Best Ideas with Contrarian Views
Hartford International Equity Fund
Author: Ticker Magazine
Last Update: Nov 06, 8:48 AM EST
|Not all financial markets are as efficient as the developed U.S. market. For investors with contrarian views and research resources, however, out-of-favor stocks in Canada, Europe, and the Asia-Pacific region can be particularly attractive. Kent Stahl, portfolio manager of the Hartford International Equity Fund, complements the input of a global research team with a factor-based risk management approach to build a diversified portfolio.
“Compared to the U.S., the non-U.S. market tends to be less efficient, and broader cap, style, or geography yield even more inefficiencies. The consistency of our performance has been predicated on the strength of our stock picking in less efficient segments of the market.”
Q: What is the mission of the fund?
The Hartford International Equity Fund began on June 30, 2008, with Wellington Management Company LLP as the fund’s sub-adviser, and I took over the reins on March 1, 2010, managing the fund along with Gregg Thomas.
The Fund’s objective is to seek capital appreciation. We seek to consistently generate a high level of alpha, combining active stock-picking strategies with a factor-based risk approach to mitigate drawdown risk.
Our benchmark is the MSCI ACWI ex USA Index and we seek to deliver a large cap, core international exposure for our clients with high active-share by holding a broad mix of high-conviction stocks spanning potentially all countries except the U.S.
Q: What is your market approach?
We intentionally build the portfolio to have broad exposure across geographies, market cap and styles. By maintaining balance across market factors, our stock picking should be the primary driver of the portfolio’s returns. Although this is obviously a large-cap portfolio, our range of stocks comprises a good balance of large, mid and small caps relative to the market. I think this approach to risk management is a key reason why we have been able to generate alpha in a wide array of different environments since taking over in 2010.
The strategy epitomizes stock picking in the most inefficient parts of the market. I would add that the one environment we find most challenging is a particularly narrow market environment simply because of the breadth of our capabilities. It is not cause for concern for us, however, because those periods don’t often last long and tend to mean-revert fairly quickly.
Q: What are the advantages of such a broad portfolio?
Compared to the U.S., the non-U.S. market tends to be less efficient, and broader cap, style, or geography yield even more inefficiencies. The consistency of our performance has been predicated on the strength of our stock picking in less efficient segments of the market and so breadth is important.
We believe that our competitive advantage is the depth of Wellington’s fundamental research. As of October 2017, we have over 650 investment professionals, many of whom are globally or internationally oriented. The goal is to exploit our research advantage in less efficient segments of the market.
Q: What core beliefs drive your investment philosophy?
We have three drivers. One is that we believe, over time, the most sustainable way to add value is through skilled stock picking, built on the strength of Wellington’s proprietary research methods.
The second is that we believe in a best-ideas portfolio, highly active stock-picking, where risk is managed separately. We source a number of our managers to run concentrated versions of what they typically do for clients. And instead of having the underlying managers focus on risk, we address it by combining managers and using our risk factor-based approach.
Third, we focus on allocating capital on a contrarian basis. We like strategies that are currently out of favor. Right now, that would be more value contrarian strategies, typically taking capital from growth styles that are doing well. I think that is a smart way to rebalance or allocate capital.
Q: What is your investment process?
We have a relatively straightforward process. We start by identifying factors or styles that we think are positioned to do really well, things like deep value or contrarian style, high growth, or quality styles.
Once we determine in what direction we want to go, we review Wellington’s broad array of investment professionals to identify those who are the highly skilled at investing with that style and have them run highly concentrated versions of their typical standalone mandates. So, while they might own 100 stocks in a diversified portfolio, for us they might only own 20 or 25.
The reason we do this is that combining all these concentrated portfolios results in a diversified aggregate portfolio. Because we only seek alpha generation from our stock pickers, we ask them to just give us their best ideas without thinking about diversifying risks individually—everything needs to be a significant active position for them. By looking for strategies that tend to be extreme in their factor exposures, we can emphasize stock picking in more “eclectic” areas of the market.
Choosing the stock pickers is part quantitative, part qualitative. We start with about 200 different equity strategies and quantitatively identify who has a factor footprint we like and who complements the other managers, and then qualitatively look to see if they have a differentiated philosophy or mindset that we believe can add value.
Once we identify the managers and factors, we use our risk-factor framework to assemble the portfolio and stress test it to evaluate how the strategy would react to different market events, which also drives the position weighting.
What distinguishes our strategy is how we combine managers and manage risk within the portfolio. We let our top investors, leveraging Wellington’s research, pick the highest alpha-generating ideas while we, the portfolio managers, focus on shock-absorbing the risk.
Q: How do you integrate the differing equity strategies?
First, having the degree of breadth in the portfolio that we do generates a balance—spanning deep value to aggressive growth helps mitigate extreme swings.
We are also valuation conscious. There is a big difference between a great company and a great stock. And because we tend to be contrarian, when an area of the market is really out of favor, we will consider shifting capital into it and selling out of those areas doing well.
Being this disciplined is not an easy thing for investors, and as a result, our turnover has been 50% to 100%, but we find that rotating out of things currently in favor and into those that are not is what enables us to add value.
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