After beginning his investment career around the same time Ronald Reagan was elected to the White House, one could easily assume Bob Doll had very little left to learn in the fund management industry.
But even for Doll, the vice chairman and chief equity strategist at asset management behemoth BlackRock, continual learning and adapting is vital to staying at the top of an industry that has undergone huge changes during his 30-year tenure.
Doll, who joined Merrill Lynch Investment Managers as president and chief investment officer in 1999, also believes the recent market and economic downturn has brought about particular challenges for a portfolio manager.
“This business is all changing so fast. Once you think you are not learning any more, or you stop trying to learn, you are a dinosaur,” Doll admits.
“When I broke into this business, a long time ago, it was all about earnings and the income statement – very little about the balance sheet. Now balance sheets are absolutely vital.
“If one did not pay attention to balance sheets before, you have learned how to do that. If one did not properly use risk management before, they were exposed.
“I think the interdependence of asset classes is another change; I have never spent so much time listening to fixed income people explain things than I have in the last couple of years.”
Lessons
While any avid follower of Doll’s must-read top 10 yearly predictions would know the veteran’s forecasts are rarely off the mark, even Doll himself could not have foreseen the problems which engulfed the financial system in 2008-2009. Putting his stockpicking hat on again, Doll says the crisis has left some lasting lessons.
“I cannot remember a period when there was so much about the macro and so little about the company specifics,” he explains.
“If on 1 January 2009, you bought a portfolio of lousy stocks – companies with bad balance sheets, deteriorating credit ratings, falling earnings estimates, and high valuations – you had a very good year.
“Conversely, if you do what we try to do for a living – buy companies with improving fundamentals, rising earnings estimates, leadership positions, inexpensive valuations – it was not a very good year.
“This happens from time to time and I guess one of the lessons is it can go on longer than you think. We are just thrilled we are back to a more normal environment, where companies that report good results thrive and those that do not go down.”
During the downturn, Doll and his BlackRock team made an effort to take in and dissect as much information as possible in an attempt to stay half a step ahead.
“We were listening and reading – maybe more than you should – simply to try to digest and understand and possibly anticipate what would come next, even if this was impossible at certain points in time,” Doll says.
“In terms of our portfolios, we certainly did not sit on our hands and try and ride it out."
“In fact, we became more active in what we did because there were more things to react to. If we see more volatility, our investment process tends to lead us into more trading activity.”
On the belief the global financial system “almost fell apart” in October 2008, Doll thinks the US Government and other global authorities did well in stabilising the situation.
“At the very root, the Government’s job, although they never quite articulated it this way, was simply to stem the fear and restore some sort of confidence. Because it is fear that causes people to draw inwards and you do get depression,” he says.
“I give them high marks on achieving that objective. We could quibble over the way that got there all day, and who am I to throw stones with 20:20 hindsight? But boy, we sure threw a lot of things at the wall to see what would stick and we sure spent a lot of money doing it.”
Realisation
From a macro standpoint, Doll says the US and many other developed countries will need to face up to the realisation of slower growth in the coming years – simply because of the excessive amounts of built-up debt. He also believes interest rates could reach levels higher than they otherwise would and currencies may be under more pressure than before.
On this theme of monetary policy, Doll believes a slow US exit strategy is well under way already.
“I think the Federal Reserve was right in February, the discount rate was just a technical factor,” Doll says.
“But I will tell you this: If it was still emergency conditions, they definitely would have not have made this call."
“Why did they do it? Simply because things are improving. As seen with the Fed stopping buying Treasuries and the announced end of buying mortgages.”
Doll says all this action will culminate in a rise in US interest rates – sooner than some expect.
“While it is not a majority view at BlackRock, my view is we will see a rise in rates possibly by the end of this year. Simply because the starting point is zero,” Doll explains.
“Zero basically displays an emergency situation and the emergency has passed. We still need low rates, we still need aggressive monetary policy, but I am not sure we need zero.”
Despite markets rallying strongly since March last year, Doll expects US equities to continue to rise in 2010 – underpinned by strong earnings growth. The manager estimates 20% to 30% earnings growth, which he says is about 10 points below a typical recovery because of structural headwind of de-leveraging.
Migration
Considering this bullish near-term prediction, Doll used periods of weakness in equity markets earlier this year to manoeuvre around his American portfolios and the locally domiciled £161.7m BlackRock US Dynamic fund.
