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Today’s market challenges and expectations for low future returns mean even the most able investors need a strong, high-conviction strategy in place to capture the most compelling opportunities. At PineBridge, our definition of active management centers on addressing stock-level market inefficiencies while putting companies’ lifecycles under the microscope.

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The emphasis on high-conviction investing is shared across all the markets in which we operate.

For Elizabeth Soon, Head of Asia ex Japan Equities and a veteran investor in the region, having an active approach means being benchmark-agnostic and focusing on stocks’ individual characteristics rather than the pure macro backdrop.

“High conviction is driven by below-market valuations, undiscovered stocks, triggers driving the stock that the market hasn’t yet recognized, and management strength that will deliver sustainable earnings over time,” she says.

Across our Japan Equity strategies, headed by Midori Katsumi, high-conviction investing is based on a balance among fundamentals, valuation, and risk. “We focus on individual stocks and analyze them according to our process, rather than focusing on the broader market through the index. We have a long-term perspective, and when we invest, we’re investing in the efficacy of these companies’ business models,” she explains.

A fundamental pillar that supports our investment process is research. Our proprietary research framework, Lifecycle Categorization Research (LCR), allows us to segment the market according to the growth and cyclicality of companies. Our analysts use LCR across all countries in which we have a local presence, from the US to Japan, and it is a key differentiator of our process versus peers.

“As a company starts its life, it begins to grow. It grows steadily, and then it matures,” Sen says. “The company moves through different phases as it travels through that lifecycle, and our investment process is based on that lifecycle methodology.” The LCR tool enables the global team to bridge research across both fundamental and quantitative strategies, serving as a common thread.

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The Common Thread: Lifecycle Categorization Research (LCR)

Categorization of stocks that behave similarly in the market results in a consistent research framework

For illustrative purposes only. Any views are the opinion of the investment manager and are subject to change.

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This focus on the cyclicality and maturity of companies also helps mitigate market risk. For example, in developing markets such as India, where companies’ growth is outpacing economic growth, operating within the solid framework of LCR makes it much easier for managers to avoid reacting to short-term stock moves. “Using LCR as an anchor, we can eliminate the noise,” says Huzaifa Husain, Head of India Equity.1

Ms. Soon concurs with the noise-canceling power of LCR, particularly amid the trade tensions between the US and China that surfaced in 2019. “We believe China will undergo structural changes that will enable it to be stronger as a global economic partner, and many Chinese companies will become robust suppliers in the technological space and also large consumers of multinational products.”

1Provides non-binding advisory services to PineBridge Investments Asia Limited.

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The domestic A-share market offers the biggest and most diverse universe for long-term growth opportunities in China. Despite its size and liquidity, this market remains highly inefficient and idiosyncratic – providing plenty of opportunities for active investing.

In 2004, PineBridge further strengthened its presence in China through the establishment of a joint venture, Huatai-PineBridge, with Huatai Securities Company, one of the country’s largest securities brokerages. “Local knowledge and a systematic approach attuned to the distinct factors driving A-shares are critical success factors in this market and provide opportunity for consistent alpha generation,” says Hanqing Tian, Deputy General Manager and Quantitative Portfolio Manager at Huatai-PineBridge.

Meanwhile, India, the world’s fastest-growing economy, continues to rely on its more mature equity market and its technological expansion. Husain believes technology has reduced barriers to trade in many industries around the world, allowing countries such as India to get closer to more advanced economies, such as the US.

“In India, technology companies are influenced by what’s happening in the US and the rest of the Western hemisphere,” says Husain. “Pharma companies in India feed into pharma companies globally. Banking companies in India follow the same rules that apply to banks in the Western hemisphere.”

In Japan, where Prime Minister Shinzo Abe’s “Abenomics” stimulus is beginning to bear fruit, the team maintains a positive outlook. On the ground in Japan, Katsumi believes better political visibility for the country will be an advantage for investors over the next few years, especially at a time of increasing geopolitical tension around the world. She believes the outlook remains particularly optimistic among Japanese B2B companies backed by positive corporate cash flows.

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Thoughtful portfolio construction

When selecting stocks, the team employs a rigorous process. Our due diligence takes into account many factors, from the compensation structure of a firm’s board to its accounting policies. The barrier to entry for any stock in the portfolio is high.

