After rounding out 2018 with a nauseating downturn, global markets have settled into somewhat of a groove over the first third of 2019. Long-term projections remain queasy, but most are viewing the current investment landscape with calm and confidence.
“In general, I’d say things look okay,” says Srikanth Iyer, Managing Director, Head of Systematic Strategies at Guardian Capital LP, “and the reason I think things look okay is because the market is focusing on all the wrong things. The analytical market or the investment management industry always tends to advise towards the trees and not the forest.”
What Iyer sees in the forest is a combination of responses to low interest rates and a capex cycle that indicates short-term thinking on the behalf of CEOs. “When you have better visibility, you will take some risks and do things. When you don’t have visibility, you start hunkering down,” he says.
Iyer feels the market has overshot P/E ratios and multiples. Such misfires inevitably result in corrections, much like 2018’s. “The fourth quarter of last year was not an anomaly,” he explains, “it was an overshoot amidst certain assumptions of where the market cycle is going.”
Terms like “overshoot” and “assumptions” speak to speculation, something many investors have had their fill of. That is why Iyer and Guardian Capital are currently focusing on blue-chip dividend growth, buying shares in companies that have consistent dividend growth and a sustainable payout where not everything is dependent on an unknowable future.
“We focus on an opportunity set that gives the client a favorable outcome, represented by a three to four percent yield growing at six to seven percent in the future. That type of response allows us to buy about 40 to 50 gorilla companies, be it a Microsoft, MasterCard, Novartis or any of the larger blue-chip companies in the world. Those types of companies allow investors to participate in a bull market or circular market like this without the headache of having the speculative element being ever-present in their portfolio,” Iyer says.
Purchasing a few pounds of gorilla flesh also allows investors to drown out constant murmurs of a bubble. It’s a view of the market Iyer doesn’t share. “I don’t think we’re in a bubble because any kind of behavioral bias that’s built into this market – people assume whatever’s going up is going up for the right reasons – is currently being subsidized by actual, real growth. Unless the real growth goes away, you won’t be able to tell if this is a bubble or not,” he says.
But that’s not to say another storm of volatility isn’t brewing somewhere far over the horizon. When it hits, flesh-and-blood advisors will be needed to clear the wreckage.
“Wealth Simple and robo-advisors will do asset allocation, but if asset allocation was the only thing that mattered for advisors, that business wouldn’t exist,” he says. “When volatility comes back, the advisor community is extremely well-equipped to hand-hold and provide a sense of long-term consistency or vision to clients,” he says. “Right now, everybody’s a good money manager, everybody’s a good stock-picker. It’s when things go bad that you need help.”
It’s been Iyer’s experience that the most effective advisors are those who are able to delegate the responsibility of stock-picking to wealth managers like himself, allowing them to better compartmentalize the value added to their clients.
“If the main role of the advisor is asset allocation and liability management, then separating stock picking and tactical or strategic market responses from the day-to-day role is important,” he says. “Advisors I see who do that have been way more successful in growing their business – and maintaining it – than advisors who try to do it all by themselves.”