Chaos has ruled markets for months. With a pandemic pummeling the economy, and everyone from central banks to mom and pop investors trying to push asset prices back up, it’s a setting guaranteed to strain the insights of fund managers.
Consider a quantity called dispersion, or how varied individual stock returns are. Bashed around in earnings season, differences between winners and losers in the S&P 500 are right now almost twice the average of the last decade.
That creates openings for active managers who can hunt beyond indexes for companies positioned to bounce, according to Katie Koch, co-head of fundamental equity at Goldman Sachs Asset Management. Funds advised by Koch, whose firm has about $1.8 trillion under supervision, are beating their benchmarks at an 80% rate in 2020.
“You want to take advantage of this dispersion and possibly find these names that haven’t been as resilient as the rest of the market, therefore providing higher upside,” she said by phone this week. “You need to look beyond the mega-cap, very resilient tech names to find those recovery opportunities.”
That big gaps would open in valuations is one thing people got right when trying to forecast the current earnings season, which has come without the aid of reliable estimates. Indeed, many professional traders were excited by the prospect of a market thrown into chaos by the pandemic’s economic consequences, believing it would be an opportunity to exploit their real-time edge.
Equity markets have shown tremendous resilience in the face of tough economic data thanks, in part, to intervention by the Federal Reserve. The central bank’s balance sheet has ballooned in recent weeks, passing $6 trillion, with some economists projecting it could top 50% of U.S. GDP by the end of the year. Thus, one time-honored rule rings loudest at Goldman.
“Don’t fight the Fed,” Koch said by phone this week. “The sheer volume of monetary support and also what they’re buying has really removed a lot of the left-tail risk for equity markets and that’s being reflected in the current relatively resilient levels of the S&P 500.”
Her recommendation to clients? Stay invested but be aggressively active in the pursuit of “abundant” opportunities that exist at the company level.
Companies should, most importantly, have balance sheet strength to manage through a protracted shutdown. From a valuation perspective, Koch looks for firms that have been heavily discounted relative to their value. Lastly, she looks for businesses that might be attached to secular growth opportunities her team believes will eventually recover.
Here are some of the areas Koch and her team are exploring: