Rupal Bhansali details her year end review and 2019 outlook as portfolio manager of Ariel International Fund and Ariel Global Fund.
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Question: As we head into 2019, what do you feel is the biggest threat facing the markets?
Answer: Balance sheet risk is the biggest threat facing equity and bond markets. Too many countries and companies took on too much debt in the recent era of historically low rates. The triple-B credit market has become extremely extended, and further increases in rates from here may be the tipping point for what could be the next big problem for financial markets: rating agency downgrades of many investment grade corporates to junk status, potentially roiling credit and equity markets, together with bank and corporate balance sheets in the process.
Question: As an investor, what keeps you awake at night?
Answer: Mostly research and email!
Question: With the heightened volatility in the markets and recent sharp selloff, how do you maintain a long-term perspective?
Answer: Volatility and cyclicality are a fact of life when it comes to investing. Volatility can be an opportunity rather than a threat to the long-term investor – something to take advantage of rather than be afraid of. Price-action alone in global stocks, bonds, commodities and currencies does not play a role in our process other than to test the thinking that comes out of our fundamental research and what drives our longer term secular and normalized outlook.
Question: Have you made any significant changes to your investment strategy in the final quarter of the year?
Answer: No. Turnover in our international and global portfolios remains at or near historical lows as we like what we own and dislike what we don’t own. In addition, we always strive to position our portfolios for long-term investment success so it would be atypical to see significant quarterly changes unless there was a major double digit market dislocation that threw up new or different investment opportunities.
Question: Given your outlook for 2019, in general, what sectors are you most bullish about? What sectors will you seek to avoid?
Answer: We are bullish on a number of out of favor, misunderstood and mispriced stocks in the telecom and healthcare sectors. We would avoid cyclicals such as industrials and banks which we judge to be overearning, overrated and overvalued. These outcomes are a function of our bottoms up research and where we find the risk/reward relationship to be attractive for particular companies, not a top down call.
Question: Are there any particular sectors in which you are currently overweight, versus your benchmark?
Answer: We are overweight the telecom space where we are drawn to the resilient business characteristics and recurring revenue streams found in consumer staples, but at valuations that we find to be far more attractive. We are also overweight health care, in particular businesses focused on discovering drugs for life threatening diseases such as HIV or cancer, rather than lifestyle drugs such as diabetes or cholesterol, which we view as a crowded space.
Question: Are there any particular sectors in which you are currently underweight?
Answer: As noted before, we are underweight cyclical companies in sectors such as industrials and materials in addition to avoiding the deterioration in corporate credit and growing balance sheet risks which will adversely affect the banking sector.
Question: When you consider investment opportunities that have been overvalued this year—for example, the FANG stocks, what do you consider to be overlooked opportunities?
Answer: The largest number of overlooked opportunities are currently in the global telecom sector. China Mobile is a good example. It is the leading wireless service provider in China, with a 60% market share and over 800 million subscribers (four times the number of U.S. mobile-phone subscribers). The market is concerned that the government keeps asking the industry to lower prices. In our view, the market is mistakenly reading this as an indication that the company won’t be able to monetize its market dominance. Our contrarian point of view is on the beneficial second order effects. For instance, when the market leader drops prices, the competition has to follow, which prevents them from earning sufficient returns on their capital employed and reinvesting in their networks. This in turn results in poor network quality and loss of market share. So the very intervention that the consensus thinks is bad news, we think is good news because it reinforces China Mobileps dominant market position and scale advantages. Smaller competitors will find it very difficult to generate the financial resources required to catch up to China Mobilers position. Ironically, the government stance is enabling China Mobile to cement its monopoly. The company has about $60 billion in net cash, and the stock, at a single digit multiple of cash-adjusted earnings and a 4% dividend yield, is inexpensive in our view.
Question: What advice is foremost in your mind at present that you would give to investors?
Answer: Most investors, when they make investment decisions, think about how much they could make and not enough about how much they could lose. My advice is to reflect on downside risk as much as upside reward. Risk comes in many forms - company risk, competitive risk, industry risk, credit risk, liquidity risk, valuation risk, economic risk, and political risk etc. You cannot eliminate all risk in investing but you want to ensure you are paid to take it. Experience has taught us that one usually finds lower risk in companies with sustainable or growing competitive advantages, high normalized returns on invested capital, strong business prospects and balance sheet. One should invest when one can get many of these attributes at attractive prices relative to one’s assessment of the intrinsic value range, with a margin of safety for risks assumed.
The information contained in these investment perspectives is not guaranteed as to its accuracy or completeness. The opinions expressed were current at the time of publication but are subject to change. The information provided in this reprint does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular security.
Ms. Bhansali candidly discusses her viewpoints of market conditions and certain specific companies. Ms. Bhansali discusses a number of stocks held in Ariel International Fund and Ariel Global Fund at the time the perspectives were written. These stocks do not represent all of the holdings in the Funds. Portfolio holdings are subject to change. The performance of any single portfolio holding is no indication of the performance of the other holdings of the Funds or of the Fund itself. See current holdings information for Ariel International Fund by clicking here. See current holdings information for Ariel Global Fund by clicking here.
The various asset classes discussed by Ms. Bhansali have different risks and benefits. Bonds are fixed income securities in that at the time of the purchase of a bond, the amount and timing of income payments are known. Bonds are subject to credit risk and interest rate risk, both of which may affect a bond’s investment value by resulting in lower bond prices or an eventual decrease in income.
Investors should consider carefully the investment objectives, risks, and charges and expenses before investing. For a current summary prospectus or full prospectus which contains this and other information about the funds offered by Ariel Investment Trust, call us at 800-292-7435 or click here. Please read the summary prospectus or full prospectus carefully before investing. Distributed by Ariel Distributors, LLC, a wholly-owned subsidiary of Ariel Investments, LLC. Ariel Distributors, LLC is a member of the Securities Investor Protection Corporation.
by Rupal Bhansali: