Institutional Perspectives
Lord Abbett value equity experts discuss the challenges—and potential opportunities—in the current market.
As part of a continuing series surveying Lord Abbett portfolio managers for their views on crucial macroeconomic and investment topics (read views on U.S. Federal Reserve policy and growth and dividend equities), we asked Lord Abbett Portfolio Manager Eli Rabinowich, who is responsible for managing all of the firm’s value equity strategies across the capitalization spectrum, to discuss how he and his team see the current market—and where they are seeing potential opportunities.
Throughout the recent period of historic volatility in the equity markets related to the global spread of COVID-19, the value team at Lord Abbett has remained focused on identifying opportunities to own high quality businesses at attractive normalized free cash flow yields. From our perspective the reaction to this crisis has been truly unique. It has moved from one initially focused on public health to include the broader economic impacts, exacerbated in the near-term by the move to more aggressive social distancing, and the knock on credit implications.
The equity of value companies have been particularly hard hit during this period as credit spreads have widened to levels not seen since the depths of 2008-09 financial crises. As a point of reference, the normalized free cash flow of the top quintile of the Russell 1000® Index has widened from 6% at the end of February to greater than 10% as of March 24, with outsized weakness in sectors and companies with greater exposure to cyclicality and higher levels of leverage. Historically, periods where we have seen this type of dispersion have created the greatest opportunities to own value stocks.
Compared to the Global Financial Crisis, we have seen governments and central banks around the world respond quickly to the developing situation. And while the risks have not yet begun to abate, there have been some early signs that their actions are beginning to have some stabilizing influence on the credit markets, though time will tell.
Given our longer-term orientation and the focus we place on normalized free cash flow, we believe we have a unique ability to look through some of the shorter-term impacts on companies due to the global pandemic, and we continue to look for opportunity in the volatility. As a result, we have been able to methodically upgrade our portfolios in sectors that have been particularly affected—consumer, industrials, and financials—by sticking to our process. It is our view that once the economy is able to move through the transitory (though significant) impact of COVID-19 into a more normalized environment, we will look back on this period as another historic opportunity to own the equity of high quality companies at very attractive prices.
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.
No investing strategy can overcome all market volatility or guarantee future results.
Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.
The Russell 1000 Index® measures the performance of the 1,000 largest companies in the Russell 3000 Index, which represents approximately 92% of the total market capitalization of the Russell 3000 Index. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
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The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.