Riding Structural Tailwinds
Oppenheimer International Equity Fund
Author: Ticker Magazine
Last Update: Nov 30, 2:36 PM EST
|Often the market and industry structure plays a key role in determining the long-term performance of many businesses just as the position of a company in a particular industry does. Companies enjoying such structural tailwinds are more likely to reward investors with delivering predictable financial results. James Ayer, portfolio manager of the Oppenheimer International Equity Fund, applies a disciplined process in search of stocks with these characteristics around the globe.
“Rather than constructing a portfolio around a benchmark, we believe in structuring portfolios around themes where we think there is long-term potential or structural tailwinds that help companies outperform over time.”
Q: What is the history of the fund?
Originally called the Oppenheimer International Value Fund, the Oppenheimer International Equity Fund was launched on July 2, 1990, and I became the portfolio manager of this fund in 2013. Our benchmark is the MSCI ACWI ex USA Index.
The previous manager was quantitative, buying cheap stocks off value screens. I had worked at the firm in the past, in the early 1990s, as part of the global equity team. When I returned to take on this fund, the portfolio managers of the Oppenheimer Global Value Fund and Oppenheimer Global Fund, along with the global team, had already restructured this to be a theme fund, with 15% cash, so it was an easy transition for me.
It is now managed more in line with the other international and global funds here, and has climbed from the bottom quartile of the category to the top third of core/blend funds based on its past 10 years, not just the last five. That’s a real turnaround.
Q: How do you define your investment philosophy?
We call our style “thematic growth.” We look for companies with structural tailwinds.
We are benchmark agnostic. Rather than constructing a portfolio around a benchmark, we structure it around themes with long-term potential or structural tailwinds that will help companies outperform over time. That’s very different from growth funds that are managed around earnings momentum.
The themes have evolved over time, but one consistent theme has been to target companies that are restructuring. While the funds at OppenheimerFunds are managed individually, ours is a collegial culture, where we share ideas. Everyone in the global equity team is based in our New York headquarters. It’s our feeling that people become siloed when they operate from far-flung offices. We prefer to have our team in the same place.
I have a predilection for macro analysis, which helps us position the fund, but our core beliefs are to be index agnostic, that active management still wins in international equity investing, and that thematic growth is a good way to structure portfolios.
Q: What is your investment process?
While the mantra centers on big themes, what is interesting are the subthemes. Take, for instance, the electrification of the car and the electronic components that go into cars. We have holdings that have subthemes with potentially long, attractive futures, as opposed to, say, the car market or OEMs, original equipment manufacturers, in the auto industry. Within mass affluence, we also have subthemes, one being air travel. More people in emerging markets want to travel, so we own shares in Airbus Group.
These themes enable us to screen out vast numbers of the two thousand companies in the index, such as those industries that are highly regulated, or overly commoditized, or exhibit very poor financial return. The Oppenheimer managers have many face-to-face meetings with management teams, and meet with sell-side sector-specific analysts. We also screen out companies in geographic locations where we just do not want to invest.
That generates a manageable universe, from which we create a watch list of about 150 stocks in addition to the 75 or so in the portfolio. Once we identify a subtheme as attractive, the stocks that fall into it are all worth looking at, unless the market caps are tiny or some management problem exists.
Q: Can you illustrate your research process with some examples?
Adidas AG, based in Germany, is a manufacturer of shoes, clothing, and accessories that fits into the mass affluence, emerging market, global consumer theme, within an added subtheme of people indulging in healthier behavior. When I came to OppenheimerFunds, Adidas was a controversial stock—Nike and Under Armour were market darlings while Adidas languished.
I am a bit contrarian, and like to look at things that are out of favor and analyze whether they’re good businesses. I analyzed Adidas and discovered management was changing the organizational structure from myriad regional heads to one centralized management, which contributed to reducing overhead and streamlined decision-making and the marketing new products. When they announced a share buyback in 2014, we bought the stock.
It fit our thematic on long-term structural tailwinds. It had a restructuring angle to it, was a good company that was out of favor at the time, and it has proved a great investment for us.
Q: Do you establish a price target or a milestone event for companies?
In the case of Adidas, the milestone event was the management reorganization and the share buyback, but I never establish price targets. If I want to make the investment, I do. The same holds for exiting a stock.
I look at all the usual valuation metrics—price to sales, price to cash flow, cash flow yield, EV to EBITDA, price-to-forward earnings—and I look at those valuations relative to competitors, the market, and the company’s history.
We do, however, set price targets on base case, bull case, and bear case scenarios, and my analysts and I assemble a scenario analysis for each investment and look for a skew that favors the upside, with limited downside.
When a stock passes our original price target, because the earnings and fundamentals have gotten better than originally anticipated, I revisit all the ratios and question what our upside is now and whether we can find something more interesting on our watch list.
I don’t think being dogmatic about specific price points for entry and exit is a good idea. Too much depends on market conditions. We are in a game of relative value, relative attraction, and relative growth. If growth becomes a scarce commodity, people will pay higher multiples for companies that are growing.
Q: What role does macro occupy in your strategy?
We are currently in a nice, synchronized expansion, with our industrial and capital goods stocks doing well, so we don’t need to chase price-to-earnings multiples.