Arege, another value investor, also believes institutions should temper their expectations. He anticipates more normalised equity market returns in the next few years, which means mid-to-high single digit returns compared to the 20% annualised returns witnessed between 2009 and 2014.
Companies with sustainable competitive advantages and business models that are resilient over market cycles are included in the US Value Equity fold. This translates into revenue and earnings visibility, healthy balance sheets that provide financial flexibility and strong management teams with a track record of creating value for investors.
In terms of sectors, Arege is focusing on consumer and financials because they are levered to the continued health of the US economy and represent good value relative to their earnings potential.
“Information technology remains an attractive sector with companies exposed to compelling secular growth trends, but we believe valuations are generally elevated and careful stock selection is critical given the high degree of idiosyncratic risk,” he adds.
Arege also believes that opportunities are beginning to emerge in energy, although remains cautious about continued supply/demand imbalances in commodities.
Diane Sobin, head of US Equities, EMEA at Columbia Threadneedle Investments is also upbeat on diversified financials as interest margin will rise on the back of a rate hike while stronger economic activity will be beneficial for increased commercial lending. Healthcare is also on the list, with a neutral position in biotech and overweight in major pharmaceutical firms due to a strong pipeline of medical devices and products.
“One the more the interesting features of the market is the section just below the mega caps,” says Sobin. “These are largely domestic companies exposed to the local economy and they do not have to think about the changes that are taking place in China and Brazil.”
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