Growth manager argues growth is back
Growth is back. At least that is the argument at Janus Capital, the Denver, Colorado-based fund management company. Marc Pinto, vice president and portfolio manager responsible for about $2 billion in US and international big-cap equities and diversified growth portfolios, is in Hong Kong this week for the CSFB investor conference. He is also meeting companies that have a bearing on his portfolio in America: about 15% of his stocks are now issued by non-US companies, reflecting the deepening of global capital markets.
"It's caused me to broaden my horizons further," Pinto says. "And China has such a big impact on companies' pricing power."
His case is straightforward. Since the end of the three-year equities bear markets of 2000-2002, value stocks have been in favour, which makes sense because value investing does relatively better in times of weak economies. But the US economy turned its corner in 2002.
Usually, Pinto says, growth investing returns to favour after two-and-a-half years beyond such turning points. This time, investors have stuck to value strategies longer - wrongly, because growth stocks are more attractive, he believes.
Improved earnings growth and returns on equity allow growth portfolios such as his to outperform, and he says recent performance has confirmed the theory.
Pinto is a bottom-up stock picker, not an economist, but he believes the macro picture looks bright, and sustainable. "I see continued improvements in the economy," he says. "Corporate balance sheets have never been stronger. Most companies have paid off their debt and now have net cash positions. That's a very positive sign. The US consumer was very strong through turbulent times; what had been lacking had been corporate investment. But now we see companies loosening the purse strings and making capital expenditures."
But what about all the red alarms over the US economy's imbalances - the current account and budget deficits, the weakening dollar, the massive consumer indebtedness?
Pinto acknowledges these risks exist. His main concern is the sustainability of consumption, now that interest rates are starting to rise. "It's clear the money saved from lower mortgage rates has gone into the cash registers of major US retailers," he says.
Two other risks: oil prices over $50/barrel, and the uncertain appetite of Asian central banks to hold dollar deposits - and thus allow America to keep its interest rates low.
Pinto keeps an eye on these things but has yet to see a flashing danger sign.
Consumers at the lowest end seem to have suffered a bit: sales at WalMart have slowed. But other retailers that cater to a more middle class market continue to do well.
Although central banks such as Korea's have said they will diversify their portfolios, the two that count, China and Japan, continue to remain content to hold dollars.
As regards high oil prices, they are beginning to have an effect, with major US car companies cutting back SUV production, but so far the economy has held up surprisingly well. Pinto thinks the $50-plus oil prices are an aberration and will subside, albeit not to 1990s levels. Moreover, low interest rates and low mortgage rates have taken the edge off any price rises at the gas pump. Finally, while energy prices do heavily impact many companies such as chemical producers, strong demand has allowed them to pass the costs on to customers and not hurt balance sheets.
The only real concern for an otherwise bullish Pinto is America's budget deficit, now over $600 billion, roughly 6% of GDP, which drags down the dollar. With tax cuts and fiscal problems in Social Security and Medicare, the deficit is a problem that must be solved. But from a portfolio manager's point of view, it affects different companies in myriad ways, and can even help some, such as HMOs, that focus on reducing healthcare costs.
Beyond these concerns, Pinto notes there are other trends that bolster America's economic health, notably recent laws upgrading transparency and improving accounting standards, following crises such as Enron's collapse.
"Yes these account standards can be a burden to companies, but it gives investors confidence that the numbers we see are real," he says. "Accounting standards in areas such as expensing options have become more conservative, which further improves the quality of reported earnings. Yes, there are risks. But there are always risks, and the outlook is favourable. Large-cap companies have resumed capital expenditure and improved their balance sheets."
Although a stock picker, Pinto says there may be cycles that create sector bets. Right now energy is the only one. For other big sectors such as healthcare - which now comprises 24% of his flagship portfolio - it is more a matter of being in high-growth sub-sectors such as biotech and HMOs, and avoiding big pharmaceutical companies.
It is similar in technology, where the biggest players have limited room to grow but where smaller niche companies such as laser printer manufacturers can do well. (Pinto reckons biotech companies are the most likely to offer a surprise on the upside, because they are involved in real R&D, not in spinning out me-too drugs.)
Energy, though, is exceptional. "Last year it didn't matter where you invested in energy, and that fact is carrying through this year," he says, noting that companies' forecasts have been re-rated to assume oil prices around $35/barrel, rather than $25/barrel. That's driven less by supply bottlenecks - the supply situation hasn't changed much - but by demand from China and the US. "We're still driving SUVs around," Pinto notes.