Portfolio Insights: Alger Weatherbie Specialized Growth Strategy
Brad Neuman (continued): Additionally, the housing market is extremely strong as existing home sales are well above pre-COVID levels and median home prices are at record highs, up a robust 8.5 percent year over year. Further fiscal support and a vaccine would go a long way to creating a sustainable environment for growth. If this is indeed the beginning of a sustainable expansion, it may be instructive to remember that the last five economic expansions lasted eight years on average. Some of our clients who agree with this message of economic recovery are still skeptical about the stock market's rapid gains and record highs. Here I would make two points. First, Wall Street is not a mirror of Main Street. This is important because according to data from the Federal Reserve, there is record divergence within the economy between winners and losers. This is key because the stock market is overweighted to these winners. Let's take U.S. business investment in software, for example. In the second quarter of this year, which was the worst quarter for economic growth in over 70 years, it actually grew year over year and while the stock market over-indexes to software investment, it's underexposed to consumer spending, particularly traditional retail. In fact, less than 20 percent of the S&P 500 is made up of consumer discretionary and consumer staple stocks while personal consumption expenditures on Main Street make up about two thirds of GDP. Second, while P/E valuations are high in absolute terms, they're low relative to interest rates and we believe accounting issues may be obscuring some value as the price-to-free cash flow multiple of the stock market is actually relatively in line with history. Finally, I just want to say a quick word about the upcoming presidential election. Investing in a, quote- unquote, "America first portfolio," or one made up of domestically oriented largely value stocks that should have benefited from the current administration's policies, such as lower corporate taxes, would have actually underperformed the broader stock market over the past four years, as did energy and financial stocks,
which should have benefited from the administration's deregulation.
However, a portfolio of the most innovative companies, irrespective of how they were viewed by policymakers, outperformed. Our takeaway is that if investing in politics didn't work over the past four years, it's unlikely to work over the next four, in our view. Investing in innovative companies with strong fundamentals is the way to go in our view.
Ted Doyle: Thanks, Brad. Let's now transition to Josh on the Weatherbie team.
Josh Bennett, our next speaker, is one of the four portfolio managers on the Weatherbie Specialized Growth strategy. Additionally, he has research responsibilities in the consumer, industrials, technology and diversified business services areas. Josh, let's dive right in and ask a few questions that I think are on the minds of investors. We just heard Brad's latest views on some macroeconomic events looming ahead and while Weatherbie Specialized Growth is a fundamental, bottom-up strategy, is the team evaluating the upcoming U.S. election and/or other macro factors and is there any positioning in the portfolio as a result? Josh Bennett: Thanks again for having me. So as you mentioned, since 1996, the Weatherbie Specialized Growth team has focused much more on individual stocks identified through fundamental, bottom-up investing rather than macro factors, but that said, we do integrate a macro perspective into discussions of both the individual companies in our portfolio as well as our overall portfolio positioning. So the election is clearly the next big macro event on the horizon and we're certainly aware of the fact that it could create some volatility in the near term. However, we'd say that should that volatility occur, it's important to realize that this team has been through these periods many times before and if we enter a period in which markets overreact to the downside, we'll do what we have always done in periods like this: we'll look for ways to further upgrade our portfolio stocks.
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