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Global stocks

Equifax Is Best Known for Its Credit Bureau, but Workforce Solutions Segment Driving Profit Growth

Finance and Economy Chart for Dollar Gold Euro Currencies Trading View

Business Strategy and Outlook

Along with TransUnion and Experian, Equifax is one of the big three credit bureaus. Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue. As the U.S. credit bureau market is relatively mature, the company has been adding new capabilities and expanding its geographic footprint, both organically and through acquisitions. As an example of its bolt-on acquisition strategy, Equifax announced in January 2021 that it will acquire e-commerce fraud prevention platform Kount for $640 million. Kount builds on Equifax’s existing antifraud products and we think acquiring unique data and software assets makes sense.

Equifax’s star in recent years has been its workforce solutions segment; we expect workforce solutions revenue in 2021 to eclipse U.S. credit bureau revenue. Workforce solutions includes income verification (primarily for mortgages), and we don’t believe Equifax has meaningful direct competition for this service. We expect Equifax’s competitive position to persist as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome. In the years ahead, we expect Equifax to focus on expanding use cases of income verification beyond mortgage to auto, credit card, and government services. Workforce solutions also includes employers’ services, which consist of employee onboarding solutions, I-9 management, tax form services, and unemployment claims processing, the last of which provided a meaningful source of countercyclical revenue amid the COVID-19 pandemic.

Equifax’s reputation took a beating after a well-publicized data breach in September 2017. This wasn’t the first time Equifax suffered a data breach; however, the depth and the breadth of the breach created ire among the public and showed that the company wasn’t prepared to handle customers data securely. Following the breach, Equifax has invested heavily in cybersecurity ($292 million in 2019) and incurred significant legal and product liability costs. In our view, Equifax has largely put the episode behind it.

Financial Strength

Equifax management has historically been reasonably conservative with the balance sheet, with leverage ratios (net debt/adjusted EBITDA) between 1.5 and 3.0 times in the past several years. Management has shown a willingness to increase debt after an acquisition. Following the acquisition of Veda in 2016, the leverage ratio went to 3.5 times, but the firm quickly paid some of its debt to reduce

leverage. Following the data breach in 2017, leverage increased as the firm incurred significant costs related to the breach. At the end of 2020, Equifax disclosed that it had $4.4 billion in long-term debt and $1.7 billion of cash. On a net leverage basis, we calculate Equifax’s leverage at the

end of the fourth quarter of 2020 was 1.8 times. Given this and the fact that a significant subset of the company’s business is either not very economically sensitive or countercyclical, we believe Equifax is on strong financial footing amid the coronavirus-induced macroeconomic uncertainty.

Bulls Say’s

  • The workforce solutions segment is a fast-growing business built on unique data and can contribute meaningfully to earnings growth. Equifax can increase use cases in nonmortgage applications for income verification. 
  • Equifax’s businesses lines are capital-light, and incremental revenue tends to flow to the bottom line, generating high returns on invested capital and operating margin expansion
  • Equifax’s acquisitions can further solidify its moat and diversify its lines of business.

Company Profile 

Along with Experian and TransUnion, Equifax is one of the leading credit bureaus in the United States. Equifax’s credit reports provide credit histories on millions of consumers, and the firm’s services are critical to lenders’ credit decisions. In addition, about a third of the firm’s revenue comes from workforce solutions, which provides income verification and employer human resources services. Equifax generates over 20% of its revenue from outside the United States.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks

Equifax: one of the big three credit bureaus, taking the limelight is the Workforce

Business Strategy and Outlook

Along with TransUnion and Experian, Equifax is one of the big three credit bureaus. Given the fixed costs inherent in a data-intensive business, Equifax has been able to enjoy strong operating leverage from incremental revenue. As the U.S. credit bureau market is relatively mature, the company has been adding new capabilities and expanding its geographic footprint, both organically and through acquisitions. As an example of its bolt-on acquisition strategy, Equifax announced in January 2021 that it will acquire e-commerce fraud prevention platform Kount for $640 million. Kount builds on Equifax’s existing antifraud products and it is anticipated, acquiring unique data and software assets makes sense.

