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Best Ideas with Contrarian Views
Hartford International Equity Fund
Interview with: Kent Stahl

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.”
We are high-conviction investors but also risk-focused. I have 30 years of experience studying factor markets and seeing how these things mean-revert, and I am very disciplined in following this strategy.

Q: Can you share examples of your research process?

A: One example would be one of our current top active positions, a Russian multinational technology company that serves essentially as a Russian Google, a search engine and social media site. We bought it amid broad global concerns over Russia, particularly after Russia’s military incursions into the Ukraine. The ruble was plummeting, but the company featured a stable, cash-flow-generated model.

The stock was cheap and our IT analyst, emerging market equity team, and investors from our contrarian team had all done fundamental analysis on the company and identified it a great business, despite Russia’s volatile situation. We get lots of input and dialog on the country, sector, and style before anything goes into the portfolio.

In contrast and showing our breadth of stocks, our top holdings also include a few Canadian banks. The reason we like Canadian banks is because they are much like U.S. banks in terms of loan growth and higher interest rates. In fact, Canada is even better than the U.S. in that its banking market is much more consolidated. Four banks in Canada represent 95% of the market share, so they are more profitable, cheaper, and higher quality than is typical in non-U.S. markets. When the market goes down, Canadian banks have historically done well.

Interestingly, most international investors start out with an EAFE (Europe, Australasia, Far East) mindset and overlook Canada, despite the fact that it is represented in the MSCI ACWI ex USA Index. We try to exploit that oversight, as they are simultaneously a great diversifier and business model.

Recently, we have been finding a lot of opportunities in India because we believe in the long-term sustainability of India’s recovery in terms of deregulation and the many improvements that have been made.

The reform of India’s financial system spells opportunity for us, and we currently own three of India’s banks including a former state-run bank that stands to benefit from recent currency reform steps. The government has eliminated large-denominated bills to eradicate the black market, forcing more money through the deposit system versus the black market by making it more difficult to hoard cash.

While our macro and emerging markets group followed the bank, its stock came into the portfolio by way of one of our more growth-oriented investors who was looking for higher-growth areas that weren’t as concentrated in the technology or healthcare spaces.

Q: What is your portfolio construction process, and what role does diversification play?

A: We look across a range of styles: deep value, aggressive growth, contrarian, momentum, and quality, and stress-test the portfolio by revisiting good and bad market periods to see how the portfolio would fare. And if we don’t have a strong opinion on the market, we endeavor to be risk neutral.

The majority of the return comes from stock picking, by minimizing the portfolio’s overall exposure to various market risks. That drives the weighting decision among the different strategies of higher and lower risk. Our stress-testing methodology is what drives capital allocation, and that in turn drives security selection.

So ours is an integrated risk process where it is our people who pick stocks from the bottom up and we implement risk management using stress testing from the top-down.

Q: Do macroeconomic factors figure into your strategy?

A: Certainly. For instance, looking again at banks in India, our view on the country, Prime Minister Modi, reforms, and the progress being made all contributed to our decision to invest. The same can be said about our need to be comfortable with Russian risk after its incursion into Ukraine.

It would be foolish not to think about such things, but essentially we focus on the individual company. Deeper-value strategies tend to do better early in the cycle, while quality or momentum strategies do better later in the cycle. Nonetheless, ultimately what drives our security selection and weighting comes down to the fundamentals and what’s happening with regard to risk.

It is the same for capital allocation—it’s what’s happening with the fundamentals, without ignoring the macro standpoint. That is why I see it as an integrated process, using all of Wellington’s research advantages.

One of the areas we are looking at is the A-share market in China, which is typically going to include companies more heavily levered to local services growth. As China is moving away from production toward a service economy, that evolution could prove a lot bigger than people anticipate.

Q: How many holdings are in the portfolio, and do you implement maximum and minimum position sizes?

A: In terms of the number of positions, again, we tend to run pretty diversified, using multiple managers with different sources of alpha and we do own a number of mid and small cap companies which results in more holdings. We focus less on the number of names than on our active share because, to me, that’s a better metric for money at risk.

The strategy’s active share has typically been in the 70 percentage range over time.

Our max position is generally about 1.5% but position sizing of individual names will vary significantly depending on the characteristics of each holding.

Our emerging market exposure generally runs between 20% and 30%.

Q: How do you define and manage risk?

A: We strive to deliver high alpha with consistency over time. We focus a great deal on stress testing in order to help us navigate market extremes which has produced a consistent pattern of outperformance.

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