The Wakefield Large Cap Equity Strategy topped the roughly 22% returns of the S&P 500 Index in 2017 by close to 10%, according to Envestnet | PMC analysts Mike Manning and Eric Halverson. Its yearly alpha from mid-2007 to mid-2017 was nearly 3.4%; plus, the firm can boast that its beaten S&P earnings by 9% a year.
How did the team do this? “It was primarily driven … by individual security selection. We weren’t overweighted in any sectors,” said Todd Gervasini, chief investment officer and founder of Wakefield Asset Management. “We didn’t have any large positions in any one stock or any two small positions.”
Gervasini points out that Englewood, Colorado-based Wakefield employs “a rigid construction process” to the 33 stocks in the large-cap portfolio. “Compared to the S&P 500, we did have a few sectors that did better than others. Healthcare, basic materials and industrials did the best, and we had five stocks that did outperform the others by quite a bit,” he explained.
Supporting its stock selection, is Wakefield’s core belief that although the markets are very efficient, “there are pockets of inefficiencies … in the marketplace,” Gervasini said, “and we think we’ve come up with a strategy to try to take advantage of them.”
One element of the group’s approach is to buy stocks that are attractively priced compared to their peers on a valuation basis — either price to earnings, price to book or price to cashflow. Second, it looks for surprises tied to earnings. “We’re able to predict which stocks are going to beat the Street and … analysts’ expectations,” Gervasini said.
Third, the team aims to buy stocks in anticipation of analysts’ move to raise earnings estimates “for fiscal year one and fiscal year two, which really drives these stocks in the market,” he added. “By predicting those analysts’ behavior and taking advantage of [it], we’re able to create excess returns that are well in front of the benchmark.”
This investing process, which the CIO says is “disciplined and consistent,” is run by younger professionals who tend “not [to be] from traditional investment management firms.” That’s because “we want them to think the Wakefield way and not the typical Wall Street way,” he explained.
The Wakefield approach involves looking at the markets “very differently — much more like an accountant as opposed to a predictor or an analyst,” according to Gervasini. “We’re not trying to figure out who’s got the best CEO [or] the best CFO, [or] what product lines might be doing well. We’re really just pouring into the data of the actual company and trying to make those predictions.”
The team focuses on researching how it ranks stocks, as well as how it can improve this work. “That’s where we spend all our time — trying to look at what we’ve done that works, how to make it a little bit better and really trying to find one or two more things we can add to the portfolio and [to] our discipline that will help in the future,” he said.
Dana Investment Advisors U.S. Large-Cap Core Strategy has “an incredibly consistent track record,” having topped its benchmark in 14 out of the past 18 years, according to Envestnet | PMC analysts Mike Manning and Eric Halverson. Last year, its performance “bested the benchmark by over 6.5%,” they point out.
The strategy team’s “superior stock selection … overcame significant headwinds from a lower market capitalization tilt” tied to its sector-neutral and equal-weighting approach, Manning and Halverson say; the “reasonably concentrated” portfolio — which has 50-60 holdings and is sector neutral — is “driven by the dual approach of quantitative screening and fundamental research.”
The Envestnet analysts add that Dana portfolio team relies on “valuation, quality and momentum inefficiencies and … three quantitative models to aggregate and rank every company in [its] universe.”
The stellar results last year did catch some performance-watchers off guard, according to Duane Roberts, director of equities and portfolio manager of Waukesha, Wisconsin-based Dana. “We did have a very good year,” he said. “And for some people it’s a little bit surprising perhaps because we’re known as a relative-value shop, and 2017 was very much a growth market.”
While the Dana team likes growth and even seeks it out, “we just don’t want to overpay for it,” Roberts explained. This approach gives the portfolio “a consistent valuation tilt vs. our benchmark in all market environments, and … allows us to participate in growth markets as well as value markets.”
The large-cap core strategy has outperformed in growth markets on a long-term cumulative basis, he says. “We just add more outperformance in value market.”
Consistency is the group’s priority. “We can’t do anything to manage the ups and downs of the market, but we try to be consistent in our relative performance …,” Roberts explained. “Part of that is by being consistent in our application of what we think is a very disciplined investment process that starts with portfolio construction.”
The team aims to derive excess returns from its stock selection and “eliminates many of the other sources” for overperformance, he points out. The strategy also stays fully invested all the time. “Timing is something we avoid … and is impossible to do,” the portfolio manager said.
“We don’t make big kind of macro thematic bets in our portfolio. We’re looking for the best individual securities in each segment of the market,” he explained. As a result, “we tend to have parts of our portfolio that will be benefiting in almost any market environment.”
This approach means the team is laser focused on “each individual security and … understanding the tradeoffs between growth and valuation in a way that [gives] us opportunities to perform [well] in almost any market environment,” according Roberts. The strategy has had good consistency across sectors, he says, and over time: “We use the baseball analogy — we want to hit lots of singles and doubles, and we’re not swinging for the fences with home runs.”
What about changing market environments? “In most … we’re going to perform reasonably well,” Roberts said. Plus, the fully invested, sector-neutral approach is complemented to the attention paid by the portfolio team to the macro environment, “and valuation assessments do change with macro environment,” he adds.
“In the short term, growth may continue to be the favorite part of the market,” the portfolio manager said. “But we are deep into a heavy growth cycle in terms of market performance, and at some point the cycle always swings back.”