Earmarking equities in an uncertain era

As frothy markets motivate talk of bubbles, Peter Hardy says his firm will stick with an approach to equities that’s tried and true.

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“We invest in quality companies while they are trading at attractive valuations and provide stable incomes,” said Hardy, senior client portfolio manager of global value strategies with American Century Investments in Kansas City, Mo., in an interview last month.

Various factors support his firm’s approach.

First, the historical disparity between growth and value stocks presents a potential tailwind for the latter, Hardy said.

The disparity is exemplified by the momentum-fuelled, outperforming Tesla — “your textbook growth stock,” Hardy said. The California-based electric vehicle (EV) company has a one-year return of more than 300%.

“The stock [valuation] has increased to a level where you could either own the company Tesla or … every other car manufacturer in the world,” said Hardy, who manages the Renaissance U.S. Equity Income Fund. “The value dynamic at play would be the other names besides Tesla.”

A second factor the firm considers is a company’s dividends — especially important given ultra-low interest rates.

“With central banks holding interest rates low, the starting point for expected returns is basically zero,” Hardy said. At such times, “dividends have constituted a greater portion of returns.”

Historically, dividends have represented about 40% of total market returns, he said. Yet, in the 1970s — a decade of lower returns — the S&P 500 returned 6% while dividends were 73% of total returns.

“And in the 2000s, the S&P had a negative return, and dividends gave you a positive 1.8% return,” he said.

Third, the firm crafts a high-quality, lower volatility profile for the portfolio relative to the market, with about two-thirds of market risk exposure over time. The portfolio still outperforms, Hardy said, and he expects volatility mitigation will remain important given last year’s market volatility and historic global debt levels.

Two of the portfolio’s biggest names are Medtronic PLC, headquartered in Dublin and U.S.-domiciled, and New Jersey–based Johnson & Johnson. Hardy described them as high-quality names at attractive valuations that generate consistent returns.

While the two health-care companies have underperformed during Covid-19 because medical procedures were halted, these companies have very stable earnings and “some of the highest forward-looking earnings,” he said.

“They’ve also been able to increase their dividends in spite of all the economic weakness and market volatility.”

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