The possibility of a pause in the US Federal Reserve’s rate hiking cycle after its widely forecast 25 basis point increase in early May hasn’t triggered much optimism among investors. Uncertainty lingers amid the fallout from bank failures, a looming US recession, ongoing inflationary struggles, and the stalemate over resolving the US debt ceiling.
For active managers, however, the market’s focus on the short term and volatility creates potential for excess returns over the medium to long term. In short, now is the time to block out the “noise” and identify the types of inefficiencies and mispricings that stem from divergent views and shifting markets – and offer scope as a source of alpha.
Notably, opportunities are increasingly apparent in the global equities universe. Looking over the medium and longer term, we see strong momentum behind secular trends that are expected to play out over the years and even decades to come: namely, improving the environment, rewiring supply chains, and upgrading productivity via automation and digitalization.
We believe companies across the world that drive or benefit from key themes may offer a greater likelihood of achieving equity outperformance. For example:
Technology enablers – leaders in digitalization, with growth driven by AI and cloud and tailwinds provided by efficiency targets.
Corporate transformers – companies moving from “good” to “great,” enabling data-led change, and adding equity value from service revenues.
Rising global affluence – brands benefiting from the addition of between 300 million and 400 million middle-income consumers in China over the next five to 10 years.
Global capex investment – sectors involved in the rewiring of global supply chains and spending to reduce carbon emissions.
With these considerations in mind, companies with agile management, strong pricing power, robust financials, and competitive positioning are especially appealing – as are those with improving environmental, social, and governance (ESG) characteristics, given how often these elements can be undervalued by investors.
Even amid uncertain conditions like we’re seeing today, the markets are differentiating between companies that exceed expectations and those that don’t. We believe the key to identifying investment opportunities is visibility into a company’s lifecycle to understand potential improvements that are underestimated by the market. These individual investments, when part of a style-neutral portfolio, result in alpha from stock selection while limiting exposure to factors that cause excessive return volatility.
Taking an active stance in this way gives us a clearer view into companies that look more likely to make their businesses more efficient, sustainable, and “future-ready” – and therefore paving the path to reliable and repeatable alpha.
Ultimately, when it comes to global equities, there are four core drivers behind our convictions:
Focus on stock-specific alpha. As bottom-up, stock-selecting investors, we seek to generate alpha by focusing on a company’s fundamental underlying evolution, which the market often fails to recognize.
A time-tested, proprietary research process. Our proprietary analysis frameworks have enabled us to identify mispriced opportunities while managing risks.
Style neutral. We target stock-specific alpha by allocating to extraordinary companies with sustainable businesses, resulting in portfolios with high active share. This typically gives us differentiated alpha exposure, a low correlation to the broad active equity universe of managers, and risk metrics similar to the benchmark.
Globally connected insights. We leverage our on-the-ground equity professionals to collaborate and share insights that inform our global knowledge, within an award-winning investment team1.
In line with these components of our strategy, two dedicated alpha tools enable us to target the mispriced potential improvement in company fundamentals over the medium to long term.
First, our Lifecycle Categorization Research (LCR) framework classifies each company based on maturity and cyclicality through its lifecycle, as opposed to traditional classifications based on industries and sectors. This provides a common investment language to evaluate improvement potential and a high-precision tool for risk management.
Second, our Equity Risk Assessment (ERA) due diligence framework defines “quality” across 77 indicators and scores companies on Governance and Leadership, Business Sustainability, and Financial Strength. This process provides conviction in making high-quality investments that we can feel confident owning for the duration of our investment thesis.
The ERA process also ensures that ESG criteria are factored into our core assessments of stocks considered for the portfolio, by integrating forward-looking metrics with thresholds for investment. Further, ERA helps us identify topics for engagement, based on the issue’s analyst-defined materiality.
Applying these tools relies on a collaborative culture, which lies at the heart of our investment process to generate non-consensus views. We believe this mindset results in stronger and more consistent analytical insights into a stock’s attractiveness and valuation than would be possible without such a unified approach.
1 Recent awards received by the team included: 1) PineBridge Investment was named the “Best Global Equities Manager” in the InsuranceAsia News Institutional Asset Management Awards 2023. Source: InsuranceAsia News, announced in April 2023. The award recognizes exceptional work done by third party asset managers on behalf of their insurance company clients across the Asia Pacific region. For details, please visit https://insuranceasianews.com/awards/institutional-asset-management-awards-2023/. Last accessed 30 April 2023. PineBridge didn’t pay compensation directly or indirectly to be considered for the award, to obtain the award, or to use the award. 2) Rob Hinchliffe, Portfolio Manager and Head of Global Sector Cluster Research, was named the “Best Fund Manager, Equity – Global Blend” in the Citywire UK Awards 2023. Source: Citywire UK, announced in April 2023. Best Portfolio Manager Awards go to the individual portfolio manager generating the highest risk-adjusted returns in a particular sector over the past three years to 31 January 2023 in the United Kingdom. These are based on the individual track records for all funds they have run in the sector over this period. For details, please visit https://citywire.com/wealth-manager/news/citywire-uk-awards-2023-the-portfolio-manager-winners-revealed/a2414822. Last accessed 30 April 2023. PineBridge didn’t pay compensation directly or indirectly to be considered for the award, to obtain the award, or to use the award.
Investing involves risk, including possible loss of principal. The information presented herein is for illustrative purposes only and should not be considered reflective of any particular security, strategy, or investment product. It represents a general assessment of the markets at a specific time and is not a guarantee of future performance results or market movement. This material does not constitute investment, financial, legal, tax, or other advice; investment research or a product of any research department; an offer to sell, or the solicitation of an offer to purchase any security or interest in a fund; or a recommendation for any investment product or strategy. PineBridge Investments is not soliciting or recommending any action based on information in this document. Any opinions, projections, or forward-looking statements expressed herein are solely those of the author, may differ from the views or opinions expressed by other areas of PineBridge Investments, and are only for general informational purposes as of the date indicated. Views may be based on third-party data that has not been independently verified. PineBridge Investments does not approve of or endorse any republication of this material. You are solely responsible for deciding whether any investment product or strategy is appropriate for you based upon your investment goals, financial situation and tolerance for risk.