David Rosenberg On The Difference Between The Buy And Sell Sides, And What He Is Investing In Right Now
While part of Merrill Lynch, David Rosenberg was always an outlier, in that he never sugarcoated reality, and could always be relied upon to expose the dirt in the macro and micro picture, no matter how granular or nuanced, and how much it conflicted with other propaganda research to come from the bailed out broker. Then three years ago he moved to Canadian investment firm Gluskin Sheff, transitioning from the sell side to the buy side, yet for all intents and purposes his daily letters, so very appreciated by many, never ceased, in essence making him a buysider with an asterisk - one who daily shares his latest vision with the broader public, in addition to his personal investment team. In one of his last letters of the year, Rosie presents a detailed breakdown of all the key differences between the sell and buyside, at least from his perspective, and also how, now that he manages other people's money, he is investing in the future. To wit: "In my former role as chief economist at Merrill Lynch, I flew all over the world and saw all the legendary portfolio managers from Paul Tudor Jones to Jeremy Grantham to John Paulson to Bill Gross — at least three or four times a year. Now the only PM's I speak to are our PM's. Not that they "have to" agree with all of my calls, but I am here as their economic concierge 24/7. The same holds true for our clients. In my previous life on the "sell side", it was very rare for me to sit down one-on-one with private clients. Today, that takes up a good part of my day — helping our client base make investment decisions that will build their wealth in a prudent manner over time." As for what he likes (and dislikes) we will leave it up to the reader to find out, but will note that Rosie appears to take issue with being labelled a permabear. And why not: he has been far more right than not since the December 2007 start of the Second Great Depression.
From Gluskin Sheff:
Marrying The Macro And The Micro
It's been nearly three years since I joined Gluskin Sheff + Associates and to this day I still get asked the question about what the big differences are between working at a big bulge bracket bank where I spent most of my career and a boutique wealth management firm.
Well, from the lens of an economist and strategist, the answer in one word is "relevance". I no longer sit on a different floor or in a different building than the critical decision makers. My office is right in the trenches with our portfolio managers and I sit kitty corner to our CIO, Bill Webb. We are in constant contact. Moreover, instead of seeing the CEO once or twice a year at some gala at a speaking event, I am in regular contact with Jeremy Freedman — daily, in fact.
In my former role as chief economist at Merrill Lynch, I flew all over the world and saw all the legendary portfolio managers from Paul Tudor Jones to Jeremy Grantham to John Paulson to Bill Gross — at least three or four times a year. Now the only PM's I speak to are our PM's. Not that they "have to" agree with all of my calls, but I am here as their economic concierge 24/7. The same holds true for our clients. In my previous life on the "sell side", it was very rare for me to sit down one-on-one with private clients. Today, that takes up a good part of my day — helping our client base make investment decisions that will build their wealth in a prudent manner over time.
So in what way are we marrying the top down "macro" view that I provide with the bottom-up "security selection" process among our portfolio managers?
While our Portfolio Managers remain long-term bulls on the resource sector, they are rightfully cautious. After all, we are clearly witnessing global growth slow, which always provides a headwind for commodities. China will do the right thing eventually and re-stimulate its economy, and we all agree that the authorities there have a much better handle on their economy than the market gives them credit for. But the economic trends over the near-term are sufficiently challenging such that the commodity space will be quite sloppy, and in our view, for at least another quarter.
Where we have conviction on the "long side" (remember, we manage our own alternative strategies) right now is in energy, primarily oil-levered equities. Gold is under some real pressure right now, but we still like the long-term picture. I don't see how Europe resolves itself without some form of monetization/printing, which has to be good for precious metals in the end. Elsewhere, we still favour agriculture stocks even though they've pulled back and our investment team favours adding to this sector at more attractive re-entry points.
Within base metals and bulks, our favorites from a structural standpoint are copper, coal and iron ore, but again they will likely underwhelm until the Chinese picture becomes clearer. The bottom line: we are secular bulls, but with year-end window dressing, tax-loss selling and a dearth of catalytic news, we probably won't see the bottom in basic materials until January or February.
In our U.S. equity strategy, our PM's have bought into the view of a slower growth environment and are rightfully running a lower beta (about 0.9) portfolio which emphasizes high return/high ROE businesses. As such, they continue to scour the universe for businesses with unique competitive barriers and which embrace many of our deflationary and frugal/cocooning spending themes. We are somewhat agnostic as to what sectors we find these businesses in, but as it shakes out, we continue to favour Technology as well as Consumer Staples and Healthcare.
