• Investment Management

Secrets of a Successful Stock Picker

How does a fund manager of global growth stocks deal with today’s volatile markets? Fishing helps.

Kristian Heugh has learned the required analytical skills and earned the CFA designation to help make him a successful global fund manager. But he thinks some of his most valuable attributes were developed as a child in Norway.

“Fishing with my grandfather taught me patience and perseverance," he explains. “Common sense and a strong passion that is controlled by the right temperament are much more important than all the university degrees, industry certifications and pedigree put together.”

Having the right temperament these days means being able to withstand the kind of volatility that sent global stocks plunging earlier this year, and more recently the roller coaster ride caused by the UK voting to sever its membership with the European Union. Growth stocks, often young fast-growing companies yet to peak in earnings potential, have taken a backseat to value stocks this year. The latter are usually larger, mature companies that often give the impression of safety, real or not, because they’ve been around for longer.

All the better, as far as Heugh and the Morgan Stanley Investment Management Growth Team are concerned. As the manager of the Morgan Stanley Institutional Funds Global Opportunity Portfolio, one of the principle investment strategies that he and other team members use is buying stocks oversold by those running in the other direction.

“We believe that risk is losing money; it's not driven by fluctuations, or tracking error, or performance in one or three months. We seek to buy companies at a very large discount to intrinsic value, so we have a cushion against unforeseen impairments of value over the long term," he says.

Heugh's fund returned more than 18% in 2015, despite it being a tough year for equities; as of March 31, 2016, it had beaten 99% of its peers for the three- and five-year periods, according to database firm Morningstar. 

Here are some other basic investing principles that Heugh, and the Growth Team in general, applies when looking for companies that he believes can withstand the test of short-term volatility.

  • Growth is Value
    “All investing is value investing in the true sense of the term,” Heugh argues.  “If you do not buy something for less than you think it is worth, then you are not an investor, you are a speculator.” A company growing rapidly can, but may not always, be undervalued in the long term. Growth achieved at high returns on invested capital strongly contributes to the value of a business. As Warren Buffett says: “Price is what you pay, value is what you get.”
  • Buy Quality
    “To us, quality is a company's ability to maintain sustainable competitive advantages, while redeploying capital into the business at a high rate of return. A truly high-quality company will be creating value for everyone in the ecosystem, while acting sustainably, and has the ability to raise prices." Heugh explains. “We believe high-quality companies with these attributes can do well throughout many different types of macroeconomic cycles."
  • What Is the Next Disruptive Trend?
    The team has a disruptive change analyst who researches trends that are game-changers for multiple industries. “This analysis doesn't always find individual companies for us to buy, but it does tell us where some risks are," says Heugh. “Another characteristic of a quality company is resilience to disruptive change. Right now, we believe solar is one of the biggest disruptive trends out there, and the world hasn't figured it out yet. We think that within five to seven years, solar is going to be cheaper than carbon fuels and hydroelectric energy."
  • Look At All Sectors and be Global
    “People tend to think that the best growth stocks are in technology and biotechnology, but we've found growth stocks in all sorts of sectors and in many regions in the world," says Heugh. His fund has everything from potato-chip makers and biotech startups, to tutoring outfits and luxury consumer brands.
  • Don't Be Deterred by Macroeconomics
    “We have a saying in our group that if we've spent 30 minutes talking about macro influences on January 1st each year, we've wasted 28 minutes a year," says Heugh. “If you only choose a few select companies that have a competitive edge through good times and bad, don’t have debt or large customer concentration, and you can invest with a three-year or longer timeframe, then you don't need to be as concerned about macroeconomics."
  • Putting Clients First
    Heugh and other members of the Growth Team call themselves "investors" because they believe they are partners in the businesses they own—not just renters of stocks.  They view the public investors in their team funds as partners as well; as such, the team members are all required to invest a sizeable portion of their deferred compensation alongside their clients. “Incentives matter.  We are highly aligned with our client’s long-term interest," says Heugh. 
Watch Heugh talk about more investment ideas in depth
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