This battle-tested pro in the stock market explains how you can ‘come out swinging’ when the pandemic eases
When your portfolio, and your psyche, have been bruised and battered by the stock market, one of the best things to do is consult an investing pro who’s been through it all before, with record intact.
Consider Kim Scott of Ivy Mid Cap Growth Fund
She’s managed her fund through two recessions prior to Covid-19, with an enviable record.
Scott beats her Morningstar mid-cap growth fund category by 7.3 percentage points annualized over the past three years and also outperforms over 10 years, according to Morningstar. Since she took charge in 2001, her fund is up 8% annualized compared with 6.4% for the Russell Mid Cap Growth Index
according to her fund company.
Here’s what this battle-tested money manager is telling clients to do now. If some of her suggestions seem simple, that’s not a bad thing. During complicated times it pays to stay grounded with uncomplicated strategies.
1. Stay in the market, or get back in if you bailed
“I’ve had a lot of people ask me, ‘Should I get out of the market?’ The answer is no. Absolutely no,” says Scott. But why be in stocks when we know so little about when the “hidden enemy” will go away, and when the economy will come back?
“One of my guiding principles is the market goes up more than it goes down,” says Scott. In other words, the dynamism of our economy, our penchant for innovation, and basic population growth will keep driving the economy, and bull markets. “The recovery will be protracted and painful, but we will recover. We need to learn how to live with the virus, and that is what will happen.”
If this has a familiar ring, it’s because it sounds a lot like the reassuring counsel from Warren Buffett that’s helped many of us, including me, stay the course through various sharp declines in the S&P 500
Like Scott, Buffett reminds us it’s never a good idea to bet against the U.S. economic system.
Scott, who has a background in microbiology and regularly talks with biotech companies like vaccine developer Moderna
says effective therapies and vaccines are on the way. “There are a lot of shots on goal. I don’t know when it is going to happen, but the resources are there. We will see something.”
Another key factor to watch for: Signs that the health-care system is becoming better prepared. “It is not just about the virus, but how unprepared we were,” she says.
While our economy will recover, it won’t go right back to “normal” right away. Early on, consumers will avoid things that put them in the company of a lot of other people, such as sporting events, concerts and cruises. “People will buy things that are useful around the home. Apparel. Good food,” she says. Recreational vehicles will see a sales bump because people will want to travel, but not on planes.
2. Stop overthinking
Here’s a lesson she learned managing through the 2001 recession. Don’t try to outsmart the market with tactics like bulking up “low volatility” or defensive names, or whatever else the talking heads are suggesting you do. “That is an exercise in futility. It will be very detrimental to your financial health,” she cautions.
Scott learned this lesson during the 2001 downturn. Her fund did well that year, but it lagged its benchmark because she stayed too defensive for too long. “That was a hard lesson learned. You need to be reasonably well invested in quality companies through thick and thin.” The lesson affects how she behaves now. “We have not been rotating our portfolio all over the place. By and large, we are letting the dust settle.”
3. Avoid cyclicals
This is counterintuitive. Cyclical companies in sectors such as basic materials, industrials and energy seem attractive now because they have sold down so much. But Scott says don’t take the bait. “You get a big move up in the beginning of a cycle, then they are down a lot at the end of the cycle. You don’t make that much money over time unless you are a trader,” she says. “I would rather own companies that have a future that is independent of the economic cycle.”
One exception: It’s OK to go into a cyclical sector as long as you’re investing in a company that’s different enough to post consistent growth. She cites Tesla
in the typically cyclical auto sector.
4. Manage your risk
Entire books are written on market risk, but it boils down to this: Stay diversified across sectors. Don’t put too much into one stock. Be patient so you don’t overpay. Waiting for a good price “is part of generating returns, but it is also part of managing risk,” she says. “We are not right all the time so when we are wrong, we mitigate the downside by minding the price we pay.”
5. Favor high-quality companies with durable growth ahead
That’s easy to say. But how do you identify these? Look for consistently high profitability over time, at companies that don’t rely on a lot of debt to make it happen. Balance sheet strength is key. That way, if a problem crops up like Covid-19, “these companies have the wherewithal to cross the cataclysm and come out swinging,” says Scott. Her portfolio has a lower leverage ratio than its benchmark.
As an example, she cites Ulta Beauty
in beauty products and services. Ulta is different because it sells a mix of prestige and mass-market cosmetics, fragrance, hair care and body products. Competitors including Target
Neiman Marcus and Macy’s
emphasize one or the other. Ulta is also different because it has a lot of stores outside of malls, in strip shopping centers. Scott expects Ulta will benefit from the current downturn since it is causing store closings at chains like Macy’s and J.C. Penney
6. Also favor growth in general
Scott likes to put money into three types of growth companies.
“Stable growth” businesses sell things that people or companies need on a regular basis. You can spot these because they have consistent profit margins through economic cycles. Here, Scott cites Hershey
fastener maker Fastenal
software company Tyler Technologies
and Maxim Integrated Products
Stable growth companies make up the biggest part of her portfolio.
Next, she likes “greenfield growth” companies that have a new approach to doing something that gives them a long growth runway. Here, she cites Intuitive Surgical
which sells surgical robots and related instrument kits. Other examples are: Guidewire Software
which offers software platforms to the insurance industry, DocuSign
which helps companies electronically manage contract documents, Monolithic Power Systems
which sells power management components, and AMD
in computer chips.
She also looks for “fallen angel” growth companies. These either hit a speed bump, or their growth is starting to naturally slow, so momentum investors are exiting. Here, she cites BorgWarner
in transmissions and power trains. Its stock is getting hit because of worries about auto sector growth, but it is the technology leader in this space.
Another is Palo Alto Networks
in security software. This company is moving to a software as a service model, and transitions like these can cause hiccups in growth. As I’ve written recently in my stock letter, Brush Up on Stocks, significant insider buying here tells us investor concern about the transition is most likely misplaced.
At the time of publication, Michael Brush owned GWRE. Brush has suggested ULTA, TGT, FAST, MCHP, GWRE, AMD, NVDA and PANW in his stock newsletter, Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School.