Global equity markets are rocked by the conflict between Ukraine and Russia and the uncertainty surrounding interest rates. Yet when veteran track picker David Fingold is asked if he feels caught between the proverbial rock and the anvil, he just shrugs.
For Fingold, it’s about keeping a firm hand in managing Series F of the dynamic $3 billion silver-rated Global Asset Allocation Fund, while looking for attractive values that can weather the storms. “I never think about [the notion of being caught between a rock and a hard place] because we are always faced with opportunities and challenges,” says Fingold, who joined the Toronto-based 1832 Asset Management Inc. investment team in 2002 after several years of working for a private investment bank and Slater Steels Corp.
Fingold is currently lead manager of several Dynamic branded US and global strategies. “Obviously our goal should be to minimize exposure to challenges and try to find ways to take advantage of opportunities. Deep down inside I always remember Ned Goodman’s greatest quote [founder of Dynamic Mutual Funds], that is to say: I am an optimist because I have never met a rich pessimist. We try to avoid the things that make us pessimistic and focus on the things that make us optimistic.
Warning signs of widening credit spreads
There are certain areas in global equity markets that Fingold says he will avoid, and the same goes for fixed income markets. “We have a lot of flexibility. We saw that credit spreads were going to widen, so we had no exposure to corporate bonds. We saw that when the stock market corrected, interest rates refused to come down, so we didn’t have duration exposure,” says Fingold.
“The longest maturity is a 12-month US Treasury note when acquired. It is now closer to 11 months. Additionally, Fingold notes that the global fixed income benchmark is “fairly exposed” to credit. Along the same lines, he argues that “many corporations and governments have ‘finished’ their debts so that the benchmark and the fixed income universe have a much longer duration than they do. had. [previously].”
Fingold notes that the narrowest spread for investment-grade corporate bonds in 2021 was around 46 basis points (bps) over corresponding US Treasuries. Since then, the spread has nearly doubled to 86 basis points over US Treasuries. “The broadening we’ve seen lately is almost the same as what happened in the fourth quarter of 2018. At the time, the Fed raised rates even as financial conditions tightened. Then we “We had the December 2018 correction and the Fed had to moderate its stance. We’re getting closer to those levels. Looking back, avoiding corporate credit has been a good move since the bottom of the cycle.”
Does not necessarily value the territory at the moment
Although US equities have fallen about 18% since the start of the year, Fingold is reluctant to classify US equities as approaching good value. “The reason we talk so much about US stocks is because the world is America-centric. The United States is the largest economy in the world and accounts for the majority of global market float,” Fingold observes. “But it’s important to understand that a large portion of US market capitalization comes from multinationals. In various years, more than 40% of the operating profits of the S&P 500 may come from outside the United States.
Fingold does not believe that the stock market must behave in a certain way to generate good value. “Ultimately what’s going to determine where the market valuation goes is going to be determined by credit markets, commodities and the US dollar,” Fingold observes. “The Federal Reserve is trying to tighten financial conditions and part of the financial conditions is equity volatility and part of it is credit spreads and the Fed survey of senior loan officers, which is bank lending .” But Fingold says it’s unclear whether Fed officials are confident those spreads have met the tightening target. The same issue applies to equity volatility and its consistency with Fed objectives.
follow the money
“I don’t spend a lot of time looking at these things. We go into risk management mode when we see credit spreads widen, and that’s what happened this year,” Fingold observes. “The idea is that there is a certain distance that the market needs to fall as credit markets start to firm up, and money flows more easily to businesses to fund their operation, then the market could be cheap. If there’s a problem causing credit markets to tighten further, you have to be concerned about the stock market,” says Fingold, adding that his team is more concerned about what’s driving the market than by others’ concern about whether the market is approaching cheap valuations.
Is it Russia or inflation?
Is the biggest hurdle for global markets the fear of runaway inflation or the Russian-Ukrainian conflict? “There is a conflict in Eastern Europe and it comes with a very high and not unprecedented humanitarian cost. But it has more of an impact on the European consumer than on North American consumers,” observes Fingold. “The challenge of inflation is more difficult [in Europe] because it requires Europe to invest more in energy conservation and the diversification of its energy sources. The same applies to their food supplies. They have a bigger inflation problem than we do. Inflation will improve in the United States and Canada, but will be more difficult for longer in Europe,” argues Fingold, adding that the challenges could be prolonged in Europe because credit conditions in Europe tend to be lower. to those of the United States by about 12 months and the euro. is rising against the US dollar which remains the strongest currency in the world.
From a performance perspective, Dynamic Global Asset Allocation F returned -15.18% YTD (May 20) and lagged the Global Equity Balanced category which posted a return of -12.05%. However, it performed better over the long term. Over the past five and ten year periods, the fund has posted annualized returns of 5.23% and 8.89%. In contrast, the category posted an annualized return of 3.79% and 7.17% for the corresponding periods.
From a strategic perspective, the fund is made up of a mix of 32% cash and 68% equities. But Fingold is quick to point out that most of the money is in government bonds that expire in less than twelve months. On the equity side, approximately 30% of the fund is held in US equities and 32% in international equities. On a sectoral basis, industrials is the largest sector with 23%, followed by 19.7% in financial services, 16.8% in technology and 8.8% in energy.
Managing a concentrated portfolio of 28 holdings, Fingold cites long-standing names such as Elbit Systems Ltd. (ILEC), the largest defense contractor in Israel and the leading producer of drones, night vision systems and cybertechnology for defense organizations. The stock has a market capitalization of NIS 30 billion (C$11.4 billion) and trades at 20 times 2023 earnings.
“Over the past few years, even as defense spending has slowed, they have had the best backlog growth. This is because of their technological advantage,” says Fingold. “Unfortunately, the world is not a safe place. Countries that thought they could cut, or not increase, their defense budgets, realized they had no choice. There is a huge advantage in defense spending within NATO [North Atlantic Treaty Organization]. And NATO is an important source of income for Elbit.
Another significant holding is AstraZeneca PLC (AZN), an Anglo-Swedish pharmaceutical and biotech company based in Cambridge, England. “It’s more of a household name,” says Fingold, noting the company has a £155bn market, trades at 16 times forward earnings and pays a dividend yield of 2.1%. “We like their pipeline because they have some very exciting therapies, including antibody-drug conjugates [for cancer treatments]. It is something very difficult to produce, so there are not many competitors in this field. And there aren’t many foreseeable exclusivity losses in the future.
Healthcare stocks have underperformed in strong economic growth in 2020 and 2021. “As economic growth moderates, this gives healthcare an opportunity to do better,” says Fingold. “I remind everyone that healthcare is one of the top three performing sectors of all time. They have been shown to be very defensive in corrections and bear markets.