T. Rowe Price
- ‘Buy and hold’ is the recommended strategy for many investors who want to profit from stocks in the long term.
- However, the $55 million T. Rowe Price Global Focused Growth Equity Fund has entered the 98th percentile of funds over the past five years by doing the opposite: trading aggressively during periods of volatility.
- In interviews with Business Insider, the firm’s portfolio managers broke down how they deploy their nimble strategy and the companies they’re counting on for continued success.
Buying and holding on to a diverse portfolio of US stocks has proven to be a formidable long-term investing strategy.
This tactic is not the exclusive domain of exchange-traded funds and other passive strategies. Many active fund managers also pride themselves in formulating theses for specific companies and defending their convictions even during the worst market crashes.
But what if there’s a way to do even better? Being aggressive when others are doing nothing has been a key strength of the T. Rowe Price Global Focused Growth Equity Fund, according to David Eiswert, its manager, and Laurence Taylor, its portfolio specialist.
The $55 million fund has a lofty 112% turnover ratio according to Morningstar, indicating that there’s a lot of movement in and out of positions.
According to Taylor, this practice — often waved as a red flag to retail investors — has made the difference between being an average fund and one that outperforms most its peers. Their growth fund has landed in the 98th percentile of its universe over the past five years, Bloomberg data shows, even after a massive rally in growth stocks relative to value in the same timeframe.
"Adding value through trading is something that your clients can’t do on their own," Eiswert told Business Insider by phone.
He continued: "A mistake retail investors make is they get overexcited or they get overly depressed. We actually use the market in our favor."
Selling when others are buying
In other words, he’s striving to do the opposite of what retail investors would instinctively do.
Take Alibaba, for example, which was the fund’s sixth-largest holding as of March 31. It wasn’t a top-ten holding last spring, when the stock was rallying to an all-time high. Instead of buying more on the way up, Eiswert defied the momentum and reduced his position all the way down to about 1% of the fund’s holdings.
That decision helped avoid the losses that followed: The stock peaked at a record high in June, then plummeted by as much as 30% into the fourth quarter as investors worried about the US-China trade war. Amid this sell-off, and as other investors rushed for the exits, the fund loaded up on enough shares to make it a top-10 holding. Alibaba has since gained 41% from its December low.
"Our job is to recognize when the market has gone too far," Eiswert said.
Even with the explosion of exchange-traded funds that promise nearly everything an active manager can deliver — from factors like quality to portfolio hedging — Eiswert says fund managers like himself still have the edge to produce outperformance.
His strategy is to focus on finding insights into companies with strong balance sheets that can improve their future returns even in a low-growth economy. One firm that fits this profile is Exact Sciences, which makes a home colon-cancer-screening test. It provides a convenient solution to a product that will be needed regardless of the economic environment, Taylor said.
The fund also seeks companies that analysts are too pessimistic about — meaning they can easily beat earnings expectations.
Lastly, Eiswert looks for companies trading at reasonable valuations. This doesn’t only mean low price-to-earnings ratios, because growth stocks should also be considered for their free cash flow and profits.
Taylor gave the example of Facebook, which traded at 85 times its earnings shortly after it went public. It’s now trading at a ‘more reasonable’ P/E of about 25 — after a nearly 400% rally that investors who thought it was overvalued have missed out on.
In some cases, Eiswert’s strategy means buying the popular growth names like Alphabet, Eiswert’s largest holding, and Netflix. But at other times, it leads his fund into more obscure companies like Essity, a Swedish company that makes toilet paper and other personal-hygiene products.
- A fund manager dominating 95% of his competitors reveals the stock picks that have given him the biggest boost — and shares his big bet for the future
- One of America’s top-ranked wealth managers details a huge strategic change she made after 20 years of success — and says she’d do it again in a heartbeat
- Here’s how the corporate-merger explosion could accelerate a market crash and make the next recession even worse