Portfolio Manager explains why he opts for fundamentals over narrative
Each month at WP we offer a slate of articles and content pieces that go deep on a particular topic. This March we’re focusing on global markets.
There’s a case to be made that the investment industry suffers from an overabundance of narrative. Markets are the means by which countless pieces of disparate information, from geopolitical tension, through technological advancement, to quarterly earnings, are digested, distilled, and expressed in price movements. As humans, we crave stories that can make sense of the world, and so those price movements are folded neatly into narratives, delivered to advisors, clients, and portfolio managers, who digest those narratives and make market decisions accordingly. One of the narratives that has prevailed in the past 18-24 months has been the rise of ex-US markets, and it’s a narrative that Gene Kim is staying agnostic to.
Kim is the Founder & CEO of Summit Private Wealth, and the Branch Owner & Portfolio Manager of that practice within Mandeville Private Client Inc. He explains that his client allocations tend to stay globally neutral, reflective of an approach that remains agnostic to themes and geographies. Kim explained why he takes this approach, along with a preference for active management, how he trains his clients to think similarly, and what he’s looking for in sector and business fundamentals once he tunes out the overarching narrative.
“We’ve always had a global neutral tilt in our portfolios, and we’re agnostic to geography in terms of where investments are actually domiciled. When you buy an index, you hope that it performs well but there can be decades where even the S&P500 doesn’t do as well and delivers a flat return. If we’re active in your management, though, we can find pockets within the US or any market that will continue to perform well during challenging periods,” Kim says. “We take a fundamental view of things based on financial data and sound decision making.”
Kim contrasts that approach with the kind of theme and narrative-driven thinking that saw booms and busts in crypto and marijuana stocks. The subjects that are hot in the news aren’t always the most fundamentally compelling. The narrative may ignore core metrics like cash flows, competitive moats, and the management of any particular business. Looking at global markets, they could even ignore areas like political and governance risk out of countries with wildly different political and economic systems.
Even amid the rise of ex-US markets, Kim has remained constructive on his US allocations. He continues to believe that the scale of the US market and the innovative companies contained therein hold promise for investors in the long-term. He notes, though, recent strong performance in non-US markets including Canada, which he has been able to trim and reallocate from.
Coaching clients to stay agnostic
It’s one thing for an advisor to tune out noise and focus on fundamentals, its another thing for clients to. Kim, however, has seen a relatively even-handed response from his clients to the wider narrative of global market resurgence and the recent shocks to global markets brought about by the outbreak of war with Iran. His clients, he says, have been coached to understand and appreciate a fundamental approach to their investments. Questions revolve more around goals and how to achieve them than outperformance against a particular index. Kim says the key to that coaching is to educate clients about risk adjusted returns, which can be used to demonstrate what they’re really getting out of their portfolio.
That is not to say Kim doesn’t grab opportunities when they arise. Through Q1 of this year he has focused on driving yield for his clients, through some temporary covered put strategies to back up the defensive posture of portfolios. As markets struggle under the pall of a new war, Kim notes that if he sees continued weakness there could be an opportunity to rotate some of that excess cash and yield into longer-term holdings, whether they’re domiciled in the US, Canada, or outside of North America.
When it comes to those ex-North America positions, Kim is also agnostic as to the investment vehicle he uses. Single stocks can work, as can ETFs. When assessing a managed fund, especially in global allocations, Kim shows a preference for active managers who are specialized in a certain niche, those who can do a better job in that category than his team can internally. Fee structures are a vital part of that decision, but Kim cautions against letting the fee tail wag the dog.
Assessing narrative in real time
Kim’s belief in a core US exposure alongside global allocations is not a dogma he holds to without question. That same agnosticism to narrative allows him to reassess where market leadership will come from at any given time. The drivers of leadership, within markets and across geographies, can be myriad and unpredictable. That brings him back to fundamentals, to the assessment of businesses and services that can continue to grow, the identification of disruptive technologies, and the emergence of new lines of business that can drive appreciation.
Maintaining that approach requires discipline, Kim says, and a clear investment philosophy. Conviction is hard to maintain, and Kim accepts that advisors can face the same challenges of noise and narrative that retail clients deal with. Using the tools and expertise of the trade to backtest new ideas, assess emerging opportunities, and check your own assumptions can help drive better portfolio allocations specific to client needs.
“You can never go wrong by going back to basics,” Kim says. “Listen to the clients, understand the conversations you have with families and what they are trying to accomplish. It's a lot more than just the target returns, it has to do with tax strategy and legacy wishes and what wealth and money mean to them, from there you can develop sound plans and strategies around those objectives.”
