Russell's take on the value-versus-growth debate

Multi-manager U.S. pool's holdings share some positive attributes.

Michael Ryval 15 October, 2015 | 5:00PM
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In the ongoing debate over the merits of value versus growth investing, some value proponents maintain that their style will again be superior when interest rates rise and liquidity starts to tighten. But according to David Hintz, head of the U.S. equity portfolio manager team at Seattle-based Russell Investments, both styles can thrive at the same time and work well when blended together.

"It would be convenient to have two buckets, and stocks in one category will do poorly and the other will do well, based on interest-rate changes," says Hintz, who oversees the Morningstar four-star-rated Russell Focused U.S. Equity Pool. "We actually think there are a lot of growth stocks and value stocks that have benefitted from high liquidity. It's not one area versus another." Moreover, Hintz argues that it's important to select stocks with specific reasons for owning them, rather than "just buying the whole category of value or growth stocks."

Available only in Canada, the multi-manager Russell Focused U.S. Equity is part of the Russell Sovereign Investment Program. It employs three sub-advisors who invest in a total of about 70 "best ideas."

Toronto-based Lazard Asset Management (Canada) Inc. has a value bias and tends to take large positions in high-quality names; New York-based Levin Capital Strategies LP, also in the value camp, emphasizes capital preservation and companies with strong cash flow. The third sub-advisor is Los Angeles-based Mar Vista Investment Partners LLC. A growth-at-a-reasonable-price manager, Mar Vista seeks companies that benefit from high barriers to entry and are mispriced relative to market expectations.

Despite the diversity of investment styles, and with only about 10% of the names shared by more than one manager, the Russell pool's holdings generally share some positive attributes. "They have lower debt-to-equity ratios than average and higher dividend-growth rates," says Hintz, who has an MBA in finance from Pacific Lutheran University and been with Russell Investments since he began his career in 1988. "We like that these are companies that can grow their dividends, but they are not the highest-yielding stocks. These companies retain more of their earnings than average, but grow their dividends more quickly than average. That makes us believe that superior dividend growth is sustainable."

As a firm, Russell's strategic view is that in the long term, value is a superior style, even though it will lag at times. So it was a conscious decision to include two value managers on the pool. "It's not just about value, but how they pick stocks," says Hintz. "We start with the people and understand how they pick stocks."

Whether it's Levin or Lazard, says Hintz, the two value managers aren't picking the deepest-value cheap stocks that have, in some cases, taken on a lot of balance-sheet risk. "They both care about valuation -- and think about downside protection as well," says Hintz.

In the case of Levin, the firm looks for managements that have taken steps to improve corporate operations and profitability, either through restructurings, spinoffs or merger and acquisition activity. One long-term holding has been  General Electric Co. (GE) "It's about understanding certain things that company management is doing, such as selling off non-core assets, and helping shareholders realize the value in the company," says Hintz, referring to GE's spinoff of its financial arm.

Lazard focuses to a greater extent on return on capital and return on equity. "They believe that in the long run you should pay for financial productivity," says Hintz, adding that the managers rely less on quantitative data and more on qualitative assessments. "They want companies that can earn well above their cost of capital."

A typical Lazard holding is  Zoetis Inc. (ZTS), a manufacturer of animal-health products that was spun off from Pfizer Inc., in 2013. Because Zoetis has a short history as an independent company, "Lazard had to spend a lot of time understanding the business model."

Mar Vista, which uses discounted-cash-flow models to identify stocks, favours companies like food and beverage maker  PepsiCo Inc. (PEP). "Even though a lot of managers don't get excited about PepsiCo, Mar Vista sees that it's a consistent and long-term cash-flow generator," says Hintz. "Mar Vista is willing to pay a higher P/E (price-earnings ratio) for it, whereas Levin might say it's expensive."

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
General Electric Co155.61 USD1.05Rating
PepsiCo Inc167.03 USD-0.67Rating
Zoetis Inc Class A199.94 USD0.47Rating

About Author

Michael Ryval

Michael Ryval  is regular contributor to Morningstar. He is a Toronto-based freelance writer who specializes in business and investing.

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