After earning her PhD in economics, new Covestor manager Banu Simmons then moved on to the banking world, where she’s a long-time quantitative analyst.
As an investor and manager of the Long Only Sector Rotation model, Banu enjoys both the rigorous analysis that comes from sifting through historical stock price data in search of patterns and the creative side of stock picking that draws on human judgment. In short, Simmons is a double threat, combining technical abilities with an economist’s broader view. Our Xavier Bremner had a chance to ask Banu about her intellectual roots and investment style.
First of all, could you tell us a little about yourself? Where did you grow up and why did you gravitate towards economics and investing? Who were the big influences in your life and career?
I grew up in Turkey, and after I got my first degree there, I moved to England to do my PhD in economics. Later on, I embarked on an academic career in the UK. What I like about economics is that it is a science and an art at the same time. For example, the field of econometrics offers us scientific methods to examine historical data for patterns which provide clues for forecasting financial developments. However, fitting the theory to real data is the challenge of economics, which leaves a room for human interpretation.
For me, this is the creativity aspect, or what makes economics an art. In my career, the person who inspired me most was an econometrics lecturer. Through him, I learned the power of econometrics to explain the behavior of financial variables. My previous work as analyst with a Swiss bank brought me into the world of investing in equities, where I found I could use my econometric skills in building stock-picking models.
Your Covestor Long Only Sector Rotation model stresses a long-term outlook in big cap stocks. What are the core principles behind this approach?
Yes, my model has a long-term perspective in terms of performance, where the long-term is meant to be not shorter than a year. Furthermore, my approach is to buy and hold a stock as long as it looks attractive according to the criteria set by my top-down model.
The model attaches weights to certain fundamental factors and the stock-ranking based on the model is subject to several overlays such as my sector strategy and the stock performance across different business cycles. The model aims to outperform the index in the long-term, hence avoiding frequent, technically-driven trading.
What characteristics do you look for before deciding a stock is right for the portfolio? Alternatively, what are the warning signs that tell you it is time to cut a stock loose?
I include a stock in my portfolio if it has a good ranking according to my top-down model, and if sector-timing is appropriate. I cut loose a stock if it longer looks favorable according to my model’s stock ranking. A trend of negative earnings surprises is another warning signal which may lead to the sale of a stock, especially when the underlying reason is an idiosyncratic risk.
Can you discuss two or three of your top holdings in detail? What do you like about these stocks, particularly in the current economic environment? What are the risk factors for these holdings as well?
As I operate with a top-down model, I select my stocks not on the basis of detailed analysis of companies but my knowledge of how these stocks have performed in different business cycles in the past, and how I see their profitability and growth prospects and whether or not their price looks fair given their fundamentals in the current economic environment.
I believe that my top stock holdings have high long-term growth and profitability prospects. Coach (COH), for example, has strong fundamentals and despite missing the latest earnings estimates, its exposure to emerging markets makes it a stock with a strong long- term growth potential. The main risk factor here is also this exposure, and possible cooling down of emerging market growth. However, I believe that the demand for luxury brands from emerging economies has so far proved resilient.
Autozone (AZO) is another stock with a large weight in the portfolio. With moderate economic growth, demand for auto parts for maintenance of old cars tends to be strong, which makes the stock suitable for the current economic environment.
For Mastercard (MA), what seems to be most attractive is its free cash flow margin, which is a factor where our model happens to assign a large weight.
What was your biggest stock picking blunder and what lessons did you take away from it?
A mistake I made in the past was holding on to a stock far too long because of its strong fundamentals, though the stock had clearly fallen out favor with investors. The lesson that I took away is with regard to avoiding ‘value trap’ stocks; sometimes, no matter how good the fundamentals look, a qualitative overlay in terms of taking account of the market sentiment is necessary. This is especially important in judging the future growth prospects of technology stocks.
Looking at the second half of 2012 and beyond, what do you think the biggest market moving themes will be?
I believe that the US economy has a strong backdrop and the housing market has bottomed out. In my opinion, energy stocks and the stocks that benefit from the housing market might be poised to outperform.
Thank you, Banu and good luck with your new Covestor model.
My pleasure.