Equifax’s star in recent years has been its workforce solutions segment; and it is supposed workforce solutions revenue in 2021 to eclipse U.S. credit bureau revenue. Workforce solutions includes income verification (primarily for mortgages), and it is not in certain of Equifax to have meaningful direct competition for this service. It is believed Equifax’s competitive position to persist as the large amount of existing records and the difficulty of convincing employers to share employee information would be too tough for new entrants to overcome. In the years ahead, it is foreseen Equifax to focus on expanding use cases of income verification beyond mortgage to auto, credit card, and government services. Workforce solutions also includes employers’ services, which consist of employee onboarding solutions, I-9 management, tax form services, and unemployment claims processing, the last of which provided a meaningful source of countercyclical revenue amid the COVID-19 pandemic. 

Equifax’s reputation took a beating after a well-publicized data breach in September 2017. This wasn’t the first time Equifax suffered a data breach; however, the depth and the breadth of the breach created ire among the public and showed that the company wasn’t prepared to handle customers data securely. Following the breach, Equifax has invested heavily in cybersecurity ($292 million in 2019) and incurred significant legal and product liability costs. It is seen, Equifax has largely put the episode behind it

Financial Strength

Equifax management has historically been reasonably conservative with the balance sheet, with leverage ratios (net debt/adjusted EBITDA) between 1.5 and 3.0 times in the past several years. Management has shown a willingness to increase debt after an acquisition. Following the acquisition of Veda in 2016, the leverage ratio went to 3.5 times, but the firm quickly paid some of its debt to reduce leverage. Following the data breach in 2017, leverage increased as the firm incurred significant costs related to the breach. At the end of 2020, Equifax disclosed that it had $4.4 billion in long-term debt and $1.7 billion of cash. On a net leverage basis, we calculate Equifax’s leverage at the end of the fourth quarter of 2020 was 1.8 times. Given this and the fact that a significant subset of the company’s business is either not very economically sensitive or countercyclical, it is seen, Equifax is on strong financial footing amid the coronavirus-induced macroeconomic uncertainty

 Bulls Say’s

  • The workforce solutions segment is a fast-growing business built on unique data and can contribute meaningfully to earnings growth. Equifax can increase use cases in nonmortgage applications for income verification.
  • Equifax’s businesses lines are capital-light, and incremental revenue tends to flow to the bottom line, generating high returns on invested capital and operating margin expansion. 
  • Equifax’s acquisitions can further solidify its moat and diversify its lines of business.

Company Profile 

Along with Experian and TransUnion, Equifax is one of the leading credit bureaus in the United States. Equifax’s credit reports provide credit histories on millions of consumers, and the firm’s services are critical to lenders’ credit decisions. In addition, about a third of the firm’s revenue comes from workforce solutions, which provides income verification and employer human resources services. Equifax generates over 20% of its revenue from outside the United States.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

BNY Mellon Global Stock Fund: A solid strategy led by an impressive, long-tenured team

Process:

The Walter Scott investment team executes a patient investment process, undertaking rigorous fundamental research to identify quality names that can deliver superior long-term returns. It earns an Above Average Process rating. The process starts with an initial screen of businesses that can deliver at least 20% cash flow return on investment over a full market cycle. The managers have an active watchlist of approximately 250 companies they closely monitor, and the team undertakes fundamental bottom-up analysis, assessing factors such as competitive position, industry dynamics, profitability, balance-sheet strength, financial model, and quality of management. 

Portfolio:

The team constructs a relatively concentrated portfolio that usually has 40-60 names. Adequate diversification is maintained by limiting position sizes to a maximum of 5 percentage points, but typically they don’t exceed 4% of the portfolio. The group’s long-term quality focus results in the strategy exhibiting a bias toward mega-cap stocks, though it does hold some mid-cap names. Historically, the strategy has exhibited significant country-level bets. It is typically underweighted in the United States relative to the MSCI World Index. At the sector level, the strategy favours tech, healthcare, and consumer cyclical stocks, while having a large underweighting in financial services.

People:

An experienced, stable team that works together well leads to a High People rating. Investment decision-making at subadvisor Walter Scott is team-based. All investments, new and existing, are discussed and debated until there is unanimous agreement by the research team. Stability and experience characterize Walter Scott’s investment team, with members boasting impressive experience and tenures with the firm. More than half of the investment team members have spent their entire investment careers at the company. In 2021, one of the joint portfolio managers, Yuanli Chen, left, a rare departure. Long-term cohead of research Alan Edington moved to a new position, Responsible Investment.

Performance:

The strategy has sported strong results from its late-December 2006 launch through 2021. The I shares’ 9.4% annualized gain exceeded its MSCI World Index prospectus benchmark’s 7.4% and edged the typical world large-stock growth peer. However, it’s lost a bit of an edge against a more growth-oriented benchmark, with the MSCI World Growth Index up 10% annualized during the period.

