While an air of caution surrounds European and emerging markets, the real action is at home in the blazing U.S. energy renaissance, two award-winning money managers said.
In a June 10 webinar, "The Best Money Managers: How and Where They're Investing Now," presented by ThinkAdvisor and Envestnet PMC, two of Investment Advisor magazine's SMA Managers of the Year, Jennifer Dunne of Cambiar Investors and Libby Toudouze of Cushing Asset Management, discussed how they are capitalizing on these trends.
Dunne is SMA Manager of the year in the International and Global Equity; Toudouze in the specialty category, specifically energy.
Cambiar Proceeds With Caution in Global Market
Jennifer Dunne, portfolio manager and senior investment analyst for Denver-based Cambiar Investors' International ADR strategy, discussed the challenges, and one surprising bright spot, in the global stock markets.
Dunne credits Cambiar's single-investment discipline, highly focused fundamental research process and benchmark-agnostic portfolios as a few of the reasons for the firm's long-term results. Cambiar – with $3 billion in international assets and $10 billion in total assets under supervision as of March 31 – knows a thing or two when it comes to investments in international and emerging markets.
"We're very positive on Japan and the potential for growth there," Dunne said.
In European markets, Cambiar has been more guarded. Lack of credit growth and disinflation complicate these markets, Dunne said.
"There's a really big problem with credit flow in eurozone currently. We are watching very closely," she added. "…European markets in general are not cheap, and you must be an active stock picker, an active analyst dissecting which companies have the best earnings prospects going forward."
Part of the reason for Cambiar's success is its permanent cautiousness in emerging markets. While Cambiar has the ability to go up to 25% emerging market exposure, it currently has 4% exposure.
"Our quality bias is such that it precludes a lot of companies entering our portfolio from emerging markets given the corporate governance issues we see," Dunne said. "Between the four dedicated international people on our team we have about 80 years of emerging market experience – so it's not that we don't know emerging markets, it's almost that we know them too well."
Dunne said Cambiar uses a stock-by-stock process to determine what's worth adding to its profile.
"We have methodically added names throughout the last year and a half, and we will continue to do so, but we are in no great hurry," she added. "…You might see us add one or two names, but in general our stance is one of quality."
The other issue for emerging markets, Dunne added, is the ripple effect of China's slowing growth.
"When you look at the past 30 years, [China's] growth has been dramatic. Those days are over," she said. "A lot of emerging markets that have relied on China are not being able to rely on China. We're questioning that old model of growth in emerging markets that was based on China and cheap markets. We are opportunistic, though. Again, that tone of caution I hope is clear."
Cushing Cashes In on U.S. Energy Renaissance With MLPs
Libby Toudouze, president at Dallas-based Cushing Asset Management, made a case for an emerging market of sorts: the North American energy market.
The energy market asset class didn't exist 10-12 years ago, Toudouze said, and ta lot of investors are fairly new to it.
"This is an asset class that you need to be considering for your clients," she said.
With the energy renaissance just beginning in the United States, Toudouze noted that master limited partnerships are critical to U.S. energy independence, which will give them visible growth for decades.
"In 2008 — despite the fact that we had probably one of the worst economic declines certainly in my lifetime — these companies were still able to grow their distributions," she said. "That's because our economy depends on these energy sources."
Energy infrastructure companies have the advantage of using the MLP structure instead of a corporate structure and thus pay no corporate-level taxes, and these companies own, maintain and operate the majority of the energy infrastructure in North America.
There may need to be more than $890 billion in energy infrastructure built in the United States by 2025, Toudouze said, citing a recent industry report. As of March 31, the MLP asset class statistics showed an approximately $620 billion total market cap and a universe of more than 120 MLP and MLP-related companies.
"MLP yields are supported by a sustainable cash flow stream that is backed by long-term contracts," Toudouze said. "Yet they also have a growth component that's very visible and predictable because of this energy renaissance."
Toudouze said that after an almost 25-year trend of declining rates, she predicts energy markets are going to see rising rates in the next 12-24 months.
"Going into a rising rate environment, the one thing that will cushion rising rates is growth," she said. "No matter whether you're health care, technology, whatever industry, it's growth. And many of these companies have it."
And the multimillion-dollar infrastructures these companies are going to build, Toudouze said, gives a very visible and predictable path of growth.
While an air of caution surrounds European and emerging markets, the real action is at home in the blazing U.S. energy renaissance, two award-winning money managers said.
