When the markets are as volatile as they were in January 2008, with news about ratings agencies, banks, broker/dealers, and the bond insurers growing darker by the day, some clients may be feeling a tad emotional. Bothered by the uncertainty, they may not feel content to stay with their advisor’s well-crafted financial plans, may reach for yield at just the wrong time, or worse, maybe they just can’t stand the roller coaster sensation of being in the markets to any degree at the moment. Emotion can complicate investing, and while a mattress filled with cash may be a comfort during uncertain markets, it doesn’t constitute a great retirement plan. While so much is still unknown about domestic companies’ prospects, perhaps it’s an opportune time to look outward, internationally, in terms of clients’ equity allocations.
One portfolio manager, Scott Snyder, takes the style boxes and emotion out of international investing with a quantitative system he uses with an industry focus, but as an example of his approach, the Greenwood Village, Colorado-based manager of the $271 million Icon International Equity Fund (IIQIX) says, “even though we’re focused on industries, we’re still buying companies to populate the industries–we’re not out buying a steel ETF.”
Standard & Poor’s ranks the fund’s I shares as four stars overall, with four stars for its three-year ranking, and five stars for the one-year ranking. The fund had an average annual total return of 24.56%, compared with 17.18% for the equity international peer group for the three years ended December 31; and 22.58% versus 12.42% for one year.
We spoke by telephone with Snyder in late January.
What’s your investment process?
The whole premise with the fund, as well as with every fund within Icon, falls back to our quantitative, systematic investment approach. We’re a bottom-up manager and we focus on industry rotation. What we’re looking for first and foremost is industries that are trading at discounts to their intrinsic value, so we use a modified Benjamin Graham model to come up with our estimate of intrinsic value. We group these based on 147 different industries as classified by S&P and MSCI, and from there we can get the whole gamut in terms of the broad market to see which industries would be giving us the most value as opposed to the least value. We’re tilted toward the higher discount; the ratio [we use is called] the value-to-price reading [VP], just your intrinsic value divided by where the stock or industry is trading right now. We’re looking for the high VP stocks and industries. Value investing always has an early bias so we’re also looking to combat the early bias, a bit, and also employing a relative strength metric to capture that. We’re looking for stocks that are, first, cheap, and they’re also on sale–trading at a discount to their intrinsic value–and this value is starting to be recognized by the marketplace. The prices are starting to get bid up and the relative strength is moving in their favor, so we view those industries as being in the sweet spot: they’re cheap; they’re on sale; and they’re really starting to move now. That’s where we focus our investments.
How is the fund different from its peer group?
Our differences stem from our unique approach. First, we’re a quantitative system so we’re not out chasing news stories and trying to outguess one person or the other in saying, “I think company XYZ is going to come out slightly less than this quarterly number,” or saying that, “Interest rates in the U.K. are going to be this versus that.” What we do is stand back and take the non-emotional approach. The reality is, we’re operating in an emotional marketplace here, and we just have to recognize instances when stocks get pushed in one direction or another, either far too optimistic and they bid the prices up far too high, or far too pessimistic where you start trading these stocks a lot lower.
The industry focus has been a unique approach across the peer group especially within the international marketplace, our ability to really take active bets across industries, and…we basically toss out the style box. That’s a unique approach unto itself. There are times when this fund can take on a small- to mid-cap growth tilt, or we can start moving to the larger-cap blend or value side of it. We’re not making the top-down decision to do that, it’s just wherever the market drives us. We have the ability to go wherever we need to. Internationally, it hasn’t been as big an issue, but it still comes up; if you look at the Lipper categories and the Morningstar categories the style box creeps in.
No one can ignore what’s happening in the financial sector. Does it affect your models?
This is the perfect example of the integration of these economies. Internationally the financials haven’t been immune to the struggles that we’ve seen within the U.S. In the shorter-term weakness over the last six months or so, financials certainly have been a weak spot globally. First and foremost we do see plenty of value there, so while our individual intrinsic valuations on the stock levels have come down with these write downs–with these decreases in forward-looking earnings, and forward-looking growth rates–it has certainly been detrimental to the individual valuations of these groups. Yet what we’ve been seeing is [that] the market’s been taking it way too far in the other direction. Granted, value has come down, but the market has overly punished these stocks.
We’ve been underweight financials for quite a while, and it wasn’t some prophetic view of me being able to outguess the next guy down the street; it was a strict adherence to our overall investment system. Much of it was [that] the relative strength component of [the financials] started to work against itself there, so from an opportunity-cost standpoint, there were better places to be within the market; we took away from our financials positions quite a while ago and moved to those better industries.
So the models came through for you?