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  • 07/09/2017

Active Management at its Best



Active Management at its Best


t-roweScott Berg is the Portfolio Manager for the T. Rowe Price Global Growth Equity Strategy and a vice president of T. Rowe Price Group, Inc. Mr. Berg has 12 years of investment experience, all of which have been with T. Rowe Price. He joined the firm in 2002 as a research analyst covering the business services sector. Prior to this, he was the Manager of Financial Analysis and Planning for Mead Consumer and Office Products, where he was responsible for his division’s annual business plan. Previously, Mr. Berg was employed by McKinsey & Company as a business analyst and was a core team member on the firm’s global growth initiative. Mr. Berg graduated first in his class from Macquarie University in Australia, with a B.Ec. in actuarial studies and finance. He also holds an M.B.A. from the Stanford Graduate School of Business and has earned the Chartered Financial Analyst designation.

The T. Rowe Price approach to its Global Equity portfolio is the very definition of active management. Scott Berg is the Lead Portfolio Manager for the Global Growth Equity Fund. He has overall responsibility for all decisions regarding investment strategy, portfolio construction and security selection.

“The strategy is truly global in nature,” he says. “This stems from a combination of research depth and the broad geographical travels of the investment team constructing the portfolio. We have a research platform of over 130 analysts located across the globe, and we use them all for ideas. This allows us to seek out the highest quality companies in every industry regardless of geography, and to compare those ideas day in day out. Unlike many competitors, we are very willing to go off the beaten path to find the best opportunities for our strategy and hold ourselves to a ‘truly global’ standard. The breadth of our buy list also means we can construct a high conviction portfolio without sacrificing the benefits of diversification.”

 

High conviction strategy

The foundation of T. Rowe Price’s approach is a belief that active management, driven by bottom-up fundamental research, can uncover and exploit anomalies among global equities. Berg says, “The strategy applies a truly global, high-conviction and growth-oriented approach, but with a mindset that valuation always matters in generating alpha and in controlling absolute and relative risks. The strategy maintains a focus on companies that we believe offer sustainability and robustness in their future earnings and cash flow growth, that have strong business models, and that apply rational deployment of capital.”

The fund is benchmarked against the MSCI All Country World Index, and a peer group of similarly managed portfolios over a full market cycle. The expected tracking error is 300 to 700 basis points. The truly active nature of the portfolio is demonstrated by portfolio turnover that is in the 100% range on an annual basis. Berg says, “While this would imply a one-year holding period, half of the turnover stems from our global comparison of stocks and our active approach to position sizing in periods of volatility. When initiating a position, we generally take longer term view, greater than three years.”

From the investment team’s perspective, there are three primary factors that result in stock turnover: “The first is market volatility; we are always sensitive to valuation. As stock prices make dramatic movements, we will adjust position sizes to reflect a significant change in our level of conviction.“

“The second factor is what we call ‘Thesis change’; when we uncover new information that significantly weakens our thesis, we will be disciplined and eliminate the stock from the portfolio. Often our thesis will come to fruition sooner than we expect, as the market comes to share our viewpoint on the stock. In this case we will eliminate the stock before our expected holding period was reached.”

“The third component of turnover is forced displacement, where we find better ideas looking across global sectors.”

A wide variety of analysis tools and metrics are used in the stock selection process. The T. Rowe Price analysts are given a great deal of scope, as Berg explains: “Our research heads actively promote a culture of flexibility for our analysts to focus on the most important criteria for a particular company, industry, and investment environment. We believe that rather than concentrating on using any one individual methodology, a mosaic of valuation approaches makes sense.“

“More importantly, based on their in depth knowledge of a company, our analysts forecast earnings over a minimum of 3 years and apply a target multiple based on their view of the most appropriate measure of valuation. This exercise turns their estimate of earnings into a price target and annualised absolute return estimate. Alongside quantifying potential return, our analysts will provide a qualitative assessment of the fundamental factors driving their estimates as well as a view on how the target multiple has been set. Risk factors will also be flagged explicitly within the stock note. Avoiding earnings disappointment driven by weak or deteriorating corporate prospects whilst capturing unanticipated growth is a key driver of stock returns over time and is dependent on unique insight and a depth of knowledge.”

 

Valuation always matters

As with all successful long term fund managers, T. Rowe Price pays a lot of attention to minimising downside risk. Risk management factors are evident through every step of the firm’s investment process, especially with a high-conviction, growth-oriented portfolio like the Global Growth Equity Fund. The foundation of T.Rowe Price’s approach is a belief that active management, driven by bottom-up fundamental research, can uncover and exploit anomalies among global equities. The strategy applies a truly global, high-conviction and growth-oriented approach, but with a mindset that valuation always matters in generating alpha and in controlling absolute and relative risks. The strategy maintains a focus on companies that T. Rowe Price believes offer sustainability and robustness in their future earnings and cash flow growth; that have strong business models, and that apply rational deployment of capital.

In addition to the fundamental assessment of risk which is integrated directly into the investment process by the analysts and portfolio management team, they use a number of risk assessment and review techniques, as additional layers of mitigation. These include:

• Proprietary evaluation tools provided by the Investment Risk team and discussed formally with the Portfolio Manager and Steering Committee that measure stock, sector, industry, style and factor exposures.

• Global risk models from Barra and Citigroup are used to estimate tracking error and to understand benchmark relative exposures to various risk factors, such as interest rates, commodity prices, growth, value and size.

• The Wilshire Atlas performance attribution system to assess the effectiveness of various elements of the investment approach, such as individual stock selection.

•  The Zephyr Style Advisor to monitor the consistency of the investment style and the sources of added value and volatility in the strategy.

Scott Berg works closely with T. Rowe Price’s Global Equity Investment Advisory Committee of regional and global sector specialists. The advisory committee provides investment ideas and insights that facilitate the comparison of stocks on a global basis. Ideas of the best securities from the global universe are promoted by the sector and regional specialists to Scott Berg for construction of his high-conviction portfolio. However, this committee has no voting rights in the security selection for the strategy. This structure allows Scott Berg to leverage the firm’s global resources to construct his highest-conviction portfolio. BM

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