How I managed my Portfolios U.S. and Emerging Markets Martin DeBovis, PhD Feb. 13, 2008
Funds Managed Managed a Large Cap Value Fund from 1991 through 1999, a semi quant fund - $500 million In 1994 I started up the Latin American component of an emerging market fund In 1996 I took on the responsibility of managing the East European, Greek, Israeli, and Russian portfolios Total Emerging Market assets $600 million I always wanted to be a portfolio manager!!
Mandate – Large Cap & Low P/E Investment Universe – 1,000 largest market cap stocks Investment style - Value. Strategy was long only with a long term investment horizon? Primary screening tool - P/E – Price divided by trailing operating earnings (Back test suggest that over the long term low P/E stocks out perform high P/E stocks Portfolio held 80 to100 stocks Rebalance monthly – at the end of the month some stocks may no longer be low P/E, fundamentals may have changed, or there may be a stock I like better. Formal benchmark - S&P500, Style benchmark - Russell 1000 Value
Portfolio Construction Quantitative Tools – Quants use the following to form an equation that forecast expected return (Alpha) Valuation – P/E, Price/Book Value, Dividend Yield, and P/Cash Flow absolute and relative to their sector. Estimate data – What is the stock expected to earn in the next quarter or fiscal year. Most Wall Street firms supply earnings estimates. Sentiment – are analyst raising or lowering their estimates? Upward revision may indicate that a stock price is likely to rise. Momentum – is the stock price rising or falling.
Portfolio Construction Fundamental Tools Avoid a value trap –a companies valuations are low because its business model is flawed and not likely to perform well – Polaroid, Xerox, GM Analyst input – analyst at money management firms study company fundamentals – Income, cash flow, and balance sheet and build models to project company earnings. They can provide information that is not captured by quantitative tools. Does this stock make sense in the current economic environment or market?
What I learned • Be patient – If the underlying fundamental haven’t changed it may take a while for a stock to start moving • Don’t fall in love with a stock. If you lose money on a stock and the fundamentals have changed – don’t hold on to it, expecting to get your money back. Accept the loss and move on. • Valuation matters – don’t pay too much for a stocks with low expected earnings growth • Investing is a lot of work and requires paying a lot of attention to details • Understand your investments
Emerging Markets • Managing an EM portfolio is a much more complex process • Funds run as separate country portfolios which required dealing with country specific benchmarks and managing 12 separate portfolios • Followed a value investment strategy – value does not always work • Markets can be extremely volatile but present tremendous investment opportunity as the developing countries grow their economies • A safer way to invest in EM is to invest in companies that derive earnings from the developing economies such as Coca Cola and GE • More later