Ms. Soon focuses on companies’ business models, and having a long-term horizon helps her avoid trading on short-term news. “The ability to successfully deliver returns depends in large part on assessing changes over the investment horizon. When industry dynamics or a company’s fundamental situation have changed, or its management has strengthened or weakened, we reassess the position to make changes to our target prices. Analysts may then change their view on the stock,” she says.

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Across the equity platform, the team believes sustainability helps deliver better results for all stakeholders, from the company to the investor to the wider community. As a “consultivist” investor, we actively engage with companies around the world in a constructive dialogue, rather than taking the more confrontational activist approach. 

Husain notes that in India, for example, “Among the important criteria we consider is a company’s energy usage, either in its own production cycle or, for instance, through products manufactured to lower customers’ energy consumption. Energy and the environment are two sides of the same coin, so a business that ignores energy efficiency or its effects on the environment is unlikely to be sustainable in the long run – a message we reinforce in our engagement efforts.”

Soon’s team emphasizes good governance in its screening process. Similarly, in Japan, Katsumi identifies the key ESG issues for each subsector, given that the materiality of environmental and social aspects differs significantly from sector to sector.

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A collaborative culture

Collaboration is embedded in PineBridge’s culture. Our local teams deliver on-the-ground insights to the broader team through regular investment forums and a monthly global equity call. These are dedicated occasions for generalists and specialists to exchange market perspectives, ideas on positions, and new opportunities.

Indeed, Sen believes PineBridge benefits from a high level of diversity of thought, with colleagues coming from different social, cultural, and educational backgrounds in addition to their areas of investment focus and expertise.

“We believe collaboration gives us an investment edge, and it’s something we work hard to cultivate – it happens because you have the right structures, the right forums, and the right incentives in place,” Sen says. “Collaboration can have almost exponential benefits for investment managers, if they get it right.”

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We further enhanced our ‘productivity basket’ by tilting toward stocks ranked highly by our Research Enhanced strategy, our quantitative investment approach. “For PineBridge, our conviction is confirmed in the clear upward inflection in sales growth for these subsectors,” Ali noted.

Husain cites another example: an extensive project testing how electric vehicles may replace conventional fossil fuel-powered vehicles around the world. The project required input from Asia, where most of the electric batteries are produced, as well as from colleagues in the US and Europe – two key markets for the car industry.

An analyst from our India team partnered with our Hong Kong and China Equity teams, visiting China to learn about the latest developments and to meet with management teams of Chinese and international automakers, suppliers, and dealerships. This effort enabled the team to position portfolios to benefit from this developing trend.

“Batteries require a lot of engineering knowledge, so we were fortunate to leverage the expertise of our global colleagues, including an analyst with an electrical engineering background,” Husain noted. “Through our collaboration, we synthesized our research and produced a briefing document highlighting our view of how that sector will change and the impact we anticipated for our portfolios.”

Ms. Soon cites another example of collaboration across teams. “We did a deep dive into e-commerce in Asia involving 3D sensing and 5G advanced wireless systems, which involved our New York, Hong Kong, and Taiwan Equity teams. The teams broke down the supply chains of these sectors through their collective research as they sought to assess potential opportunities.”

“Based on our assessment,” she says, “we trimmed our exposure in the 3D sensing sector and participated marginally in the 5G market because we saw limited impact at a security level, given that only a few names were positioned to benefit.”

It’s this collaboration across the Equity platform that leads not only to more informed decisions but also to better results for our client portfolios.

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Reading quant signals

Each quarter the Quant Equities team creates a “heatmap” showing optimism or pessimism among companies by assessesing corporate earnings calls, using a proprietary machine-learning-based model that flags instances of positive or negative sentiment. This snapshot can provide a gauge of how industries and sectors are reacting to current conditions and what to expect going forward – and provide a signal that informs investment research and decision-making.

“Our post-Covid heatmap is telling,” Ali notes. “Whereas the leadup to the 2008 financial crisis was marked by years of increasingly negative sentiment that persisted past the most acute phase of the crisis, the Covid disruption thus far has been short, stark, and contained. A more sanguine mood has already set in, with implications for portfolio positioning, and it bodes well for a post-Covid recovery that is already underway.”

Company Sentiment Plummeted After Covid Disruption But Has Bounced Back Quickly

Earnings call transcript sentiment scores (normalized)

Company Sentiment Is Solidly Positive, Auguring Well for Future-Looking Investment 

Source: PineBridge Investments as of June 2021. For illustrative purposes only. We are not soliciting or recommending any action based on this material.