"That's not always true, but sometimes it's the case," Pope explains. "We do careful, fundamental bottom-up [research] where we reach out to the company. From [here] we do our stock selection process."
On average, the fund owns 60 to 80 stocks. "It's not a concentrated portfolio, but may be slightly more concentrated than the average core manager out there," he explains.
When a team member finds a stock that is of interest, they apply a "three-alpha approach," Pope says. First, they contact the company, "engage" with management and "collect all the available public information out there," he says. The second source of alpha is the fundamental research that comes from the equity analysts. Finally, there is the quantitative team that uses a multi-factor model on how the stock is rated.
"After we utilize all three sources of alpha, we will come to an independent conclusion or investment thesis," he says. That falls into one of three categories: market efficiency, thesis still to be determined and investment merit. This final one is when the names finally make it into the portfolio, Pope adds.
The portfolio has 60% to 80% turnover per year; when the market is more volatile, the turnover goes up. Pope says an advantage to their contrarian approach is that it makes them wait. "A lot of times people are just reacting to the news flow. …. I like [our process] because it makes us wait for a better entry point, a cheaper entry point," he explains.
Pope calls 2020 a "fascinating year," in which they started hearing in January about the "virus in Asia and we got a little concerned and started to trim some stocks that were relying on Asian consumers, but the market shrugged it off very quickly," he recalls. At first they wondered if they had made a mistake, but then in February the market went into its "waterfall decline."
Having been a portfolio manager for 28 years, Pope says he's built up "mental models" for markets, but "there is no page in the playbook for any portfolio manager on how to deal with a pandemic."
The senior portfolio manager said the downdraft of the market was so severe that their indicators eventually "looked very similar to past corrections, where at a certain point you have to turn from being defensive to being opportunistic. It made us think back to [the] fourth quarter of 2008, the summer of 2011 and December of 2018."
That meant leaning into a correction, "and when you are leaning into a correction, you want to make sure you're buying stocks that can outperform on a market rebound versus everything," he explains.
Pope explains his team also did well because of the "two phases to last year. The first three quarters, growth [stocks] outperformed [due to the] Fed taking rates to zero and saying they would keep them there awhile."
Also, FANG stocks, such as Amazon and Netflix, benefited from the pandemic. In the fourth quarter, however, value stocks did better. When the firm's research pointed to a faster vaccine development, they added value stocks to the portfolio, which "helped us outperform [too] in the fourth quarter," he adds.
