A long-time value investor whose largest holdings are in technology, John Buckingham is clearly not your typical value portfolio manager.
That shows up, apart from his betting on technology, in a striking record of picking winning equities for more than 30 years.
Assessing today’s market, he argues: “It’s a market of stocks and not simply a stock market. It depends what you’re investing in,” he tells ThinkAdvisor in an interview.
The bullish manager expects value to outperform the overall market this year, posting a return of 11% vs. 7% for the S&P 500.
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Principal and portfolio manager of Chicago-based Kovitz, he has been managing the Al Frank Fund (VALUX) from its inception in 1998.
Since then, through Jan. 7, 2022, it has realized an annualized return of 10.79%, compared with 7.9% for the Russell 3000 Value Index and 8.75% for the S&P 500.
Editor of the long-established Prudent Speculator newsletter, Buckingham oversees assets of $900 million of Kovitz’s approximate total $8 billion.
In the interview, he discusses seven investment themes he has chosen for 2022 and several stocks within each.
Themes vary from “The Fed Slows Down the Refilling of the Punch Bowl” to “Good Things Come in Small and [Mid] Packages.”
Buckingham observes that right now, long-term investors are more concerned with inflation and interest rates than with the coronavirus health risk.
“They don’t seem to be factoring that in much” in their decisions, he says.
Last year, despite a host of worries, the equity market was “fantastic,” he declares.
“Contrary to what many people believed, 2021 illustrates that time in the market trumps market timing.
“You buy good companies, patiently sit on them and not worry about the daily, weekly and monthly fluctuations,” he advocates.
ThinkAdvisor interviewed Buckingham on Jan. 10. He was speaking from his home office in Laguna Beach, California.
About today’s myriad economic and political obstacles, he points out: “There’s plenty to worry about, and I think that’s impacting some investors.
“But the market will climb a wall of worry,” adds the optimistic manager.
Here are highlights of our conversation:
THINKADVISOR: What’s your outlook for the stock market in 2022?
JOHN BUCKINGHAM: We have a generally healthy economy, and corporate profit growth is going to be strong this year. The only time you see a stock market decline is when there’s a corporate profit recession, a drop in corporate profits.
So I don’t see a big overall market downturn for the year.
But what about the higher interest rates that are coming?
Historically, rising rates haven’t been good for growth stocks. So investors should be gravitating toward value stocks.
The first week of 2022 has been phenomenal in terms of value being up and growth being down.
Over the last month or so, value has outperformed significantly and will continue to for the full year. We think it will outperform the overall market with an 11% return this year vs. an S&P return of, say, 7%.
What’s your expectation for GDP growth in 2022?
Last December, the Federal Reserve projected 4%. That was before the omicron variant hit. So I expect there’s going to be a modestly negative impact on GDP growth in the near term.
I’d say about 3.7% or 3.8%, which is still very strong, way above where we’ve had for many, many years. Therefore, it’s still likely to be a very healthy economic climate.
You’re a dedicated value investor. But do you ever invest in growth stocks?
One of the big differentiators between us and many other value managers is that we like technology. Over 20% of our portfolio is in technology stocks [growth].
Our largest holdings are Apple and Microsoft. We bought them when they were value stocks.
We want our companies to grow. We want to buy them when they’re trading at inexpensive price tags and are willing to hold them through their growth phase.
What was Apple’s price when you initially bought it in 2000?
The cost basis was something like 10 or 8 cents because of all the splits. It was trading at a very low price. It wasn’t making money. But we thought the business was certainly viable and very interesting.
Getting back to the present, how much does the coronavirus pandemic figure into your forecasting?
The health risk isn’t really the problem today; it’s the economic risk — the supply chain risk, in the short run.
But in the long run, I don’t think [the virus] is going to be that big a deal.
Yes, it’s not under control. It’s not been eradicated. It’s not endemic yet — it’s still a pandemic.
But long-term investors don’t seem to be factoring it in much. Their concern today is more rising interest rates and inflation — what the Fed will do.
So what’s your thinking about rising inflation?
The supply chain issues are the primary culprit in the significant inflation we have.
As omicron starts to fade, I think those issues will begin to get under control, and inflation will come down somewhat.
To approximately what rate?
I’m guessing there might be a 3% inflation rate this year.
What impact will that have on stocks?
Historically, rising inflation is good for value stocks, not as good for growth stocks.
When do you expect interest rates to rise?
In March. But I don’t see why people are so concerned about the Fed [and rates] when what we want is a more normal economic climate. So if there’s another bad event, the Fed has room to lower rates.
What are your expectations for bonds this year?
My worry for many investors is that if they have bond exposure of 40% or 50% in their portfolio, they’re going to lose money, as they did last year.
Over time, we’re going to see, not massive equity-like losses in bonds but [big] losses. When you lose 1% or 2%, as people did last year and bonds are down 1% or 2% already this year, that’s not what you [want to] expect with fixed income.
You’ve identified stocks that you like this year under seven different themes. How did these equities perform last year?
Many lagged. Some performed well, though they may be down a little bit this year. It all depends when your start date is.
Most of these stocks are going to be well off their lows [and] most are going to be well off their highs.