How refined analysis of all-cap equity fund capitalizes on market's short-term disconnect

Sandy Sanders, who leads Manulife Investment Management's U.S. Core Value Equity Team, explains his investment process and why it's prudent to look beyond volatility

How refined analysis of all-cap equity fund capitalizes on market's short-term disconnect

We live in an “everything now” world, from consumerism, social media and stock market performance. In times of crisis, this invites a lack of perspective. One asset manager, however, believes his investment process stands out for being the anti-thesis of this on-demand culture.

Sandy Sanders leads Manulife Investment Management’s U.S. Core Value Equity Team and has overseen its asset growth from $3 billion to $27 billion in AUM1. The team has a rigorous seven-step process that focuses on companies’ long-term revenue and margin expectations.

Its methodology is put to the test during times of volatility, like the March 2020, COVID market crash or the recent impact of Russia’s military action in Ukraine during a quarter that was the worst for stocks in two years.

Through its forensic lens, Sanders and his team of nine experienced investment professionals assess whether a company’s sales growth is potentially repeatable and realistic. For example, the Manulife U.S. All Cap Equity Fund, managed by Sanders, owns Meta, and believes the tech company’s current stock price foresees about 3% long-term growth looking ahead to the next 10 years2.

Sanders explained: “Basically, that's global GDP growth. Now, we know [Meta] is no longer a 40% or 50% grower like it was coming out of the 2016 period, but we think it's better than 3%. We had calls with digital advertisers and did survey work to back up our process, and our base case suggests it’s closer to 10%. That’s the disconnect - most folks are focusing in on what's happening just today.”

Sanders models companies with a minimum five-year outlook up to 10 years. It’s an approach that also puts macro events, or the interest-rate picture, for example, in clearer perspective. Russia’s military action in Ukraine caused many stocks to drop to worst-case valuations, presenting an opportunity for the fund.

Sanders said: “COVID caused massive fear, and we were very active during that period buying stocks because, through our process, we could see they were near worst-case values. Markets didn't get as cheap this time, but we were still active and bought new names during the volatility.”

The fund manager expects Federal Reserve Chair, Jerome Powell to continue to be measured in his rate-hiking schedule, with the goal of disrupting the markets as little as possible. Again, any volatility will present buying opportunities, but he believes the U.S. economy offers reason for optimism because of the resiliency of the consumer. Household debt service ratio was at a 30-year low (about 9% for Q4 of 2021)3, the housing market is in good health with historically low interest rates, and the large-cap banks are well-positioned.

“The U.S. consumer, which is two thirds of our economy is a key indicator for future market direction,” Sanders told WP. “Today, that looks favorable to me, particularly given this pullback, so I think you're potentially set up for a summer rally as we get clarity on Ukraine.”

The fund’s portfolio balances growth and value companies and is modestly tilted towards the former. This flexibility – and the fact the team carries out about 700 meetings per year with companies - allows a more diversified approach so the fund can enjoy the best of both worlds. What it won’t do, insists Sanders, is compromise on quality by delving into cyclicals that may “destroy” value through a full cycle. With that in mind, the fund avoids sectors like airlines, automotive, telecom, utilities, materials or mining. In terms of company size, the Manulife U.S All Cap Equity fund currently features about 55% large cap, 25% mid cap, and just under 20% small cap equities1.

This portfolio make-up is determined by an expert team that’s been together for a decade. After joining Manulife back in 2010, it hired fresh talent out of business school – and individual careers have grown with the fund. Analysts are paid on the entire portfolio performance, not just on their own sector’s, which fosters a team-oriented approach.

Sanders believes this encourages more debate and incentive to be involved in all aspects of the portfolio. “That’s a real differentiator versus other shops that are typically more siloed. Intellectual honesty is the cultural mandate that we stand by and it hits you where it matters – your wallet.  That is how we've always worked.”

It’s all part of the rigorous process that has made the fund such a high-performer – and having had its method vindicated by portfolio results during the pandemic, Sanders is confident in navigating the numerous inflationary headwinds hitting investors. From shutdowns to inventory depletions and now the commodity price spike caused by the Ukraine-Russia conflict, it feels like the perfect storm.

“My view is that these near-term headwinds are manageable because of that robust consumer. Consumers have the best balance sheet, and employment and wage rates are rising. People have cash on the sidelines. Overall, I do think that inflation is a headwind in the near term, but my view is that we’ll see some improvement over the next 12 months.”

As ever, Sanders and his colleagues will be poised to take advantage of any market disconnect, when short-term fear or hype obscures the longer-term view.

1 Source: Manulife Investment Management as of March 31, 2021

2 As of April 1, 2022.

3 Federal Reserve Board: Household Debt Service and Financial Obligations Ratios

Sponsored by Manulife Investment Management, as of April 2022. 

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