Key points
- Balancing both value and growth styles can help to mitigate portfolio risk and reduce the need for investors to have conviction in either style.
- We adopt a concentrated approach that demonstrates conviction and seeks to take advantage of the most actionable ideas from our global research platform.
- The strategy aims to deliver alpha by focusing on individual stocks versus large style or cyclical bets, offering potential to add value across different market environments.
Heightened market volatility challenged the conviction of asset allocators in 2022 as inflation ballooned to 40‑year highs and led the U.S. Federal Reserve to deliver some of the sharpest sets of interest rate hikes in recent history. The rising rate environment benefited value areas of the market, while punishing many growth stocks. However, even in a tough environment dominated by an exceptionally strong style effect, the Global Select Equity Composite kept pace with the MSCI World Index, eliminating the need for asset allocators to have conviction in either growth or value.
We operate a core approach that is style balanced between both growth and value stocks, which allows the opportunity to create alpha by focusing on individual stocks with idiosyncratic drivers of relative returns regardless of the market environment. This balanced approach helps to reduce the risk of being on the wrong side of any large style swings that can occur between growth and value.
A Concentrated Portfolio Demonstrates Conviction in Ideas
We believe focusing on investing in our best ideas can help deliver alpha in both up and down markets, as well as in markets that are led by growth or value. As a long‑term, bottom‑up investor, we want our stock selection to be the main driver of alpha and to not have the portfolio returns dictated by macro factors or style bets. Therefore, the strategy implements a high‑conviction, bottom‑up approach to portfolio management with a framework that emphasizes business quality and risk control. The representative portfolio is typically concentrated in 30-45 stocks and is designed to be less benchmark‑centric with high active share. Leveraging the best thinking of T. Rowe Price's global research platform, we focus on stocks where we believe we have an edge and a potentially favourable risk‑adjusted return outcome.
While our focus is on idiosyncratic ideas, given our global mandate, we incorporate different types of stocks with different risk profiles and factor exposures into our analysis. Stock level risk and factor exposure is managed in concert with our detailed bottom‑up, fundamental analysis to ensure that the portfolio is not defined by style or macro‑specific outcomes. At a stock level, for example, some companies with large export‑oriented businesses have been hindered by the recent strength of the U.S. dollar, while there are companies that have suffered due to China's zero‑COVID policy. More generally, higher inflation has negatively impacted companies as input costs have risen. Conversely, there have been clear beneficiaries of higher prices with energy companies a clear example. This reflects the bifurcation within equity markets and the types of risk we must balance to build a portfolio with alpha potential in varying market environments.
The Importance of Following Investment Principles and a Clear Investment Process
Our approach is to own proven, growing businesses that we believe can improve profitability and cash generation at attractive valuation points, but also to be sensitive when valuations may appear close to extreme levels, especially when managing our sell discipline.
When constructing a concentrated portfolio, it is crucial to understand the drivers behind stock performance. The macro variables that can drive stocks need to be balanced to control risk. We seek to create alpha by balancing unsystematic risk and focusing on companies that we believe are positioned to outperform relative to their peer group. Stock returns within the same sector or industry can exhibit notable dispersion, so we aim to identify the durable and resilient companies that can demonstrate pricing power, barriers to entry, and sustainable advantages over time. Research is crucial here to figure out who has, or is developing, an advantage and is winning in their marketplaces. This helps to refine stock‑picking ideas considerably.
This research is also immensely useful when stocks are undergoing periods of distressed sentiment but transitioning to a better outlook. While it is always tempting to wait for patterns of recovery to be established, early identification of fundamentals stabilizing, or the "stop getting worse" point, is crucial to return generation.
In all cases, we would emphasize our desire to remain disciplined around valuation and remain continuously engaged with companies. Not only is it important to meet companies face to face, visit their stores and factories, etc., but we also need to meet with their competitors at the same time to build a complete picture of the opportunity set.
This post was funded by T. Rowe Price
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