Shannan

Welcome back. Hi everyone. I'm Shannan Simmons, PineBridge’s Global Head of Consultant Relations. And I'm delighted to be joined yet again by Rob Hinchcliffe, Equity Portfolio Manager and Head of Global Sector Cluster Research, and John Song Equities Research Analyst focused on the tech sector. We're thrilled to have you back to the second episode in our series to talk about tech markets, implications for investors, and your team's approach to investing across company lifecycles.

Welcome back, Rob and John. And thanks so much for joining me again today. John, in our last episode, we talked about the remarkable rise of the so called 'Magnificent Seven' and the so-called 'bad breadth' they're causing. This 'bad breadth' has left many investors in a bit of a quandary. Surging share prices have been positive for returns. But memories of the same eight stocks that helped lead the 2022 market downturn are still fresh. Can you share your outlook on the tech sector? And do you believe this growth style bias in the market will continue?

John

Thanks Shannan. Thanks for having us. So, you see the biggest market gains when you come off any low in any cycle. So, from that alone, valuations and stock selection become more important. But we think a lot of end markets haven't really seen a significant pick-up yet. So, for that reason, the short answer is yes, we think growth can continue to work, but depends really on the company and the individual cycle that it serves.

Rob

And Shannan, maybe I could jump in on that too. And thank you for having us also. And just to add to John's point there, from a portfolio perspective, you know, we don't want to take style exposure, even if to John's point, we think growth can continue to work or lead in the markets. That's something we're just, you know, we don't really get those top-down calls right, at least not consistently. So, from a portfolio perspective, we manage the portfolio so it is style neutral. And we let the stocks do all the work, and the style, the bias rotations in the market shouldn't have any impact on our performance.

Shannan

Great, thank you both. Rob, maybe I'll direct this one at you. We preview the team's application of lifecycle categorization, which focuses on the style neutral approach. How have the different styles performed in the past years? And why do you think the style neutral approach still makes sense in the current market environment? And why is it considered a better way across market cycles?

Rob

Well, if we go back to, let's say, 2020, the start of COVID growth has led the markets pretty consistently, with the exception of 2022. And that said, there have been many rotations during each period of time when sentiment shifted away from growth. But nevertheless, from our perspective, getting these top-down calls right is really hard. You know, and I said it before, they're really hard to get right on a consistent basis. Instead, we focus on our skill set, which is stock selection in our efforts to deliver returns ahead of the benchmark.

So we obviously take risks versus the benchmark when it comes to our individual investments. Stock selection, that’s the risk we want to take. In our last podcast, we talked about how we use our lifecycle framework to help us identify potential investment opportunities. You know, we also use it in portfolio construction to help us to make the portfolio look similar to the benchmark when it comes to style. With the style risk mitigated, we're indifferent to whether the growth outperforms or underperforms the market. The benefit then is that we can maximize the value of our tools to seek investment opportunities and looking backwards, we can attempt to deliver consistent alpha regardless of the market environment.

Shannan

Great, thanks, Rob. For our final question, perhaps both of you guys can chime in. But understanding your bottom-up stock selection seeks to drive a differentiated portfolio, with holdings significantly different from the benchmark and peers. How do you maintain high active share and benchmark similar risk at the same time? Isn't it a contradiction?

Rob

That's a good question. Maybe I'll just start with a quick note, just to say that we don't seek to have a differentiated portfolio. It's that our process, because we think of stocks differently, using our lifecycle framework, and we think of risk differently, to be style neutral, for instance. It allows us the freedom to invest in a differentiated set of holdings. In other words, we don't need to hug the names in the benchmark to manage risk or reduce portfolio volatility. Simply put, we're trying to beat the benchmark. So, we measure our active risk. How does our portfolio compare with the benchmark across a variety of different metrics?

As an example, we own one of the largest retailers in the world, and we believe that the market does not yet appreciate the potential profitability of the company from new revenue streams and from harvesting investments that they've made over the last several years. We want this company specific risk. But on the other hand, we need to size our investment in this company, so that along with our other investments, the portfolio looks like the benchmark when it comes to investment style exposure, currency exposure, market cap exposure, etc.

In other words, we need to bolt together each of the investments that we’ve made one by one, so that the collection of companies behaves properly. The result of doing this is a concentrated portfolio, so clearly a high active share. The volatility and other risk metrics are very similar to the benchmark, because of how we construct the portfolio. So, portfolio performance doesn't get whipsawed around by rotations and volatility in the market. So, to answer your question, Shannan. No, it's not a contradiction.

Shannan

Great. Thank you, Rob and John, for your insights today.

Rob

Thanks, Shannan.

John

Thanks Shannan and thanks for having us.

Shannan

And thanks also to our listeners. We hope you enjoyed and learned something from today's podcast. For more of our market and Investing Insights, please visit our website at pinebridge.com. Til next time, thanks for listening.