Perkins IM talks US value stocks after negative S&P move
Chicago-based Perkins Investment Management, which focuses on US value investing, is not a household name in the US let alone Asia, as the firm’s management is the first to admit.
The $20 billion manager has been around for 30 years but is "largely an untold story" in Asia. So chief executive Peter Thompson felt it was time to spread the word. He was in the region earlier this month meeting institutional investors, investment consultants and decision-makers at intermediaries.
The firm complements its parent group, Colorado-based Janus Capital, which is known for growth and fundamental core equity funds. Janus raised its stake in Perkins to 80% at the end of 2008.
Perkins has investment professionals in both Chicago and San Francisco, plus marketing and client relationship support in Asia in the form of Janus’s team in Hong Kong.
But Thompson’s own staff will be spending more time in the region – with executives and analysts coming out at least twice a year – with a view to marketing its US all-cap strategy and researching for its global value strategy.
The latter strategy was transferred to Perkins from Janus late last year along with Janus portfolio manager Greg Kolb. The strategy has $100 million in assets – the vast majority from US investors – but the firm expects to see interest from other regions, including Asia, given that interest in value equity strategies is reviving.
“Many people were surprised that a lot of value managers did so badly in 2008; that they turned out not to be the conservative bedrock portfolio that many believed,” says Thompson.
But demand is returning, he says, because large-cap US stocks have more attractive valuations versus other asset classes at present. Bonds are not looking as appealing as, say, a year or so back, and nor are European or emerging-market equities, for reasons of turmoil and high relative valuations, respectively.
Thompson agrees with the consensus view that US large-cap names offer the best value at present, since small- and mid-caps have seen a significant run-up over the past year. This is the case despite the US being put on negative outlook for the first time by rating agency Standard & Poor's this week, a move which has hit share prices globally.
Negative news such as S&P’s shift in outlook often creates more opportunities for value seekers like Perkins, says Thompson. “The market often overreacts to such news,” he says, “and we are hunting to find those opportunities that have been unduly punished.
“Of course, we do see the need for more cooperation in Washington and an end to the partisan games that seem to be stonewalling the progress towards greater US fiscal responsibility.”
Perkins labels its approach to investing as ‘seeking uncommon value’ in that it doesn’t subscribe to the idea that certain sectors are growth or value sectors and certain ones are not. For example, the firm is overweight in technology and healthcare stocks – usually seen as growth sectors – and is significantly underweight utilities, which is typically fertile ground for value investors. “Utilities just don’t have the balance-sheet strength we want to see at the moment," says Thompson.
Moreover, Perkins is happy to change its view on what is or isn’t a relevant investment for its portfolio. “Just because a certain sector, such as technology, was trading at exorbitant multiples 10 years ago – say, 50x or 60x price-earnings – that doesn’t rule it out for us now.”
Perkins has 11 analysts following individual sectors, whose first step when valuing companies is to calculate a downside price, taking into account top-line compression, stress tests etcetera.
“We want to know how wrong we can be; what can happen to this company, to its competitors, what has happened in the past,” says Thompson. “Once we’ve come up with a downside price, we then calculate an upside price.”
One thing that will be adding to downside risks is the high levels of debt weighing on US states. How concerned is Thompson about the potential impact on stock prices?
“Certainly local governments in the US are strained to say the least,” he says. “My state, Illinois, is close to the top of a list you don’t want to be at the top of. Doomsday scenarios [have been raised] for muni and local government obligations.”
He admits that “muni bond strains touch all kinds of industries”, but notes that Perkins is consistently underweight one sector that is an obvious candidate for problems due to muni debt issues: utilities.