Barrow Hanley Senior Managing Director Brad Kinkelaar heads the team that manages the Barrow Hanley Global Share Fund. The Fund offers Perpetual’s Australian investors access to value-oriented equities exposure run by Barrow Hanley’s experienced US-based investment team. Kinkelaar joined Barrow Hanley in 2017 after previously serving as an equity portfolio manager and head of value-based dividend strategies at Pacific Investment Management Company (PIMCO). In this Q&A we discuss Barrow Hanley’s value-oriented investment strategy and features of the Global Share Fund.
You have lead PM responsibilities for the Global Share Fund with the support of three co-portfolio managers. Can you take us through the day-to-day running of the fund?
The management structure of the Global Share Fund is very effective in leveraging different perspectives and experiences to facilitate optimal decision making. Each of our members are very active in our various investment meetings across the firm including participating in analyst research meetings, as well as US-focused meetings for PMs, Non-US meetings, and EM-focused meetings. In fact, two of our co-PMs, Dave Ganacheau and TJ Carter, facilitate the research efforts for US analysts and non-US analysts, respectively. As a Global team, we come together formally in a weekly Global team meeting to discuss decisions directly related to the Global Share Fund. Informally, the team communicates almost daily around news related to fund holdings, market issues, and any new stock ideas being presented to the broader research platform.
Barrow Hanley's equity investment philosophy is based on the premise that markets are inefficient and can be exploited through investment fundamentals and value-orientated stock selection. Can you give us one example of this from the Fund?
Sea World is a stock that we have owned for a few years. Pre-Covid, we believed that the assets were not being managed as well as other theme parks, and we believed that could change under the new management team. As we went into Covid lockdowns, Sea World revenues almost went to zero as parks were shutdown. The stock plummeted and began trading like the company might go bankrupt. However, they were able to raise convertible debt to get them through the lockdowns, and we were able to add to our position at prices dramatically below our initial investment. As economies re-open, we are seeing evidence of Sea World management’s pre-Covid efforts being reflected in current revenues, earnings, and cash flows. As a result, the share price is now about 10X higher than Covid lows, and about 100% higher than pre-Covid levels (although park attendance has yet to reach pre-Covid levels).
The Fund holds between 50 and 70 positions and may hold up to 20% in emerging markets. Stocks with the most attractive risk/return characteristics are held at a larger weight, limited to a maximum of 5%. Do you feel this construction process effectively allows the Fund to capture Barrow Hanley's best ideas?
We manage the Global Share Fund as a Barrow Hanley “best-ideas” strategy in that we try to leverage the expertise of the entire Barrow Hanley investment team. All of our investment analysts are trying to identify the best opportunities within their area of expertise – whether by industry, sector or geography.
Given the boutique nature of Barrow Hanley and our flat organizational structure, new ideas are shared seamlessly across the platform pre and post recommendation. The formal presentation of a recommendation in our “deep dive” meetings allows all those with knowledge of either the industry or company to discuss with the analysts the underlying assumptions in their recommendation and importantly to test the downside thesis to insure we are underwriting the best risk/reward ideas for the strategy.
Because the Global Share Fund has the broadest opportunity set, we must also have the strictest purchase criteria. As such, we are highly selective, and we only purchase about 25% of all new buy recommendations in this strategy.
Although individual sector and country weightings are an outcome of the stock selection process, they are subject to absolute limits of 40% and 25% (except the US), respectively. What countries and sectors are you currently overweight and do you expect this to continue over 2022?
When measured versus the MSCI World Index, most observers would note that we are currently underweight North America by 12% (60% in the fund versus 72% in the index). The broad index is highly overweight US-based technology shares, of which we currently have a much lower allocation. More importantly however, we highlight that the fund is overweight North America when measuring revenues (58% for the fund versus 52% for the index).
By sector, our biggest overweights are in Consumer-facing businesses (Staples and Discretionary combine for 29% of the fund versus 19% of the index) while being underweight Technology (5% in the fund versus 24% in the index). Much of this divergence is driven by our value-based investment philosophy putting our portfolio more in line with the allocations seen in the MSCI Value Index. We are unable to predict the future allocations in the fund given we allow the portfolio to naturally migrate to where the best value opportunites are at any given moment.
Barrow Hanley believes its investment strategy provides downside protection while also allowing investors to participate in improving economic cycles. Can you explain how this works?
We seek to identify investment opportunities with attractive asymmetrical risk/reward profiles. That is, finding stocks with more upside optionality than downside risk. When we can identify opportunities with this margin of safety at the stock level, then we should be able to build a portfolio of 50-70 stocks with this type of profile, which in aggregate gives you asymmetrical portfolio returns that participate in upside moves in the market while protecting on the downside.
The Fund's investment objective is to outperform the MSCI World Net Total Return Index (AUD) (before fees) over rolling three-year periods. However, the Fund has an informal investment objective to outperform the MSCI World Net Total Return Index by 1.5% p.a. to 2% p.a. (before fees) over rolling three to five-year periods. Can you give us a sense of how this has gone?
Portfolio returns have been very competitive over the short, medium and long-term for a value-based strategy. However, the value index has lagged the broad index by a wide margin over the last decade due to the dominance of Technology and internet related shares over that timeframe. Historically, value stocks have provided long term outperformance over the broader market with the exception of this recent growth market which is the longest in history. We have begun to see value stocks reassert themselves and would expect, as this trend continues, our value strategy over the long term will provide strong excess returns relative to the MSCI World Index.
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