- This bear market is very difficult to invest in because there is no reliable precedent for it.
- John Linehan of T. Rowe Price shared how he manages more than $16 billion in assets.
- This is how Linehan finds dividend stocks for stable income when the economy weakens.
John Linehan, the chief investment officer for equities at T. Rowe Price, has encountered many different investment landscapes in his 33-year career. But he has never seen such a market.
Every bull and bear market is unique, Linehan told Insider in a recent interview. And while they all share similarities, he believes it’s a mistake to assume that what worked in past recessions will work today.
“No two bear markets are the same,” Linehan said. “No two recessions are the same.”
Linehan continued, “There’s no rhyme or reason for any of them. And trying to use a script from the past doesn’t necessarily make sense going into the future.”
Investors today are rightly focused on the economic risks arising from the Federal Reserve’s decision to raise interest rates quickly as a means of slowing down stubbornly lingering inflation, Linehan said. The near unanimous consensus among CEOs in a recent survey is that this will trigger a recession as tighter monetary conditions force consumers to cut spending.
Linehan, who manages more than $16 billion in assets in the T. Rowe Price Equity Income Fund (PRFDX), is currently trying to thread the needle between playing offensively and defensively.
“I want to think very carefully about the risk we are taking in the portfolio in this environment,” Linehan said. “I don’t want to get over my skis in terms of too little risk, and I don’t want to get over my skis in terms of too much risk.”
If the market recovers, it will soon, Linehan said. But at the same time, he said it would be wise to prepare for much more downside risks if the Fed is forced to raise interest rates.
“What I’m trying to do is build a portfolio that hopefully can stand the test of both extremes,” Linehan said. “And as a result, we’ve tried to have some of our portfolio fairly defensive and some offensive and really look more for quirky names that we think will do well over time.”
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Unlike some portfolio managers, Linehan said he has a good chunk of his assets in his fund.
“I invest in the money as if it were mine, because in many ways it is,” Linehan said.
As if that wasn’t enough pressure, Linehan is responsible for managing the retirement and savings of countless other people. That gives him a “healthy appreciation for risk,” he said, but he can’t be paralyzed by the risk of losing some of the $16 billion he oversees.
“In terms of the amount of money we manage, I think if you focus on that, it can be overwhelming,” Linehan said. “So instead, I’m just trying to focus on creating the best portfolio — the optimal portfolio. Whether it’s $100 million or $100 billion, I don’t think it should change.”
While the T. Rowe Price Equity Income Fund has fallen more than 10% this year, it has beaten its index (which is down 13.7%) and is in the top 30% of funds by 2022, according to Morningstar.
When it comes to finding the right stocks for his income-oriented fund, Linehan said he looks for US and global companies with attractive valuations and positive fundamentals that will ensure solid dividend yields and perform well over a long time horizon.
The key valuation metrics to consider are price-to-earnings (P/E), enterprise value (EV) to sales and price-to-book (P/B) ratios, as well as industry-specific measures, Linehan said. . These metrics go hand in hand with a company’s trajectory and the story it can tell about its business, he added.
But a great company isn’t always a great stock if it’s overvalued, the portfolio manager said, and conversely, cheaply valued stocks are sometimes discounted for good reason.
High, reliable dividend yields are vital to the T. Rowe Price Equity Income Fund, Linehan said, but the size of the quarterly payment is far from his only consideration on that front. Revenues reflect a company’s financial health, ability to generate free cash flow and capital discipline, he said.
“We’re looking for companies that have both attractive yields and attractive traits beyond yield,” Linehan said. “Just finding companies with the highest returns, I think, is a tough environment to live in in the long run because with any investment you really have to question the sustainability of that return.”
Finally, Linehan takes a long-term view of his investments, which he says is easy to say, but hard to do. His fund has a turnover rate of about 20%, meaning he holds a stock for an average of five years. Markets can fluctuate wildly between quarters, but in the long run, a company’s valuation, fundamentals and returns will cause it to either sink or swim, he said.
“So many people are focused on the short term and whether a company will make a profit or lose it in the next quarter, that they get so caught up in the trees, that they lose sight of the forest,” Linehan said. “One of the things I want to know for sure is that — I can’t necessarily tell you what a company is going to do in the next quarter, but I can tell you if we think they’ll have an attractive fundamental background over the next few years.” have. year.”
That mindset means Linehan is patient with his holdings, especially during rocky markets. Unless a stock’s stance deteriorates to the point where it’s no longer true, Linehan said he’s inclined to hold onto them — even with unprecedented and unpredictable risks on the horizon.
“We’re not pulling the plug just because the company underperforms,” Linehan said. “We will be patient. And often that patience is rewarded.”