Based in New York, the chief investment officer for U.S. Trust, Bank of America Private Wealth Management was in Rhode Island recently for a U.S. Trust client event at which he shared some cautiously bullish thoughts about the investing environment going forward.
He took some time from his trip to answer questions about how he looks at the world from an investors’ perspective and how important going on the road is to his job.
PBN: Is global economic uncertainty an impediment to formulating and implementing a successful investment strategy?
HYZY: Although any uncertainty can be an impediment to a consistent trend in asset prices, a successful strategy can still be developed.
Economic uncertainty is significantly different than uncertainty around a financial system failure. Economic uncertainty can lead to a decline in more cyclically sensitive investments, but opportunities may still reside in more defensive areas, including equities.
When there is uncertainty surrounding counterparty risk or a financial system failure, then the potential for correlation to rise across all asset classes is significant and the ability to protect against loss declines dramatically.
Economic uncertainty is rather common and can happen once every business cycle. Therefore, successful strategies must include active tactical allocation changes throughout the lifecycle of the economic path (from growth to peak to decline to potential recession and recovery).
Furthermore, although uncertainty still resides in the U.S. and Europe, the global economic backdrop is healthy overall, particularly the emerging markets, which helps build and manage a successful strategy more easily.
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PBN: How large a role do changes in government regulation play in investment recommendations you make?
HYZY: Regulation changes in one sector or another are just another input to the investment process when making portfolio strategy decisions. The sector in which the regulation change is being applied tends to dictate the magnitude of the overall impact to asset prices both within the sector itself and the broader economy.
Financial regulation changes tend to have a larger impact on asset prices across all asset classes for obvious reasons versus adjustments that may be made in the health care, energy, telecom or utility sectors.
In addition, another input in context of regulation changes that is important is the “reason” for the adjustment.
Most increased regulation changes involve higher costs to companies operating in that industry. If these companies tend to have a higher weight in the index and/or place the country in which they reside at a disadvantage to global competitors, then there can be very broad and negative consequences.
On the contrary, deregulation can lower barriers to entry, increase competition, spur innovation and ultimately lead to the birth of new companies.
What is most important in the context of the investment process, however, is still the leading economic indicators, employment trends, the overall profit cycle (which can be affected by regulation changes), valuation, investment flows (where is the herd?) and the inherent risk/volatility in the capital markets.
PBN: What sectors of the economy do you see offering the best investment opportunities in the next year, the next five, the next 10?
HYZY: Currently, the sectors that we have rated as “overweight” are: Information Technology, Industrials, Materials and Energy, sectors that derive more than average revenues from outside the United States. The IT sector appears to be attractively valued.
Favored industries: Software and Services, select Hardware and Equipment companies, and select Semiconductor Equipment companies.
Earnings growth is expected to be led by the Transportation, and Commercial & Professional Services industries.
Favored industries: Capital Goods, Industrial Machinery and Tools, Railroads, Construction and Engineering, Air Freight and Logistics, Electrical Components and Equipment, and Waste Management companies.
We continue to be long-term commodity bulls.
Favored industries: Diversified Mining companies, Diversified Chemical producers, Building Materials, select Fertilizer companies and Metal Manufacturers.
Both the ROE and the free cash flow per share have reversed downward trends and have scope for further rise in the energy sector.
Favored industries: Exploration and Production, Oil Drillers and Equipment Services, some major global Oil Integrated companies, select Land Rig Operators, and Oil Tanker companies.
Investment themes: Water, Agricultural Commodities, Climate Change, Healthy Behavior and Aging, Asia’s Currencies versus the U.S. Dollar, Defense, Emerging Market Middle-Class Consumer, Nuclear Power, Global Information Technology, Africa.
PBN: How often do you leave the office and visit businesses to supplement the research that U.S. Trust staff does already? Do you feel that getting into the field is a necessity to truly understanding what to invest in?
HYZY: Traveling across the country to visit with clients and prospects that run businesses is one of the most important inputs into our macro strategy research process.
All of our research personnel travel to meet with all types of businesses in order to confirm and test our macro research. We want to know that the micro aspect of the economy (real life on the ground business production) is confirming the trends we see occuring from a top down perspective.
I, as well as our head of strategy and portfolio conulting, travel about two-to-three weeks per month. This allows us to do on-the-ground fieldwork in various types of businesses given the fact that our clients manage businesses in all industry groupings with many of them having significant exposure to the global economic cycle.
We link our field work (bottom up) with the the macro (top down) in order to develop a more robust and realistic investment process. We believe this helps determine the strength of the business cycle and the durability of the profit cycle.
If business owners are not hiring, we hear it directly from them. If they are shifting resources overseas to distribute quicker to an emerging market consumer, we hear it directly from them. If they are getting easier access to credit, we will know.
This all helps build a much more robust investment process.
PBN: Being the head of wealth management for a private bank, do your investment recommendations accept a higher level of risk than what you would for a broader spectrum of investors? Is that the only difference in your approach?
HYZY: As the chief investment officer, I set investment policy for the firm across our client base. The investment policy of the firm is then tailored to each client relationship according to their individual risk profile. We customize a robust investment mandate that takes into account various categories of risk, including liquidity, market and exposure risk, as well as tax considerations, liability hurdles, return expectations, existing investment exposures, estate planning issues and specific wealth aspirations overall.
Each relationship is unique in of itself for a variety of reasons. The characteristics are captured in an investment policy statement. Each relationship is then managed accordingly and reviewed on an ongoing basis.
