Eisinger: "For the past few years we have been bullish on US equities as an increase in profits and rising CEO confidence drove an increase in capital expenditures and employment against a backdrop of attractively valued stocks. We are at an important juncture here as this more bullish thesis is tempered by renewed macro uncertainty and concerns about inflationary pressures around the world. The intermediate-term direction of the market will likely depend heavily on whether US policy makers continue to provide liquidity to the system and the economic environment drives that decision.
Valuations in the US market are undemanding by historical standards. A decade ago, valuation multiples were much higher than they are today and the S&P 500 has returned very little over the 10 year period. At the same time, U.S. companies have grown their earnings significantly as these multiples have compressed. So the starting point today is attractive. Moreover, most large U.S. companies have rock-solid balance sheets—in stark contrast to some governments. Companies in the S&P 500 have around $1.2 trillion in cash on hand. This has important implications for valuations as some US companies have 20% to 25% of their market cap in cash.
From a stock perspective, the markets are behaving very similarly to 2008 when there was no differentiation among companies or valuations. We know how that ended in 2009 when the most undervalued went up the most. We are in a similar place today with markets and some stocks like coiled springs. We are concentrating the fund into these names that come under pressure for no fundamental reason."
e-fundresearch: "Which are the most important elements in your investment process?"
Eisinger: "We are looking to invest in businesses that 1. create value as defined as generating positive or improving economic profit margins 2. trade at a discount to intrinsic value 3. where we have a differentiated opinion on the value of a business. Positive economic profit margins mean that a company is earning returns on invested capital that exceed their cost of capital. Although this should seem like an obvious goal for a business, it is surprising how few companies actually achieve this over time. We take an opportunistic concentrated approach, seeking the most mispriced stocks in the US, regardless of market capitalisation. The entire process is fundamental bottom up stock picking which leverages our global research team."
e-fundresearch: "Which over- and underweight positions are currently implemented in your fund?"
Eisinger: "The largest overweight sector continues to be health care where we are finding the most attractive opportunities for mispriced stocks. We are focusing our research on identifying situations where individual companies will create value through capital allocation rather relying on a specific macro-economic outcome. The fund is underweight energy as we have had a more difficult time finding value in the sector."
e-fundresearch: "Where do you see potential risks for US equities?"
Eisinger: "However, there are some notes of caution looking at balance sheet strength and capital allocation. We worry that having a lot of cash on hand could incentivize companies not to use their cash productively or to overpay for growth. Ill-conceived mergers and/or foolishly valued acquisitions are two potential wasteful uses of capital that we are watching out for.
One of the most important issues to watch in the global markets and the US today is the end of QE2 and the implications for commodity prices. A peaking in commodity prices could lead to declining inflation pressure globally and draw investors back to high growth markets like China where P/E multiples for stocks are similar to the US and not reflective of secular economic growth."
e-fundresearch: "Please comment on the performance and risk parameters of your fund in the past year as well as over the past 3 and 5 years."
Eisinger: "The fund has returned 42.24% over one year compared to the benchmark, Russell 3000 Growth, of 35.68%; over three years it has returned 8.53% compared to 5.28% and over five years, 9.32 compared to 5.36%. The information ratio is 0.29. All information is as of 30 June 2011."
e-fundresearch: "Thank you for the interview!