William (Bill) Sterling, chief investment officer of New York-based Trilogy Advisors LLC and the largest sub-advisor to CI Mutual Funds Inc., is constantly looking for signs of structural economic change and emerging world trends.
"Change is not going to go away, in fact the pace is accelerating," says Sterling, who manages about US$5.2 billion for CI, including the $1.8-billionCI Global, the $1.1-billionCI Global Boomernomics Sector and the $925-millionCI International Balanced. "If you want to beat the index, you need to be able to see change coming and invest accordingly." Sterling says the key drivers of change are demographics, globalization and technology. Often more than one theme is at work, and sorting out contradictory influences on an industry can be challenging.
For example, an aging population will increase demand for drugs and health care, but the large U.S. pharmaceutical companies "are being squeezed from the top by politicians that want to wring costs out of the drug system" and from the bottom by generic drug makers jumping in to copy best-selling drugs as soon as the patents come off.
"The major drug companies are like piñatas to politicians -- you hit them with a stick and all the goodies come pouring out," he says. "There are better opportunities in smaller health care companies that are off the radar screen."
Sterling's top-down-driven style has produced an above-median return over 10 years for CI Global, his largest fund, which he has managed since October 1990. It has a 10-year average annual return of 6% to June 30, beating the category median of 5.6%. However, it trails the benchmark MSCI World Index's 7.2% over that same period.
With an MA in economics obtained from Harvard University in 1978, followed by a Harvard PhD in economics in 1984, Sterling calls himself a "recovering economist." An outstanding student, he also spent five years at the University of Tokyo on a Fulbright Scholarship, before joining General Motors Corp. as a senior economist in 1983. He later moved to Merrill Lynch & Co. Inc. as chief strategist.
In 1995, he joined New York-based BEA Associates, an investment counselling firm that later became part of Credit Suisse Asset Management. He and a group of partners founded Trilogy Advisors in 1999, and with CI as a joint venture partner, also founded CI Global Advisors LLP to manage the CI funds. The two firms were merged last year when Trilogy bought out CI's position in CI Global Advisors.
Another trend that Sterling expects is increased technology spending as U.S. companies move to upgrade their systems following this year's big jump in corporate profits. Microsoft Corp. ( MSFT/NASDAQ) is currently CI Global's largest holding, and Sterling is overweight in tech stocks generally.
On a geographic basis, he's been cutting back in the U.S. due to caution about rising government deficits, and fears of a weakening dollar. The U.S. now accounts for about 40% of fund assets, while 30% are in Europe, 19% in Japan, and 7% in Asia/emerging markets. "One of the appeals of global investing is that the world is your supermarket," he says. "You're not forced to stay in one aisle, you can go where the sales are."
Sterling keeps both sector and country weights to no more than double their weights in the MSCI World index, but no less than half. "We remind ourselves that no matter how much we like a company, country or sector, we can be wrong. If we're significantly overweight relative to the benchmark, it can have a huge impact. However, we're paid to beat the benchmark, and unless we make significantly different moves we won't."
He seeks companies with a market capitalization of more than US$1 billion, and usually holds between 150 and 200 names, with the largest positions accounting for 2% to 3% of assets. If he's finding better opportunities in emerging markets or more medium-sized companies than large cap, he'll take smaller positions in a greater number of companies to decrease risk.
Sterling bases his decisions on bottom-up fundamental analysis and risk assessment, with a strong emphasis on the value of discounted cash flow. He also seeks a catalyst that will propel the stock price within a two-year time frame.
His portfolio turnover is about 50% to 100% a year. He sells when his target price has been realized, the catalyst has gone away, there's been a negative change in fundamentals or he's simply come up with a better idea.
"We take a fresh look at the portfolio every week to make sure the reasons we bought a stock are still relevant," he says. "In this business, if you're right 70% of the time you're a genius. When you're wrong you have to take your lumps and move on."
