Q&A with Equity Portfolio Manager Joyce Gordon
Joyce has been with Capital Group for 43 years, and, in this interview, she shares her views on the economy, discusses opportunities in the market and outlines the importance of assessing corporate management teams.
After a sharp drop at the end of last year, the stock market bounced back strongly in the first quarter. What are your thoughts on the economy and market?
I’m a bit surprised at how quickly the market has come back. The rebound has been due in large part to the Federal Reserve stepping back from further interest rate hikes. The Fed sees that economic growth is still positive around the world — but that it’s been slowing. On top of that, geopolitical tensions are creating further uncertainty. When you get to a point like this, there can be a lot of volatility in the market, and that’s what we’ve seen. I believe volatility will persist, and I’m positioned fairly defensively in the portfolios I manage.
There has been a lot of speculation about a potential recession. Do you see that as an imminent threat?
We know we’re late in the business cycle and that a downturn is going to come at some point. But I don’t see a recession immediately on the horizon. Keep in mind, of course, that it’s extremely difficult to pinpoint the exact timing of economic contractions. Investors can be tempted to try to time the market, but that’s a fool’s game. I don’t think anyone has been able to do that with any consistency.
It’s also important to remember that recessions last for relatively short periods of time. More often than not, the market is appreciating and the economy is not in recession. You certainly don’t want to be out of the market because you think a downturn might occur. That in itself is risky. You don’t want to miss out on a gain because you’re on the sidelines. You want to be invested, but you want to be more conservative when we’re late in the cycle. For me, that means holding securities with good dividend yields where payouts are growing. That usually points the way toward companies with underlying earnings growth and strong prospects regardless of economic gyrations.
Have you been able lately to find companies with attractive dividend yields?
It’s gotten harder to find opportunities in the U.S. where a stock yields 4% or so and the company is raising its dividend. There are a handful of these but not an abundance. However, when I look around the world, that’s really my sweet spot. There are more overseas companies with above-average dividends and growing dividends. These are well-managed businesses that seem to have a lot more ability to increase earnings over many years. I still have quite a few holdings in the U.S., but the incremental opportunities I’m finding tend to be in Europe and Asia.
Which industries are you drawn to at the moment?
One area is the defense sector. Unfortunately, the world is not getting safer. There is something of a built-in demand for missiles, jets and related equipment. Governments will put pressure on companies to keep pricing down, but demand is definitely there. These companies tend to pay good dividends — many in the range of 3% or so — and some businesses are raising dividends as much as 10% a year. They’re well managed and have a stream of new products with important functionalities.
What are some of the key elements you look for when researching companies?
Management is extremely important, and I regularly meet with executive teams. That helps me understand what’s really happening at a company. It’s difficult for an executive to mislead me because I will go back in to the company in six months or a year and say, “Well, you said you were going to do this.” After meeting with them several times, you know whether they do what they promise. You even get to know the personalities so well that you can read body language. If someone is always excited and then you go see them and they’re kind of down, that tells you a lot.
The most important thing that I try to figure out is whether I trust what they tell me and trust them to do the right thing for shareholders. It’s also important to determine if they know their business and what the risks are in their business. It sounds surprising, but I have come across a lot of managers who didn’t know the risk in their own business. Are they too myopic? Is a financial company, for example, unaware of the risks on its balance sheet? It’s always critical to have a thorough understanding of companies and their industries, but that’s especially true at this point in the business cycle. This is the type of market where I believe Capital shines. We do the fundamental research to try to gauge which businesses have solid underlying growth and long-term staying power.
The above article originally appeared in the Spring 2019 issue of Quarterly Insights magazine.