Arising tide lifted all boats in global markets last year, with some rising higher than the others. T. Rowe Price, winner of the Best-in-Class in the Top Fund Awards (Retail) for its Global Large- Cap Growth Equity strategy, has successfully ridden the synchronized global growth to create compelling value for investors. At the helm of the strategy are Portfolio Manager David Eiswert and Portfolio Specialist Laurence Taylor. The duo told us how the team unearths growth potential in an already elevated market, and where opportunities exist in2018 and beyond.
BENCHMARK (BM): Your flagship fund, T. Rowe Price Global Focused Growth Equity Fund, has consistently outperformed benchmark in the past few years. What contributed to the outperformance?
Laurence Taylor (LT): Yes, the solid track record is anchored in our focus on stocks with improving business fundamentals on the right side of change. In 2017, information technology was a key driver of our portfolio outperformance. We have high conviction in the technology sector, where rapid market share shifts mean growth companies are plentiful regardless of the broader macroeconomic environment. Healthcare was another significant contributor to relative returns, where we have focused on idiosyncratic, somewhat contrarian names, particularly in biotechnology and pharmaceuticals.
BM: Thank you for sharing your sector views. Geographical-wise, your bottom-up security selection has led to a bias toward U.S. equities. How would this change and where do you find growth in 2018?
David Eiswert (DE): You’re right that while we aim to ensure the portfolio is diversified through conscious stock, sector, and country allocation decisions, our approach is very much bottom-up, focusing on finding stocks characterized by growth and improvement. We continue to find many companies that fit this profile in the U.S.
Outside of the U.S., continued economic recovery in China last year gave a boost to Germany, France, and Italy, which benefited from stronger exports, but outside of China’s growth, there are not a lot of growth drivers in Europe. With the re-emergence of potential political risks in Germany resulting from Merkel’s difficulties in forming a coalition and uncertainty around Brexit negotiations remaining, we feel the region does not look as attractive from an investment standpoint as it did in the fall of 2016. In Japan, valuations are relatively attractive, but investors need to be selective in what they own.
BM: You just mentioned valuations. When many stocks are already trading at a premium, how do you approach stock selection? And can you tell us how you manage risk?
DE: In our view, most stocks seem relatively fairly valued, and we want to own durable companies that can grow earnings and are not too expensive. We remain constructive that there are enough drivers in place to maintain and potentially elevate equity market levels. Economic growth and inflation are likely to remain subdued, which, all else being equal, should be favorable for me as a “growth” manager. Ultimately, companies delivering stronger earnings growth will be crucial.
To your second question, risk management is integrated directly into our investment process. We are highly conscious of the potential for volatility in a focused portfolio, and close attention is paid to risk factors both at the security and the overall portfolio level. Added to that, we never forget the importance of both valuation and the relevance of a business in the future. That’s why the fundamental research from our global analyst platform is crucial for the early detection of events or trends that can affect the valuation or fundamentals of a company.
BM: After the strong rally in 2017, do you see any headwinds in the global large-cap space in 2018?
LT: 2017 was an exceptional year in many ways, and potential headwinds abound in 2018. In corporate profit terms, whether it’s European exporters facing euro strength or the secular growth winners facing blowout, year-on-year earnings comparisons, there likely will be some disappointment to potentially shake the confidence, assumptions, and time horizons of investors. Political risks are likely to also hover over markets as Brexit and the US midterm elections approach, with scope for the protest vote likely to re-emerge as time passes. Economic data are also likely to challenge those with less confidence in their positions as China’s stimulus program fades.
We may (and indeed have already in 2018) experience more volatility, but this should not be confused with the end of this bull market. One way or another, the unknowns of the cycle will mean that we will be offered opportunities to refresh the portfolio on weakness at some stage before this bull market eventually ends. BM