Many Americans hoped that 2021 would bring an end to the profound uncertainty plaguing consumers and investors throughout the previous year.
But in the wake of last week’s violent insurrection, 2021, if anything, seems even more unsettled. While news of a coronavirus vaccine and the resolution of the presidential and Senate elections brought some clarity, much of what lies ahead remains uncertain.
How can advisors weather such uncertainty? U.S. News spoke with Eric Schoenstein, managing director of Jensen Investment Management, about strategies advisors and clients can use to prepare for market volatility.
Here are edited excerpts from that interview.
What does the current state of the market mean for financial advisors and investors?
The market has continued to move higher as news on the vaccine has been positive and emergency-use authorizations have been approved. Market expectations appear robust and are dependent on reflation in energy prices, consumer spending and industrial activity concurrent with accelerating growth for companies in the technology and health care sectors. With such a large menu of positive assumptions, any disruption, even on a minor scale, could likely bring volatility. Financial advisors and investors should be prepared.
What are some strategies for advisors and investors to position themselves in the event of an uptick in volatility?
It’s important for investors and advisors to know what they own, understanding competitive advantages, business models and resilience of cash flow generation. These are the attributes of quality companies.
Quality companies can be more consistent in their business performance and, thus, more resilient in the face of any uptick in volatility.
How do you think the outcome of recent elections will impact the financial markets?
Elections have not had huge impacts on markets although some industries may do better than others. The two Georgia Senate runoff elections have determined control of the U.S. Senate, and while Congress and the White House are now controlled by one party, the majorities are by very slim margins.
This more likely means the impact from legislative action may not be as sweeping as once thought, and focus will be on getting the pandemic under control, along with additional stimulus to get the economy on more solid footing. More substantial reordering of the economy may need to wait.
Regardless, markets will remain focused over the long term on businesses and business models that are consistent value creators. Value creation in quality businesses occurs without specific regard to political outcomes.
How do you identify sustainable competitive advantages? What distinguishes a business as an attractive long-term growth opportunity?
Our due diligence process is focused on understanding and assessing sustainability of competitive advantages. These include strong brands, network effects, high switching costs and patents, to name a few.
Steady and persistent revenue growth, evidence of pricing power and margin stability, market share consistency and gains and resulting persistent free cash flow growth are good financial indicators of competitive advantages and ongoing attractiveness of long-term growth opportunities. Of course, there also needs to be a valuation assessment to determine whether the stock prices of these businesses are attractive enough for investment.
Where is Jensen Investment Management looking for the best investment opportunities in 2021?
Our goal continues to be the construction of a portfolio of companies positioned to grow and create business value. Our focus remains on identifying businesses with sustainable competitive advantages, resilient financial results and attractive long-term growth opportunities. We believe that there will likely be additional volatility in the markets and that our focus on high-quality business models will be rewarded.
Do you have specific companies or funds you can flag as attractive opportunities right now?
For much of the post-bear market period in 2020, investors have focused on lower quality stocks, as well as fast-growth momentum stocks, while looking past companies with steady, albeit somewhat slower, business growth. Examples would be health care stocks such as Stryker Corp. (ticker: SYK), Becton Dickinson and Co. (BDX) and Johnson & Johnson (JNJ).
Health care companies provide vital goods and services and have shown resiliency on their business models over time, given competitive advantages such as patent protection and pricing power. These stocks remain attractively valued and provide strong dividend profiles that can reward patient investors who are seeking long-term opportunities.
How can advisors bring peace of mind to clients?
We work on maintaining a focus on a long-term horizon and on what a client’s individual goals are for their investable assets. This can help to filter out the noise of day to day, which can feel overwhelming.
Copyright 2021 U.S. News & World Report