U.S. equity portfolio manager explains seven-step investment process

Sandy Sanders, who leads Manulife Investment Management’s U.S. Core Value Equity Team, explains the investment philosophy behind its growth from $3 billion to $25 billion AUM

U.S. equity portfolio manager explains seven-step investment process

Sandy Sanders has a distinct investment philosophy; seven steps to stocks heaven that has enabled his team to grow from $3 billion in AUM to $25 billion as of August 25, 2021, since joining Manulife Investment Management 10 years ago.

Sanders, a senior managing director and senior portfolio manager, leads the U.S. Core Value Equity Team, and is a long-term investor who applies to his honed, detailed fundamental assessment to each company under investment consideration. It’s a process that takes three to four weeks of work with his team before they look to buy the stock at 70 cents on the dollar.

So, what is Sanders’ seven-step secret sauce? The first step focuses on a company’s competitive advantage and asks, is it sustainable? Is it going to last not just for a couple of years but for a minimum 5-10 years? The second step is an industry analysis, understanding the sector, who has market share and who are the leading players.

The third step is identifying growth drivers. Sanders carries with him words from an old mentor - ‘always understand what drives top-line revenue’. For example, when Sanders first invested in Amazon back in 2003, when it was $17 a share, online penetration of retail sales in the U.S. was only 3%, but he believed that number was going to grow substantially over time. He met with Jeff Bezos who explained his competitive advantages - widest selection, lowest prices and convenience – completed his analysis and bought the stock. Sanders said: “That’s an example of a company that had a clear growth driver - penetration of its end market with offline retail going online.”

The fourth step is a financial statement analysis, getting into the nitty gritty of the balance sheets from a cash-flow perspective, while the fifth step is a management team assessment. Sanders is not interested in a company’s latest shiny product but instead wants to understand the key assumptions that go into his team’s investment process. ESG factors are also analysed at this stage, including how the board is made up and the compensation model.

Step six is critical and involves Sanders laying out four scenarios - best case, base case, bear, and worst, which are all five-year minimum discounted cash-flow models. The base case is what he thinks the stock is worth today, an estimate of cents on the dollar or intrinsic value. If Sanders believes a stock is worth $100 and it’s trading at $70, it’s 70 cents. He said: “We have this list of companies we're following, and it's ranked by cents on the dollar every morning. When stocks get to 70 cents, we recheck the analysis and we buy, and when stocks get up to 100 cents, we sell. That, in a nutshell, is our process.”

Every quarter these values are updated, in step seven, so it’s a moving target, underpinned by deep fundamental research that involves a 10-person team looking at one stock at a time before presenting it the team for debate.

While many investors focus on what is happening that quarter, Sanders told WP he thinks longer term, an approach illustrated by the crash of March 2020. He saw a health crisis, not an issue with the consumer, who ultimately drives the economy. Now in his third market cycle of managing money, the portfolio manager recognized that many elements were actually in good health, from millennials with no mortgages, a housing market at steady levels in the U.S. as it continued its recovery from the 2008 Global Financial Crisis, and a banking system that was doing well after 10 years of Federal Reserve stress tests.

Sanders said: “What you had was a perfect set-up because it was a health crisis, and everything else was fine. The U.S. government stepped in [with stimulus] and you had these vaccine companies come up with solutions quite quickly. I realized that this potentially could be a quick recovery.”

Stocks were being sold off on short-term concerns, with people assuming it was going to be another 2008. Sanders and his team simply did not believe that was the case. “That gave us the confidence to step up because many stocks were trading at our worst-case values last year, embedded that the earnings don't come back for 10 years.

“So, we had very good margin of safety all of a sudden – and it was one of the better buying opportunities I've seen in a decade. We stepped up, used our process, and we were buying stocks at 40, 45, 50 cents on the dollar in many cases in the portfolio.”

Constantly evolving, Sanders admitted investing can be a humbling business and the team learn from their mistakes and consistently seeks to improve its process. Recently, it added a moat rating and a management team rating to its analysis, guarding itself against selling a company too early if those scores are high. 

On top of his seven-step process, he’s also learnt to pay close attention to the macroeconomic outlook to understand where the economy is trending. He highlighted three areas he’s bullish on heading into the next stage of the economic recovery. He continues to see opportunities in large-cap technology FANG names such as Facebook, Amazon and Google – three companies taking market share dramatically from offline advertising. These companies are also well positioned to capitalize in the shift to cloud computing, with Amazon already a market leader.

Sanders also likes financials, explaining that better economic growth means more lending activity and more capital markets activity. He added: “That may drive the earnings of the large-cap banks, as well as boost their margins because, most likely, higher interest rates are on the horizon.”

Completing the trifecta is housing, with the millennial demographic a major growth driver for the industry. With young adults stuck at their parents’ place because of COVID, the pandemic has provided the “perfect storm” to kick-start the U.S. housing cycle. “Millennials are moving out because they want their own place under their own terms, and this is all happening at once because of COVID,” Sanders said. “It really has stimulated the housing market and, on top of that, you've got record low interest rates with the Fed having been very supportive, so taking a mortgage out is quite affordable.”

When it comes to the seven-step investment process, Sanders believes that in order to be good at anything, whether it's investing or playing the guitar, you have got to do it the same way over and over again. “It’s just discipline – and that's what we’ve got with this process.”


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