Want to know what the market will do in 2023? Is a recession inevitable? Don't ask managers of the $259.8 million EIC Value Fund (EICVX) even though they're outpunching the broad market — by a lot.
They've outperformed the broad market in the form of the S&P 500 over the 12 months ended Wednesday, slipping 0.55% vs. the S&P 500's jumbo 18.29% tumble, according to Morningstar Direct. Even among just large-cap value funds — which average a 6.56% setback over those 12 months — theirs has outgained 89% of them.
But the fund's managers don't bother trying to guess where the market is going or whether a recession is bearing down on investors. "We think it's reasonable to expect more volatility in the market next year," said "Bo" (Robert) Ladyman, co-manager of the fund along with Tom Knapp, William Bruner, Richard Irrgang and Ian Zabor. "But we think the reality is that no one knows exactly how the economy or markets will evolve over the course of the year."
Recession: No Prediction
Nor do Ladyman and his teammates think it matters. "We're not trying to predict a recession — or anything else," he said. "When we make an investment, we tend to hold that investment through a full economic cycle."
Whatever the macro environment is, Ladyman and colleagues seek stocks that provide value, quality and diversification. Their formula for outperformance hinges on doing well in upturns and much better than rivals in general during downturns.
Over the past five years as of Dec. 31, for example, their fund has notched 82.8% of the S&P 500's gains during run-ups. During pullbacks, it has limited losses to 78.9% of the market's. "Our investment philosophy is that the key to long-term success is avoiding significant losses," Ladyman said.
More Gas In The Tank
ADRs of the French-based integrated oil and gas producer TotalEnergies are one holding that has helped EIC Value Fund achieve its goal.
Its ADRs are up 26% over the past 12 months. The EIC Value Fund managers do not think energy in general and TotalEnergies in particular have run out of fuel. "We're trying to value energy companies based on conservative assumptions for what oil and gas prices might be in the future," Ladyman said. "We're looking at very long futures prices, not near-term spot prices. Under that framework, TotalEnergies remains attractive."
Further, EIC Value Fund sees the ADRs as attractively valued. They're trading at five times forward earnings vs. a forward multiple of 17 for the S&P 500 index. "And TotalEnergies has a healthy dividend that it can cover with cash flow with oil prices as low as $40 a barrel," Ladyman said.
TTE's dividend yield is around 4%.
West Texas Intermediate oil was trading around 73 a barrel on Thursday. Brent crude was near 78 a barrel.
Thinking Long-Term
Would a 2023 recession disrupt financial services giant Charles Schwab? Managers of EIC Value Fund aren't asking themselves that question. Instead, they're projecting Schwab's prospects over a longer period of time.
As a result, they're not overly concerned that Schwab shares have merely lost 6.41% over the past 12 months. "We bought our position in March 2020, near the white-heat point of the pandemic," Knapp said. That March, the broad market fell to its lowest point since August 2016. "Our entry price was 29.06. We added to it in July of 2020 at 34.86. We saw an opportunity to own a high quality market leader in brokerage services and the asset custody business that we think should continue to grow and take market share long term."
Now Schwab is trading in the low 80s. "Earnings growth will follow organic growth," Knapp said. "While its valuation has expanded some since our initial purchase, it's still positioned for solid returns over a multiyear period."
Recession Or Not
AmerisourceBergen is another holding whose multiyear prospects EIC Value Fund's managers like, whether or not 2023 brings a recession. Shares are up 25% in the past year. Its dividend yield is 1.2%.
The fund's managers also like the fact that health-care stocks tend to have relatively steady revenue, even amid economic slowdowns. That protects their earnings.
Another appeal is that the stock appears to have moved beyond a key headwind. The drug wholesaler faced the prospect of a large number of state-and-local lawsuits for its role in allegedly fueling the nation's deadly opioid crisis. The company has settled some suits. Also, in July a federal court ruled in favor of the company. Still, the Department of Justice (DOJ) filed a new suit late last month.
"We first bought our position in 2018 at a time of high uncertainty around the magnitude of a potential settlement in opioid litigation," Knapp said. "That situation is largely resolved. So, investors will be able to focus more on the quality of AmerisourceBergen's core pharmaceutical business, which is very consolidated."
Any settlement stemming from the new DOJ suit is likely to be smaller than the state-and-local settlement ABC has already entered, Knapp says.
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