則認為營商環境將陸續改善,而在選舉前六個月所受抑壓的需求將再度釋放。

Hench繼續分析:「就業強勁和消費者的資產負債表狀況好轉;此外,假設國會偏向保守,為避免擴大儲備赤字而限制支出,那麼積極的財政政策最終會以合理的步伐實施;再加上下調利得稅,對小型企業來說,統統是利好消息。」

雖然新政府的政策影響仍為未知之數,但肯定的是,小型股於2017年的表現將取決於經濟以及收入增長。 Hench對最終受惠於經濟轉強的行業特別留意,包括非住宅建築、工業以及科技業,當中有不少股份在2016年走勢強勁。集中美國內需的公司或會受惠於特朗普「買美國貨」的施政方針,而基金亦會因應巿場情況而改變定位。

Hench認為2017年最大隱憂將會是美國加息,他認為:「這等於向消費者徵稅,從而減少消費者開支,以及增加政府的利息成本、擴大財政儲備的赤字。」另一大隱憂是聯邦儲備的開支仍是未知數,具體政策最快在作為新任總統的特朗普安頓下來才開始立法,接著要下半年後才開始實施。所以,在美國有明確具體的政策前,各界別均會處於觀望狀態,國際貿易亦可能變得淡靜。

然而,Hench認為在等待下半年出現更利好的投資環境前,上半年應該阻勢重重。無論任何不明朗的投資環境下,Hench依然堅守宗旨,發掘具備審慎管理、穩定收益及股價被低估的公司。最後Hench總結:「投資者重新欣賞基本因素,未嘗不是一件好事。」 BM

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