Investment strategy, stocks to buy in 2022: best fund manager

  • After beating 92% of its peers in 2021, the Hotchkis & Wiley Diversified Value A fund is still hot.
  • Scott McBride, a portfolio manager behind the fund’s success, shared tips for value investing.
  • Here are four stocks McBride is bullish on and the two sectors he finds most attractive.

One of the best performing funds of 2021 is off to a flying start in the new year.

Hotchkis & Wiley Diversified Value A (HWCAX) fund rose 32% in 2021, outpacing 92% of its peers in its second-best annual performance since 2012. And a strong start to 2022 indicates the U.S. value-focused fund could be ready for another year of impressive returns.

In the first eight days of the year, the fund returned 6.2%, outperforming 99% of its peers and outperforming its benchmark, the Morningstar US Large-Mid Cap Broad Value Index, which increased by 1.2% over the same period. Scott McBride, CEO of Hotchkis & Wiley Capital Management, said the secret to the fund’s success was simple.

McBride said his team targets quality companies that are financially sound and have strong leadership from a capable and experienced management team focused on creating shareholder value – not “building of their own empire”. Companies that differentiate themselves from competitors, operate in a favorable market structure and have a low cost of capital are also attractive investments, McBride said.

“Many companies whose businesses have been negatively impacted by the pandemic have been priced as if that impact is permanent,” McBride told Insider in a recent interview. “And that created an opportunity for someone who was willing to scour the market, looking for good companies with balance sheets that could weather the downturn and with a management team that was going to do the right things but was depressed because of the downturn. of the pandemic.”

He added: “If you’re willing to take a longer-term perspective, there’s reason to believe that one day the world will get better and one day the profits of these companies will get better. that’s what we did.”

According to McBride, investors must tick two boxes to be successful: they must prioritize value by refusing to pay too much for overvalued stocks and maintain a long-term time horizon. The latter is especially vital in a frenetic news cycle where a 2% drop can be treated as a disaster.

“We find that the stock market is often focused on the very short term, and companies facing near-term challenges are often priced as if those challenges will continue in perpetuity,” McBride said.

When asked if sticking to your beliefs or being flexible and adaptable is a better mindset for investing in a downturn, McBride said it’s best to pass the needle between the two.

“I actually think those two things are important,” McBride said. “I would say sticking to discipline is maybe – I don’t mean ‘the most important’, but it’s essential to be a good investor, to have a process and a philosophy and to stick to it, especially when you’re facing an environment where your investment style is out of fashion.

“But I think – I wouldn’t exactly say, ‘Follow the flow of the market’, but I think you want to be flexible in terms of looking at companies and trying to be open-minded.”

What to expect from the markets in 2022

As early returns from the Hotchkis & Wiley Diversified Value A fund indicate, McBride expects another strong year for the US stock market — or at least for value-oriented stocks.

There’s no shortage of opinions on the growth versus value debate, and it’s no mystery whose side McBride and his team are on. Although growth stocks have created more value over the past five years, McBride said the gains haven’t come primarily from earnings growth.

“The real reason growth stocks outperformed dramatically was multiple expansion,” McBride said. “Their multiples have gone up. And that’s the part of that value versus growth dynamic that I think is the unsustainable part.

“If you’re an investor, I wouldn’t expect this multiple expansion to continue indefinitely. In fact, I would expect it to reverse, which we’ve seen a bit here over the the first week of the year.”

Inflation near 40-year highs is a headwind for many stocks, but a boon for companies in cyclical sectors like financials and energy, two sectors where McBride said his team’s fund had excessive positions. Companies in these economically sensitive sectors should have more room for improvement as the economic recovery continues, McBride said.

Financials is a good choice, according to McBride, as rising interest rates in response to above-trend inflation will boost the sector. Bank profitability improves when lenders can borrow at cheaper rates and lend at higher rates.

Energy stocks are undervalued — even after a bumper 48% run in 2021, McBride said. He said he believed oil prices would remain high thanks to steadily improving demand as the economy reopens, combined with lack of investment in fossil fuels in recent years. This mismatch between supply and demand is expected to keep the sector afloat, despite long-term concerns about renewables.

“The energy has really been left for dead for the past few years,” McBride said. “And I think that’s become a really unloved part of the market.”

Investors looking for more specific investment ideas can consider the following four stocks on which McBride has strong conviction in 2022: Citigroup (C), Marathon Oil (MRO), General Electric (GE) and F5 (FFIV) .

Below is the ticker, market capitalization, and a slightly edited summary of McBride’s thesis for each stock.

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