Within Technology, we think we are in inning two of nine with regard to enabling mobility, and have embraced the ecosystem leaders which we perceive to have unfair advantages (Apple, Qualcomm, Google, American Tower). Some might argue, but I believe a smartphone is less of a luxury these days than cable television. The cost to the consumer after carrier subsidy is less than $100 and costs as low as $15 per month for a device which can be your phone, camera, messaging device, video camera, book reader, internet browser, video player, and countless other things.
Within the Consumer group, we focus on businesses that take advantage of secular trends or provide good dividend income rather than high-end retailers or restaurants (ex-McDonalds). Our largest weights embrace the trends surrounding the U.S. consumers "saving money" or taking steps to watch their pennies. Our largest two discretionary positions are providers of used/refurbished auto parts, given the average age of vehicles on the road in the U.S. (10.6 years) and the desire to provide inexpensive fixes.
We then have the likes of McDonalds, Family Dollar (the second largest U.S. dollar store chain), Mattel (I would argue toys for kids aren't discretionary; grandparents are living longer, divorces are good for toy buying, and the average Mattel toy is less than $12). Very much in line with my thoughts on the consumer.
Given the regulatory overhang and clouded earnings outlook in the Financial Services Sector we are focused on their credit offerings and remain wary of the equity. Our European exposure through ADRs (American depositary receipt) is comprised of Vodafone (all wireless and owns half of Verizon Wireless and will yield 8% in 2012) and Ryanair (actually do better in recessions as large and high cost airlines in Europe consolidate and lose money).
We have been long Aerospace all year (see my work on this from yesterday's Breakfast with Dave), as airlines need to upgrade planes in the era of $100/bbl oil and competitive fares in order to stay in business. This is a solid 3-5 year growth market and backlogs have never been bigger for the plane makers. This goes to show, yet again, that we can invest in secular growth themes that transcend the Eurozone debt crisis, economic headwinds in the United Sates and growing real estate strains in China.
This holds true, for example, in the Healthcare space, where valuations are attractive and the overall business is non-cyclical. The sector more than discounts the patent cliffs for big Pharma, and will benefit from rising income levels in emerging markets. The average dividend of greater than 3% yield dovetails nicely with our (Safety & Income at a Reasonable Price) S.I.R.P.strategies.
Within our long/short strategies, we are positioned conservatively at the current time. We are long either large cap, blue-chip dividend payers that are growing their dividend or Canadian yield-oriented names that are mid-cap (names that we have owned for many years, whose management we know well and that we believe operate in a very good competitive position).
We are generally short businesses we think are either in secular decline or have a poor capital structure that may force a dividend cut.
Thematically, we are generally short anything reliant on paper, as we believe the digital transition and cultural changes will make these dinosaur businesses obsolete.
We are long power and pipe companies in Canada that pay an attractive dividend yield and we view the underlying assets as very valuable. We are long blue-chip, large cap U.S. dividend payers — McDonald's, Hersheys, Altria are some examples.
We have been short the Canadian consumer/housing through some retailers and mortgage insurers. The longs in this universe are more in the property and casualty firms — that are well positioned from a balance sheet and competitive perspective. On net, we are short the financials.
In conjunction with our resource sector view, we remain long Canadian exploration and production firms that have good organic growth profiles and have an oil bias or a bias of gas-rich or natural gas liquids.
Also consistent with my long held view that this is a multi-year malaise, and identifying where people spent their time for enjoyment in the dirty-thirties, it was at the movie theaters. In our view, this sector has become a cash cow. We're long both Canadian and U.S. theatre companies in our long/short strategies, and it is a theme that is working well.
When Gerry and Ira started the business in the early 1980s, 1-bill yields were in double-digits. Now that is a big "risk-free" hurdle for any fund manager to clear, but interest rates at that level were also foreshadowing a very benevolent macroeconomic landscape ahead. But today we have the inverse. Risk-free rates are close to zero, which is a tail-wind for us, but it is also a signal of how challenging the investment horizon is currently — there are far fewer needles in the haystack. But between my top-down research and the bottom-up by our PM's and analysts, we are finding quite a few.
Perma bear, indeed. It's all about preserving capital first and generating attractive risk-adjusted returns over time.
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