(Source: Morningstar)

Price:

Analysts find it difficult to analyse expenses since it comes directly from the returns. Analysts expect that it would be able to deliver positive alpha relative to its category benchmark index.


(Source: Morningstar)                                                                     (Source: Morningstar)

About Funds:

With a focus on investing for the long term, the portfolio consistently favors technology, healthcare, and consumer discretionary names while being significantly underweight in financial services and energy. The strategy won’t always lead the way in buoyant markets. It landed behind the MSCI World Index benchmark in 2021. The investment seeks long-term total return. To pursue its goal, the fund normally invests at least 80% of its net assets, plus any borrowings for investment purposes, in stocks. The fund’s investments will be focused on companies located in the developed markets. Examples of “developed markets” are the United States, Canada, Japan, Australia, Hong Kong and Western Europe. It may invest in the securities of companies of any market capitalization. The fund’s sub-investment adviser, Walter Scott & Partners Limited (Walter Scott), seeks investment opportunities in companies with fundamental strengths that indicate the potential for sustainable growth.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Dollar Tree’s Price Hike Should Help, but Long-Term Competition Remains a Concern

Business Strategy and Outlook:

Dollar Tree’s namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, before the pandemic, its Family Dollar unit (acquired in 2015) struggled to generate top-line and margin growth. Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results.

Accounting for around half of sales, the Dollar Tree banner’s wide assortment of products at $1.25 or less has appealed to customers, drawing a broad range of low to middle-income consumers. We believe the concept has room to grow (with square footage rising by a low- to mid-single-digit percentage long term), expanding in new markets while also increasing density. The chain’s fast-changing assortment creates a treasure hunt experience that has a history of drawing customers (posting nearly 3% same-store sales growth on average over the past five years) and has been hard for online retailers to match.

Financial Strength:

Though it took on considerable debt to fund its 2015 purchase of Family Dollar, Dollar Tree’s leverage-reduction efforts have left it on sound financial footing. Its strong balance sheet and free cash flow generation should suffice to fund growth and investments necessary to maintain low price points and respond to competitive pressure. The firm ended fiscal 2020 with net debt at less than three-quarters adjusted EBITDA, the latter of which covered interest expense more than 17 times. Furthermore, capital expenditures to fuel store growth are fairly discretionary, so Dollar Tree should be able to curb targets if needed in the event of financial strain.

Bulls Say:

  • Dollar Tree’s $1.25 price point concept is differentiated, holding absolute dollar costs low for customers while allowing the retailer to realize higher margins than conventional retailers. 
  • Small ticket sizes make it difficult for online retailers to contend with Dollar Tree’s single-price-point model as shipping costs weigh on their ability to compete profitably. 
  • As its two banners become more closely integrated and the store network expands, Dollar Tree should leverage its supply chain and distribution infrastructure investments, generating resources to fuel its low-price model.

Company Profile:

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1.25 price. Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Dollar Tree Inc: Distinguished by its $1.25 price point concept

Business Strategy and Outlook

Dollar Tree’s namesake banner has a long history of strong performance, enabled by its differentiated value proposition, but, before the pandemic, its Family Dollar unit (acquired in 2015) struggled to generate top-line and margin growth. It is suspected the Dollar Tree banner is better positioned long-term, but do not believe the aggregated firm benefits from a durable competitive edge, as competitive pressure in a fast-changing retail environment amid minimal switching costs limits results. We expect the pandemic’s effects to be confined to the near term, leaving the long-term competitive dynamic intact. 

Accounting for around half of sales, the Dollar Tree banner’s wide assortment of products at $1.25 or less has appealed to customers, drawing a broad range of low to middle-income consumers. The concept has room to grow (with square footage rising by a low- to mid-single-digit percentage long term), expanding in new markets while also increasing density. The chain’s fast-changing assortment creates a treasure hunt experience that has a history of drawing customers (posting nearly 3% same-store sales growth on average over the past five years) and has been hard for online retailers to match. With basket sizes small and the average transaction resulting in a modest bill, we consider the segment relatively well insulated from the digital threat. 

