The presidential race is behind us, but the fiscal cliff lies ahead, and who knows what other economic and political events await. How does one stay fundamentally focused in uncertain times? Tom Pence, CFA, explains in this excerpt of On the Trading DeskSM from Friday, November 16, 2012. Tom is managing director and senior portfolio manager with Wells Capital Management’s Fundamental Growth Equity team.
Tom, what does “fundamentally focused” mean to you?
Well, I think fundamentally focused, Peter, just means trying to stay focused on the things that matter. There are a lot of things happening in the marketplace driving stocks, and they certainly matter to the price movement in a given day or a given week, but they may not matter to the fundamentals of the company longer term, particularly companies who are making investments for the longer term. So in the past year here, and really even beyond the year, maybe in a good portion of last year, as well, as macro forces have really been dominating what’s been happening to valuation of price-to-earning (PE) multiples, it’s been very important, I think, for growth managers in particular to stay focused on what really matters, and that’s the underlying fundamentals of the companies, which frankly, have not changed that much. Growth has continued, despite what’s been happening outside the macro marketplace.
Now, small- and mid-cap companies, how are these companies doing these days?
They’re actually not doing that bad. You know, if you look at the different benchmarks on a year-to-date, mid-cap stocks are up about 8.5%; smaller companies, like the smid (small/mid cap) benchmarks are up about 7.5%. That’s a little bit less than some of their large cap brethren. But really, I think one of the things that small-cap and mid-cap stocks have benefited from over the past year has been a focus more on domestic growth opportunities and less on what’s happening elsewhere in the world. So while they have picked up more recently with what’s been happening in the large-cap space, where there’s been a little bit more money flow coming in there, I think the underlying earnings have been less affected than companies with more global exposure.
Can you give us an idea, Tom, of a company you like and how it fits your fundamentally focused approach?
There was a great article in the New York Times
a few weeks ago by a Harvard professor by the name of Clayton Christensen. And he talked about three types of innovation that are being invested in today. Where the really terrific returns can be made, over the long term, are the companies that are investing for what he called empowering innovation—products that were once available only to a very few people now are available to many. We’ve seen that, obviously, in the large-cap space with the iPhone and the iPad. But you actually see it in the small- and mid-cap space, too. Companies like BioMarin, which actually has invented an advanced drug that saves lives that, frankly, couldn’t be saved before. And Thoratec, which has developed a ventricular assist device for a heart valve that before, anybody who had this affliction was just doomed to die unless they could get a heart transplant, which seemed very unlikely. These types of investments take a long period of time to play out, and I think the marketplace in the last couple of years has been so nervous and so skittish and primarily focused on shorter-term investment opportunities that they haven’t really looked at the companies that are investing for long-term innovation. And I think that’s the big opportunity out there, where you can invest in smaller and mid-cap companies that are looking out to those broader opportunities and beginning the innovation.
We have a brief moment yet, Tom, and we would welcome a parting thought for investors?
Today, staying fundamentally focused means looking beyond all this noise of multiple compressions in the marketplace right now, and really focusing on who are those true, innovating companies making empowering investments.
Tom, thanks for joining us On the Trading Desk.
Thank you, Peter. It’s always a pleasure.
As of 9-30-12, BioMarin was 1.39% and Thoratech was 1.21% of the Wells Fargo Advantage Discovery FundSM.
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