“We are always migrating the portfolio. Earlier this year we saw the 10% pull-back in global equity markets, defensives held up well but the things that went down 20% tended to be global cyclicals,” Doll explains.
“One of the things we did in January was trim some of our healthcare exposure, despite maintaining an overweight, and adding to some of the hard-hit cyclicals.
“In our minds some of the metals and energy stocks, for example, got caught up in the over-reaction and sure enough, as the market has done a little bit better, guess what has come back the most? Those cyclical areas.”
While the move East is now fully established in the investment world, Doll says the US market has more than enough opportunities to tap into developing world growth. The manager says the American multi-nationals, which are entrenched in the emerging world, are currently still inexpensive given the growth they can expect to attain from a global reach.
“While here at BlackRock we obviously have lots of investments in the emerging markets, many of our global portfolios in fact took some direct exposure to emerging markets off the table in the fourth quarter of last year and instead bought some indirect exposure through these multi-nationals,” Doll says.
“In the US Flexible fund that I manage, we have a barbell strategy in geographic terms at the moment.
“One end of the barbell is exposure to US domestic cyclicality – which we believe will outperform European and Japanese equivalents because of the aggressive US stimulus.
“At the other end of the barbell is exposure to the faster-growing areas of the world. We do want earnings exposure because we want earnings growth and to get it you go to the emerging markets.”
While many investors have become cautious on emerging markets in recent months, Doll remains bullish.
“With everybody talking about these regions, there is a danger a love affair occurs and a bubble gets created,” Doll says.
“Valuations suggest we are nowhere near a bubble. We may get there X years down the line, but not before we have some pretty fancy returns.
“You just need to play emerging markets both directly and indirectly. The multi-nationals are just so much cheaper and have much higher quality than a lot of the emerging market countries.
“So if you say blindly, you want to pick 10 companies and lock up a portfolio for a decade, I am going to have a lot of the big multi-nationals with decent balance sheets, good free cashflow and earnings exposure to the emerging markets.”
Weighting
In the BlackRock US Dynamic fund, run by Doll since October 2004, the manager’s largest sector weightings are in healthcare, IT and energy.
He has identified three key leaders in healthcare – UnitedHealthcare in the HMO space, Amgen in bio-tech and service company Medco Health.
“I believe these companies are cheap relative to their fundamental prospects, with extremely good free cash flow in all three cases,” he says. “Looking at Amgen, it has got the potential for a new anti-cancer product, which has received approval for osteoporosis, and our hope is for more cancer prevention.”
Many technology and energy names in Doll’s US Dynamic fund would definitely be familiar to UK investors.
“In technology, Microsoft and Apple alone have about a half dozen potential blockbuster new products just this year, which forms our enthusiasm for the sector,” Doll explains.
“Energy is a little different. A year ago we would have had mostly the big integrated oil names – but if you want global cyclical exposure and more exposure to oil price increases, or cyclical unit growth, you need some of the oil service companies.
“So we have some integrated stocks, such as ConocoPhillips and Marathon, but also some oil service like National Oilwell Varco. I think you need to diversify an energy portfolio.”
Fears
While Doll is more optimistic than many investors on the markets and the state of the global economy, he still has deflationary fears despite the worldwide efforts to avoid a Japan-style situation.
“Deflation was a pretty big force for 18 months or so, and I do not think it is dead – it still lurks in the background. I think Greece is a perfect reminder of deflation,” Doll says.
“There are bad debts out there and there are going to be more bad debts to come. If we are right and this is a sub-par economic recovery, some people are not going to be able to pay their bills. So the risk is if we are underestimating the evil forces associated with deflation. We do not think it is a high risk. It is not our main line scenario, but I worry about it.”
Indictments
Despite this fear, Doll still expects equities to be the best performing asset class on a long-term view, considering the low base.
“We are so coloured by the rear-view mirror and the trouble we have gone through. But the fact the stocks have not gone anywhere for a decade, roughly speaking, is not an indictment of today, it is an indictment of the starting point,” Doll concludes.
“Valuations assumed there was a new normal. And that we would repeal all the rules that existed before about valuation growth. In my mind we have corrected much of that.
“So while we anticipate, over the long-term, somewhat slower growth for the planet than we saw in the boom years when we had global synchronous growth, I think we are going to get growth and that is good for equities.”