Prospects are murkier at Family Dollar, which has struggled since its acquisition, though the pandemic has provided a fleeting sales lift. Evenly distributed between urban and rural areas, it is anticipated that the chain’s presence in cities is especially susceptible to competitive pressures from a bevy of convenience stores, mass merchandisers, and grocers. While its mix of low prices and convenience carries appeal, particularly among customers that do not have nearby alternatives, It is expected that the benefits of operational improvements and tighter integration with Dollar Tree will largely be offset by competitive strain.

Despite the headwinds, both chains should deliver long-term top-line and margin growth in aggregate, capitalizing on consumers’ desire for convenience and value even as the landscape becomes more challenging.

Financial Strength

Though it took on considerable debt to fund its 2015 purchase of Family Dollar, Dollar Tree’s leverage-reduction efforts have left it on sound financial footing, in our view. Its strong balance sheet and free cash flow generation should suffice to fund growth and investments necessary to maintain low price points and respond to competitive pressure. With the stores remaining open and catering to essentials, we expect little difficulty with navigating the challenges presented by the pandemic. The firm ended fiscal 2020 with net debt at less than three-quarters adjusted EBITDA, the latter of which covered interest expense more than 17 times, neither mark troubling. Despite aggressive growth in the Dollar Tree banner (from under 4,000 stores at the start of fiscal 2010 to more than 7,800 at the end of fiscal 2020) and performance improvement investments at Family Dollar, cash generation has been strong. It is expected to have free cash flow to the firm to average 5% of sales over our explicit forecast. Furthermore, capital expenditures to fuel store growth are discretionary, so Dollar Tree should be able to curb targets if needed in the event of financial strain. Annual outlays to average 3%-4% of sales over the next decade, or just over $1 billion. We do not anticipate Dollar Tree will introduce a dividend. Instead, we expect it to direct excess funds to share repurchases, consistent with its practice before the Family Dollar purchase (the firm bought back an average of just under $500 million in shares annually from fiscal 2010 to 2014, adding $200 million in fiscal 2019 and $400 million in fiscal 2020). In the long term, we assume the company uses around 60% of its cash flow from operations to buy shares.

Bulls Say’s

  • Dollar Tree’s $1.25 price point concept is differentiated, holding absolute dollar costs low for customers while allowing the retailer to realize higher margins than conventional retailers. 
  • Small ticket sizes make it difficult for online retailers to contend with Dollar Tree’s single-price-point model as shipping costs weigh on their ability to compete profitably. 
  • As its two banners become more closely integrated and the store network expands, Dollar Tree should leverage its supply chain and distribution infrastructure investments, generating resources to fuel its low-price model.

Company Profile 

Dollar Tree operates discount stores in the U.S. and Canada, including over 7,800 shops under both its namesake and Family Dollar units (nearly 15,700 in total). The eponymous chain features branded and private-label goods, generally at a $1.25 price. Nearly 50% of Dollar Tree stores’ fiscal 2020 sales came from consumables (including food, health and beauty, and household paper and cleaning products), just over 45% from variety items (including toys and housewares), and 5% from seasonal goods. Family Dollar features branded and private-label goods at prices generally ranging from $1 to $10, with over 76% of fiscal 2020 sales from consumables, 9% from seasonal/electronic items (including prepaid phones and toys), 9% from home products, and 6% from apparel and accessories.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks Shares

Nike’s Powerful Brand and E-Commerce Position It Well Despite Some Short-Term Issues

Business Strategy and Outlook

We view Nike as the leader of the athletic apparel market and believe it will overcome the challenge of COVID-19 despite near-term supply issues. Morningstar analyst think Nike’s strategies allow it to maintain its leadership position. In mid-2017, Nike announced a consumer-focused realignment. It is investing in its direct-to-consumer network while reducing the number of retail partners that carry its product. In North America and elsewhere, the firm is reducing its exposure to undifferentiated retailers while increasing distribution through a small number of retailers that bring the Nike brand closer to consumers, carry a full range of products, and allow it to control the brand message. Nike’s consumer plan is led by its Triple Double strategy to double innovation, speed, and direct connections to consumers. Triple Double includes cutting product creation times in half, increasing membership in Nike’s mobile apps, and improving the selection of key franchises while reducing its styles by 25%. We think these strategies will allow Nike to hold share and pricing.

Although its recent results in China have been inconsistent due to supply issues and a political controversy, Morningstar analyst still believe Nike has a great opportunity for growth there and in other emerging markets. Moreover, with worldwide distribution and huge e-commerce that totaled about $9.3 billion in fiscal 2021, Nike should benefit as more people in China, Latin America, and other developing regions move into the middle class and gain broadband access.

Financial Strength

 Nike is in excellent financial shape to weather the COVID-19 crisis. At the end of fiscal 2021’s second quarter, Nike had $9.4 billion in long-term debt but $15.1 billion in cash and short-term investments.Nike does not have any long-term debt maturities until May 1, 2023, when its $500 million in 2.25% senior unsecured debt matures, but it does have significant endorsement commitments that, as of the end of fiscal 2021, totaled at least $5.5 billion over the ensuing five fiscal years. The firm produced nearly $19 billion in free cash flow to equity over the past five years, and Morningstar anlayst estimate it will generate more than $38 billion in free cash flow to equity over the next five. Nike issued $1.6 billion in dividends in fiscal 2021 and analyst forecast an average annual dividend payout ratio of about 30% over the next decade. Over the next five fiscal years, Morningstar analyst forecast that Nike will repurchase about $19 billion in stock and issue $11 billion in dividends. 

Bull Says

  • Nike has a great opportunity in fast-growing markets like China. More than 70% of Nike’s growth over the next five years may come from outside North America. 
  • Nike’s Triple Double strategy of increased innovation, direct-to-consumer sales, and speed may improve margins and share. Membership growth in its digital channel has exceeded expectations. 
  • Nike’s gross margins may expand by a couple dozen basis points per year through automation, ecommerce, and higher prices. Nike is actively shifting sales to differentiated retail in North America to increase full-priced sales

Company Profile

Nike is the largest athletic footwear and apparel brand in the world. It designs, develops, and markets athletic apparel, footwear, equipment, and accessories in six major categories: running, basketball, soccer, training, sportswear, and Jordan. Footwear generates about two thirds of its sales. Nike’s brands include Nike, Jordan, and Converse (casual footwear). Nike sells products worldwide and outsources its production to more than 300 factories in more than 30 countries. Nike was founded in 1964 and is based in Beaverton, Oregon

 (Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Daily Report Financial Markets

USA Market Outlook – 11 January 2022

USA-Market-Outlook-11-January-2022Download

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Technology Stocks

Raising Moderna’s FVE to $182 on Pipeline Progress and Additional 2022 COVID-19 Vaccine Sales

Stock market digital graph chart on LED display concept. A large display of daily stock market price and quotation. Indicator financial forex trade education background.

Business Strategy and Outlook

Moderna’s mRNA technology has gained rapid validation as sales of its COVID-19 vaccine soar in 2021, but we think the firm has yet to secure a narrow economic moat around its business, largely due

to uncertainties tied to an evolving virus and the changing competitive landscape for innovative vaccines.

In a record-breaking span of just 11 months, Moderna created, developed, manufactured, and got regulatory authorization for mRNA-1273, a two-dose COVID-19 vaccine that is one of the first two mRNA vaccines ever authorized (alongside Pfizer/BioNTech’s BNT162b2). The pandemic accelerated Moderna’s evolution into a commercial-stage biotech, and we expect that the firm’s ramp-up in manufacturing and clinical know-how will pave the way for faster timelines for additional programs. Moderna’s mRNA platform, involving rapid design and similar manufacturing across programs, allows the company to pursue multiple programs in parallel. Moderna also retains full rights to most of its programs, although key partnerships with Merck and AstraZeneca help support its efforts in oncology.

We expect the firm to report $17 billion in COVID-19 vaccine sales in 2021, with $20 billion in sales in 2022 as demand for first doses begins to decline but demand for boosters expands. We see potential for sustained revenue in the low-single-digit billions annually if higher-risk populations continue to receive annual vaccines beyond the pandemic, although there is high uncertainty around the number of long-term competitors (including new mRNA players) and pricing.

Moderna’s most advanced program outside COVID-19 is for cytomegalovirus, a leading cause of birth defects, but several other vaccines are in earlier trials, targeting other respiratory viruses like RSV and influenza. We see each of these as more than $1 billion annual sales opportunities. Moderna is also pursuing therapeutic cancer vaccines with Merck, as well as regenerative therapeutics and intratumoral immuno-oncology therapies with AstraZeneca, which we include in our valuation. We recently included Moderna’s leading secreted or intracellular protein programs in our valuation, as they have entered early-stage development.

Financial Strength

Moderna raised $1.85 billion through two equity offerings in 2020, ending the year with cash and investments of $5.25 billion. This added substantially to the firm’s IPO proceeds in 2018 of $563 million. Given Moderna’s massive expected COVID-19 vaccine sales in 2021 and lack of debt, the firm’s

financial strength looks solid.

