American Funds portfolio managers Tim Armour and Rob Lovelace discuss investment opportunities in the emerging markets, oil and commodities, health care and pharmaceuticals, and the internet.
Kevin Clifford: With your portfolio manager hats on, and you’re looking ahead to not just ’16 but the next couple of years, what are the themes that you’re focused on as you’re thinking about your portfolios — whether they’re tailwinds or headwinds — things you’re trying to participate in, things you’re trying to avoid, Tim, as you look out over the horizon?
Tim Armour: There are companies that benefit from interest rates rising. So I think that’s an important theme today. Now, not that we’re expecting interest rates to rise rapidly quickly, but I think it is an important area that we can leverage off of and identify good companies to invest in. So that’s one.
Another that I think about a lot, and Rob touched on it earlier, is that it’s been very difficult in emerging markets. There are companies, though, that have more global business where they derive their revenues and their earnings, that may be domiciled in some of the developing markets around the world. And they’ve been painted with the brush that they’re part of an emerging markets country and have been punished unduly, I think, in some cases. So I think there are some real opportunities there.
And then I guess finally, we all know what’s happened in the oil/commodities complex. It’s been very, very difficult as global growth has slowed down. So there are a lot of companies that are selling at distressed valuation. Some of them should be, but there are others that have strong balance sheets, still have positive cash flows, that will be survivors. And someday I suspect oil prices will be higher; commodity prices may be higher at some point, too. And so there are opportunities that abound in some of these areas that have been very beaten up in the last year, year and a half.
Kevin Clifford: Rob, would you like to add?
Rob Lovelace: I’ll highlight two themes, really both based on demographics. The first one is on the Baby Boomers, and this has been a group that we need to focus on — and have focused on for many decades — and right now, obviously, moving into retirement. Health care is one of the big aspects of that. China actually is an aging society, especially with the one-child policy. And Europe and Japan are aging societies. So we’re all kind of converging around this issue, around health and health quality, which is why I think you’re seeing that combined with breakthroughs in the science of discovering drugs. The genome project really is beginning to bear fruit right now. So drugs and actual cures are being developed: new therapies, new treatments, new medical devices. It’s a really exciting time right now in the pharmaceutical, medical device and related area. And we’re seeing a lot of interesting companies there. It’s one also where fundamental, bottom-up research really pays. You can’t just buy the sector. You need to understand individual molecules, how they work; how the approval processes work; and how it’s going to come out the other side and how profitable it will be with pricing.
At the other end is the Millennials. So the Boomers always get all the all the attention. The Millennials are one of the largest generations in terms of number of people, and with that, we’re focusing a lot on the internet and what that means. We’re all using it, but we’re all technology immigrants. They’re the natives; they’ve grown up with it. So we're really moving very quickly in this area. If you look at the portfolio, we own a lot of these internet companies, not just internet commerce but others that are creating portals and places for people to come together, or disruptive technologies. So these are two big themes that I see in the portfolios.
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