Martin Taylor: The Tsar Has No Clothes
Martin Taylor looks for three essential characteristics while selecting emerging market equities:
1. Favourable macro-outlook—There are two main ways in which Taylor’s macro assessment affects the portfolio. First, he concentrates longs in the countries that have the most positive fundamentals. Second, the global macro climate can influence the net exposure of the total portfolio.
2. Supportive secular trend—Taylor looks for situations in which there is a strong fundamentally based temporal trend that supports the trade.
3. Good company—Taylor looks for companies that have attractive growth outlooks and are reasonably priced relative to expected earnings. He avoids low-beta stocks despite their good values.
Investors often tend to miss the best stocks because they can’t persuade themselves to buy a stock that has already ascended a lot. How well a stock is priced relative to its prospects matters and not how much it has gone up.
Your net exposure should match your comfort level. For example, if you are uneasy being entirely out of the market, then a flat position may be riskier than a fair long position. This is because you will be more likely to be a victim of false rallies. Taylor believes that because of some long exposure during the volatile period of 2008 to 2009, his potential losses were reduced even though the market collapsed.
Another benefit of trading within a comfort zone is that smaller net exposure may generate better returns.
Taylor believes that a fixation with monthly returns can adversely impact long-term investment decisions. When he is strongly confident that a stock will move higher over the long term, then, reducing exposure during temporary weakness to restrict the monthly loss would be a mistake.
Taylor believes the best opportunities are those where you can identify a potential trend that the market does not acknowledge because it is concluding history instead of looking forward. Investors often make mistakes by associating manager performance in a given year with manager skill. In some examples, more skilled managers underperform because they deny participating in market bubbles. In fact, during market bubbles, the most unwise managers emerge as best performers.
Taylor underperformed in 1999 because he thought it was outrageous to buy tech stocks at their exaggerated price levels. However, this same investment decision was one of the main reasons for his strong outperformance in the following years when these stocks slid extensively.