Bulls Say’s

  • The stellar efficacy and safety profile of Moderna’s COVID-19 vaccine offered rapid validation of the firm’s mRNA technology
  • Its mRNA technology could allow the firm to compete in a wide range of therapeutic areas, ranging from other prophylactic vaccines (like influenza and other viruses) to enzyme replacement (various rare diseases) to cancer
  • Moderna’s cash infusion from COVID-19 vaccine sales in 2021, as well as newly established large-scale manufacturing facilities, positions the firm to accelerate timelines for new pipeline programs

Company Profile 

Moderna is a commercial-stage biotech that was founded in 2010 and had its initial public offering in December 2018. The firm’s mRNA technology was rapidly validated with its COVID-19 vaccine, which was authorized inthe United States in December 2020. Moderna had 24 mRNA development programs as of early 2021, with 13 of these in clinical trials. Programs span a wide range of therapeutic areas, including infectious disease, oncology, cardiovascular disease, and rare genetic diseases.

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Fixed Income Fixed Income

TCW Emerging Markets Local Currency Income Fund Class

Approach

A combination of flexibility and caution, as well as a thoughtful approach to country and currency analysis, continue to support a High Process Pillar rating. This strategy’s approach combines fundamental analysis and top-down research with an aim to manage downside risk. Analysts are responsible for setting three-, six-, and 12-month targets for local rates positions, and the team actively trades around currency positions. There is evaluation of interest rates and currencies on a country-by-country basis, and its higher-conviction positions aren’t usually more than a few percentage points off the JPMorgan GBI-Emerging Markets Global Diversified Index’s, a sensible guardrail given the exchange-rate volatility inherent here. 

In addition, it isn’t typically, complete avoid an index constituent, either taking a small position in that country’s rates or currency, which makes sense given the small number of names (roughly 20) in the sovereign bond benchmark. The strategy also allows up to 20% in U.S.-dollar-denominated debt and cash. Still, the process allows plenty of room to manoeuvre. When it’s found that emerging-markets currencies are extremely undervalued, it can take that exposure up to 125%, and when they are expensive it can hedge it to 75%. The portfolio is further diversified by off-index plays, which have included frontier markets (Egypt) and developed markets (Greece). 

Portfolio

The process allows for ample movement in the strategy’s overall emerging-markets currency exposure, which has been dialled up and down in a tactical fashion based on valuations and its market outlook. The portfolio’s overall emerging-markets currency exposure was light (around 75% of assets) following 2012’s big market runup, which served the strategy well when things got tough in 2013. The managers brought that exposure up to the 90% range at the end of the sell-off in 2015 and then let it run in the 110%-120% range as it rallied in 2016 and 2017. Since the pandemic-riled markets in February 2020, the team has kept the portfolio’s overall emerging-markets currency exposure between 93% and 100%, given it has been concerned about U.S. dollar strength. The strategy sticks close to the benchmark, but at times its high-conviction and tactical nature is on full display. In 2020, the team was overweight in longer Brazilian debt based on valuations and favorable real rates, which hurt early on during that year. But off-benchmark moves have helped combat the concentration risk associated with this bogy. The portfolio’s positioning in Egypt was a prime example in 2020: That stake sat at 5% to start the year, and the team cut it completely by the end of March to redeploy to more attractively priced opportunities before building it back to 4% at the end of September. As of September 2021, the team continued to hold a 4% stake in local Egyptian debt given its attractive yield and pending inclusion into the JPMorgan GBI-Emerging Markets Global Diversified Index.

People

This remains one of the more-experienced teams that works well together, but its size hasn’t kept pace with some larger peers. This underpins its People Pillar downgrade to Above Average from High.

Emerging-markets bond veterans Penny Foley and David Robbins took over here in December 2009. Foley cofounded an institutional emerging-markets debt and equity strategy in 1987; Robbins joined her there in 2000 after running emerging-markets trading at Lehman Brothers and Morgan Stanley. Alex Stanojevic, a trader with the team since 2005, was named comanager in mid-2017, helping build ample transition time for when Foley eventually retires. 

