Speaking at a media briefing in Sydney last week, New York-based Rupal J. Bhansali, Chief Investment Officer, International & Global Equities at Ariel Investments, articulated her position that the Trump agenda includes many factors that an index ignores – from foreign policy to fiscal policy – presenting greater risks for passive investors and greater opportunities for high conviction active managers to generate alpha.

Ms Bhansali said she believes key proposals and executive orders in just the last month, such as changes to ObamaCare, the immigration ban and potential legislation to modify the Dodd-Frank Act, have brought greater uncertainty and volatility for many sectors, countries and asset classes.

Ms Bhansali said she believes active investing has tended to do better in choppy markets fraught with ambiguity.

“Passive investors may find they have been penny wise and pound foolish by unduly focusing on low costs at the expense of higher risks,” she said. Risks of excessive allocations to passive include liquidity risk, valuation risk and market timing risk.

“I think passive has become a very crowded trade of late. Chasing what is in vogue has never been a successful recipe for securing long-term returns but instead often proves to be a precursor to large losses or underperformance.

“In fact, going passive is an active decision in itself – it assumes active managers continue to underperform passive. But we’d argue that the massive changes afoot in political and economic regimes, from the UK to the USA, play into the hands of active managers,” she said.

Horses for courses

Ms Bhansali said the age-old active versus passive argument was less about one approach being superior to the other, but rather an appreciation that each approach outperforms in certain market environments.

“Outperformance of each approach is cyclical, not secular,” she said. “Studies have shown dramatic reversals occur when the active style suffers bottom decile performance versus passive for several years, and vice versa.”

Ms Bhansali pointed to a chart showing the percentage of funds outperforming the S&P 500 on a 5-year basis going back to 1970 – to show how close investors may be to a reversal in favour of active management:

Sector impacts

Ms Bhansali said that by applying a contrarian approach, Ariel continues to find good opportunities in spite of – and sometimes because of – the political uncertainty. She views the healthcare sector as a current favourite with promising potential.

“Pharmaceuticals is a sector that has underperformed the S&P500 by nearly 40%,” Ms Bhansali said. “We think no matter what the results will be for ObamaCare plans or whatever form its successor takes, innovative drugs which save lives will receive their fair economic return. In fact, this myopic focus on near term regulatory risk is ignoring the Silicon Valley-esque innovation going on in drug discovery – whether it is in personalised medicine via combination therapies or game changing concepts such as gene editing.”

She said one such company was Gilead which has come up with a cure to a life-threatening disease Hepatitis C.

“In my view, the stock is cheap as it has been sold off on the back of concerns about sustainability of their Hep C franchise. Pessimism has gone to extreme levels where no credit is given for their promising pipeline. Even ignoring the pipeline, the existing products in the market generate so much cash that it could buy back the entire company in six years at the current rate. It is our largest healthcare holding, as we believe it has very compelling upside potential versus downside risk, further buttressed by a strong net cash balance sheet,” Ms Bhansali said.

Ms Bhansali said another area of opportunity in many global markets are Exchanges which are fee based businesses within the financial sector as opposed to interest rate spread based businesses such as banks.

“Markets have re-rated banks all over the world as beneficiaries of rising interest rates but ignored the benefit of increased interest income on free floats on clearinghouse balances and the increased hedging activity that follows interest rate volatility at Exchanges.

“Chicago Mercantile Exchange and Deutsche Boerse are second order beneficiaries of this development but their stocks have lagged the mainstream financial sector,” she said.

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Speaking at a media briefing in Sydney yesteday, New York-based Rupal J. Bhansali, Chief Investment Officer, International and Global Equities at Ariel Investments, said investors have become obsessed with stability and have developed an aversion to volatility, which has led them to accept the “certainty of low returns for the hope of low risk.”

“Stability is not always your friend, and volatility is not always your enemy,” Ms Bhansali said. “By using proven principles of contrarian value investing, investors can achieve high returns and low risk by owning stocks of quality companies trading at a discount due to concerns about volatility. Conversely, investors should avoid buying stocks selling at a high premium for their perceived stability.”

