That one of the best long-term equity plans should be one that invests in the US may seem nothing remarkable, given the growth of US indices over the past decade. However, succeeding in outperforming your most direct competitors, who are also focusing on the same assets, is much more impressive. MAPFRE AMERICA PP’s 10-year annualized performance currently exceeds 11 percent, slightly below other similar plans which nevertheless apply a less active management style and bearing in mind that its manager, Patrick Nielsen, has been reducing the weight of technology securities to incorporate companies that benefit more from cyclical change.
For many years you have relied heavily on technology companies, what percentage of the portfolio has been invested in that type of firm?
We’ve held a percentage somewhat higher than their overall presence in the American stock market, with a bias toward large companies. The aim has been to ensure that the commitment was not excessive, because the economy is a whole and, however attractive a particular sector is, in the end it will depend on its clients and they will depend on other sectors. So there is a need for a coherent ecosystem. That said, the weight has grown progressively. Twenty years ago it accounted for 15 percent of the total, and has since risen to 30 percent. We now take a more neutral stance because there is too much enthusiasm. What we like are companies that, through an innovative business process, are capable of increasing their market share. They are technological, but because of demand, their balance sheets and income statements do not have the characteristics of that type of company.
Is that why you like companies like Alphabet and Microsoft?
Yes. The challenge with these types of companies is to know what valuation is justified. There are some that have long been identified as very good companies, such as Dove, the software producer. These firms confirm that they maintain their financial ratios, which increases their margins. But the concern comes from knowing whether the quote is justified.
And how is it valued?
We are getting closer to a vaccine and this has a positive impact on medium- and long-term growth, and there is interest again in sectors such as those that depend on human interaction (transport, cruises, restaurants). Now, suddenly, normalcy begins to look closer, improving prospects for these companies and decreasing their financial risk. This fuels a rotation of investors and, in companies that had a very high premium for stable growth prospects, we must rethink whether this premium is justified. We believe that long-term growth is structural, and therefore deserves a premium. But until now the premium was excessive, so we had already begun to lighten such companies’ weight in the plan’s portfolio.
Will Biden’s arrival at the White House in January accentuate this rotation?
Biden’s victory has been won with sufficient margin and the framework for action is a very fine balance between Republicans and Democrats, so there will be no biased initiatives in one direction or the other, if it comes to the question of removing Trump’s tax improvements. There is no best case scenario, although it helps to have a solution for the vaccine issue and that a date can be set for the return to normal. However, there are still difficult months remaining until they are available. It is important to reflect in our portfolios what the economy of a more centrist government reflects, with the sectoral implications that that entails.
How is this rotation being conducted in the plan’s portfolio?
Throughout the summer very good quality securities have been introduced, such as Delta Airlines and Royal Caribbean, which had been heavily punished and whose future was very uncertain as long as there were no prospects for a vaccine. But that does not mean that we are thinking of totally removing Google or Microsoft, which we used as a shelter. We’ve just lowered the proportion. And the next moves will be based on the data.
What other companies do you like?
A more hybrid company such as Disney, health sector firms, which are severely damaged by the political prospects but are trading at attractive ratios. We don’t want to forget about stable growth companies either, because bad blows can come any time without warning. However, for the next few months we have to forget a bit about the ‘stay at home’ and the digital growth theme, but we will return to them when valuations normalize. We are now watching firms from the energy sector and large banks, such as JP Morgan. Although it is important to look at their growth prospects, which are not the best. Companies in the communications sector, such as Verizon and AT&T or more average-sized companies like Comcast, which have been a little bit caught between two tendencies. They are not the ones who are either most harmed by Covid or the ones that most benefit from the new environment of these last several years and we think there are interesting topics in there.
In the portfolio, Procter&Gamble and Johnson & Johnson have a significant presence.
For three years now, we’ve been constantly increasing their proportion, with a strong preference for the former in particular. The market is now rating the company better and, although it no longer has such a big margin, it has improved its management and its margins have reassured investors.