The managers’ supporting cast is experienced and works together well, but it’s half the size of some peers, which can leave the team stretched in an ever-expanding investment universe. The managers are supported by five sovereign analysts led by Blaise Antin, who joined TCW in 2000. Longtime team member Javier Segovia leads a group of three emerging-markets corporate analysts including Stephen Keck, who has focused on this sector for TCW since 2003, and two more experienced analysts who joined in 2011 and 2015. This corporate cast, while experienced, is much leaner than some peers. Additionally, their relative inexperience with Asian corporate credit was partly to blame for 2021’s disappointing performance. As the emerging-markets debt market grows, this midsized team will need to stick to what it knows best to maintain its edge.

Performance 

This strategy’s Institutional share class gained 0.6% annualized from its mid-December 2010 inception through December 2021, ranking third out of 14 distinct strategies in the emerging-markets local-currency bond Morningstar Category. It also outpaced the JPMorgan GBI-Emerging Markets Global Diversified Index by roughly 10 basis points annualized. Though the strategy isn’t likely to reach the heights of its more aggressive competitors in strong rallies, it’s been no slouch. It edged out its typical peer and benchmark in 2016 and 2017, for example, through smart positioning with larger index constituents such as Brazil and Russia, as well as picking out-of-benchmark winners such as the Indian rupee and Egyptian pound. The strategy has held up better than peers and the index in some tough markets thanks to the team’s valuation discipline and smart allocation moves. Taking emerging-markets currency exposure down to 75% of assets and raising cash to around 11% helped going into 2013’s taper tantrum, as did some better performing off-index investments in China and Uruguay. Still, lately there have been a few bumps in the road. The strategy’s 9.3% loss in 

2021 lagged its typical rival by 110 basis points and its benchmark by 90 basis points. Much of this underperformance owed to the team’s overweighting in emerging-markets local-currency exposure, as the U.S. dollar outperformed for most of the year. From a country perspective, an overweighting and long-duration positioning in Mexico and Columbia were painful.

(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
ETFs ETFs

Goldman Sachs Activebeta U.S Large Cap ETFs: Mild Factor exposure provides an edge

The Goldman Sachs ActiveBeta U.S. Large Cap Index underpinning this fund spins a broad portfolio that pursues four factors: value, quality, momentum, and low volatility. This fund’s mixing approach–which combines four equally weighted distinct sleeves, each focused on a different factor–is simple and transparent.

Approach

While this portfolio’s factor exposure is modest, it is well-diversified and boasts low turnover. This index constructs four separate factor sleeves that start with the Solactive U.S. Large Cap Index, a broad, market-cap-weighted portfolio of large-cap stocks. Each factor sleeve adjusts stocks’ weight based on the strength of their exposure to value, quality (gross profits/total assets), momentum (11-month risk-adjusted return), or low volatility (12-month standard deviation of returns). Stocks with pronounced traits may see their weight materially increase within each sleeve, while those with poor exposure may be eliminated. After the index establishes each sleeve, it weights each of them equally at the portfolio level.

Portfolio

This broad portfolio looks very similar to the S&P 500. The market’s largest stocks receive the most investment, but the fund bends toward those that score well in several of its intended factors. Many stocks carry factor traits that offset, which leaves this fund with mild overall factor exposure. Its quality tilt has been the most defined. In profitability measures like return on invested capital, this fund has outshined the S&P 500. Momentum exposure has been quiet but detectable. The fund’s value tilt has been the weakest of the factors, likely because its quality and momentum sleeves pull it toward more richly valued companies.

Top Holdings

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People

Goldman Sachs ActiveBeta® ETFs are managed by our Quantitative Investment Strategies team, comprised of over 95 Portfolio Management and Research professionals, with an average of over 15 years of experience. Raj Garigipati and Jamie McGregor are the named managers on this fund. Gagrigipati has managed this fund since its inception in September 2015, while McGregor joined in April 2016, replacing Steve Jeneste. Garigipati is the head of ETF portfolio management at Goldman Sachs. McGregor was a portfolio manager at Guggenheim for a year prior to joining Goldman Sachs as a portfolio manager in July 2015.

Performance

The fund has come alive recently, outpacing its category benchmark by more than 2 percentage points from May 2021 through December 2021. Its value-oriented consumer discretionary stocks picked up steam, and highly profitable firms like Visa V and Mastercard MA helped it outperform in the tech arena. Steady portfolio management has kept this fund in line with its benchmark index. Over the trailing five years through December 2021, it trailed its benchmark by 13 basis points annualized, a margin slightly wider than its 0.09% expense ratio.

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(Source: Morningstar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.