Ms Bhansali describes contrarian investing as buying securities when they go “on sale,” but avoiding those that are offered “on clearance.” She adds, “Contrarian investing works best when backed by independent thinking and patience.”

Ms Bhansali said it is better for investors to focus on valuations, which is often the tipping point between risk and reward, rather than labels or perceptions of stability and volatility.

“Many investors think stability is equated with reducing risk, but in reality, they may have merely swapped risk, not reduced it,” she said. “Overpaying for stability can result in underperformance or losses. On the other hand, going long on volatility at a discount can work in your favour in generating returns.”

Ms Bhansali points to the U.K.-listed drugmaker GlaxoSmithKline, which is currently deeply out of favour due to product pipeline disappointments and earnings volatility, as an example to illustrate her contrarian approach.

“We like the business due to the high barriers to entry, attractive long-term economics and resilient cash flow profile across its three business lines,” she said. “Lower earnings expectations with low valuations can create a margin of safety. We think the stock is now on sale.”

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Ariel Investments specialises in managing all-cap global and international equity portfolios, as well as U.S. small- and mid-cap equities strategies. The firm will initially market the Ariel Global product to Australian and Asian institutional investors.

Ariel Investments brings a patient, long-term approach to investing to the Australian marketplace, employing the firm’s motto, “Slow and steady wins the race.” Ariel differentiates itself from other equity firms by conducting research with an independent, often contrarian lens. It seeks to identify and own quality businesses that are misunderstood and mispriced. Moreover, there is a strong focus on risk management. The Ariel Global product is benchmark agnostic and typically invests in 75 to 100 stocks, with a high concentration across the top 10 holdings.

The Ariel Global product was launched in 2011 under the stewardship of a proven and seasoned investor, Rupal J. Bhansali, Chief Investment Officer, International and Global Equities. Ms Bhansali and her equity team are based in New York. Named a “Global Guru” by Forbes International Investment Report in 2009, Ms Bhansali has enjoyed a distinguished investment career of more than 25 years.

“Pension and super funds across the Asia-Pacific region are looking for capital appreciation driven by a proven investment process and a cohesive team,” Ms Bhansali stated. “This is exactly what we bring to the table. From our negative screening process to our 360-degree scenario analysis, along with our rigorous attention to risk management, we have developed a robust and repeatable investment process to meet client objectives.”

A global contribution

Ariel Investments is a boutique manager, wherein all employees hold an ownership stake in the business. As part of its philosophy of teamwork, the firm has also built an enduring reputation as a contributor to improving financial literacy and investor education across the United States.

Part of this effort is demonstrated through the firm’s 19-year sponsorship of Ariel Community Academy, a Chicago Public School. Ariel Community Academy offers classes from pre-kindergarten through eighth grade, serving more than 500 students, 98% of whom are African American and more than 85% of whom come from families living on low incomes. In the United States, Ariel President Mellody Hobson has become a nationally recognised voice on financial literacy and is a passionate advocate for the power of investor education. Ms Hobson was recently named to Time Magazine’s 2015 Time 100, a list of the most influential people in the world.

Ian Webber, Senior Vice President, Head of Asia Pacific, said the firm’s commitment to giving back and its distinctive approach to generating superior long-term investment outcomes would form key planks of his drive to build Ariel’s reputation in the region.

“I am excited to introduce Ariel’s investment process to institutional investors throughout the region,” he said. “The process is truly unique—most importantly it has delivered strong results for investors across different market cycles, in both absolute and relative terms.”

Mr Webber brings to Ariel more than 15 years’ experience in the funds management industry, having worked with firms such as J.P. Morgan Investment Management, Salomon Smith Barney/Citigroup Asset Management and AXA Rosenberg Investment Management. He was most recently country head and director of sales, Asia Pacific, for Artio Global Investors.

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