Claus Vorm, Portfolio Manager of Nordea’s Stable Equity Strategies, talks about how his team is taking on the 2023 market with confidence
The primary challenge facing investors today is historically high inflationary pressures, which are forcing many central banks to aggressively hike interest rates. Despite the challenge this presents, if we look at markets through a fundamental lens, equities remain the asset class most likely to deliver a robust return able to offset inflation. Portfolio manager Claus Vorm believes the most successful companies in 2023 will be those with steady earnings and robust balance sheets, which can be stabilising forces against economic weakness and rising rates.
With Nordea’s Global Stable Equity Strategy, you select stocks on a quantitative basis. What factors play a role in the selection of stocks?
First of all, we try to identify the risk-return ratio of individual stocks and look at different key figures: the price, earnings, dividends, EBITDA and cash flow of a company. Stability is what we are looking for. While models like the Capital Asset Pricing Model assume that high risk stocks also generate higher returns, we try to identify market anomalies. We are looking for high returns with low risk.* Take the example of growth stocks. On average, expectations for growth stocks are higher than the actual return. We therefore avoid growth stocks and focus on low absolute risk stocks with a better risk-return ratio. Through this initial selection, we then get 350 stocks that are defensive, have established names and sufficient earnings transparency. Instead of simply buying these stocks into the strategy, we put a valuation overlay on top of them in order to be able to exclude negative surprises as far as possible. Only then do we start constructing the portfolio. The result is a diversified portfolio of about 100 stocks.
Will we see a rotation towards more growth stocks in 2023?
Growth stocks have performed poorly over the past year for good reasons. Some of the stocks were overpriced and are now at more reasonable valuations due to the correction. When there are growth stocks with attractive valuations again, there will be opportunities to buy in this segment. I don’t see this happening on a broad scale yet. On the one hand, there are more and more attractive growth stocks, but on the other hand, many of the companies are still too expensive and the risk-return ratio too poor. But that does not mean that we blindly bet on value stocks. We look at quality and stability. In this way, we avoid focusing too much on value stocks.
What is the composition of the sector allocation?
We find the healthcare sector attractive at the moment because there are well-diversified companies here whose dependence on individual products is low. In addition, many pharmaceutical companies have great pricing power. In principle, however, we do not want any one sector to account for more than 25% of the portfolio.
What happens when a sector reaches over 25%?
That is not a hard limit. We try to identify the companies that are favourably valued on a weekly basis. As long as companies have solid data, they are also eligible for the portfolio. We also try to take special care that the companies are not too similar or operate in exactly the same area. Sometimes we also make the necessary corrections. When the performance in a sector is good for a longer period of time, smaller corrections are quite normal. Some of our healthcare stocks have been revalued. We then dumped the candidates with weaker numbers and picked up more attractive companies.