Large Cap Investing During Volatile Markets

TRANSCRIPT

We would contrast that with what we're seeing from executives. Insider buying, we're observing, has hit a record peaks across market caps, even higher than the Global Financial Crisis. And we'd also point out that historically the returns when the VIX has been over 40 have been quite strong; historically the one-year and the three-year returns when VIX has been over 40 has been 32% and 58% on average. In terms of valuation of the overall stock market, we like to look at the implied equity risk premium, or how much investors are requiring on those risky assets over and above the risk-free rate. One shorthand way to look at that is to look at how much equities are earning–or are yielding in terms of their earnings yield relative to Treasury bonds. And today, if we look at trailing earnings, the earnings yield on stocks is about six points higher than the ten-year Treasury bond. That's more than three times higher than its long-term average and pretty much in line with what it was in the Global Financial Crisis. So stocks appear attractive relative to interest rates and bonds in our opinion. Finally, I want to point out that, as investors have raised cash and sold risky assets in the past several weeks, correlations between asset classes and within the S&P 500 between stocks has increased significantly. In fact, when we look at the data that we have going back to 1995, S&P 500 correlations, the correlations between stocks within the index, are the highest on record. And in our view that's a positive for good stock pickers, as many stocks that are high quality are going down with stocks that are lower quality and worse positioned and I think you'll hear more about that from Patrick and Ankur as we move into Q&A.

on companies across sectors. You have the continued trends of the internet and mobile internet, which continue to be very disruptive but there are a number of other trends such as digital transformation, artificial intelligence, cloud computing, autonomous vehicles, electric vehicles, internet of things and 5G. We have discussed these themes in previous podcasts, so we'll not go through them again in detail but we do continue to see evidence of this innovation across sectors. We're seeing disruption across traditional retail, traditional media, traditional banks, traditional technology companies, auto and energy. The innovation is creating winners and losers across sectors. Macy's recently announced that they're closing 20% of their store base and I just saw that Macy's was removed from the S&P 500 last night. Pier 1 Imports recently filed for Chapter 11 and this was before the coronavirus even hit. This concept or idea of a local retailer selling to a local community with an inefficient supply chain is changing, as companies are now selling directly to end consumers over the internet to a global customer base. Many other traditional retailers are coming under pressure and will continue to come under pressure. Netflix is disrupting the business models of many the traditional media companies and broadcasters and many of those companies are trading at five-year lows. Ford is a single digit stock that has come under a lot of pressure recently as there is a concern as to how they're positioned in a future world of electric vehicles and autonomous vehicles. The energy sector will continue to be disrupted by technology and many of the traditional technology companies are being disrupted by the cloud. The logistics sector is also being disrupted, as that sector digitizes and companies such as Amazon now have the scale to compete with the duopoly structure of FedEx and UPS. Fedex and UPS were once viewed as having some of the most defensible business models in the stock market but have been significant underperformers as they are now facing new competitive threats.

Kevin Collins : Thank you, Brad. Patrick, I know that you want to speak about innovation and how it's recasting whole industries. What are you seeing?

Patrick Kelly : We've been saying for a while that we believe we are in the early days of one of the most innovative times in history; the pace of innovation is accelerating, it remains underappreciated. The reason this time is different from previous times is the number of big picture themes that are having a significant impact