Partner Insight: The benefits of resilience in active multi-asset funds

Economic and market conditions over the past decade or so have created an environment where value stocks have typically lagged their growth counterparts. When interest rates were close to zero, investors seemed to be more comfortable taking on risk and were willing to pay a higher price for growth stocks because they were more confident that they had the potential to outperform the market. 

However, the transition to a higher interest rate environment could provide the right conditions for value stocks to outperform over the long term. Value stocks can be temporarily out of favour with the market, but companies whose long-term prospects are believed to be attractive can be found at the higher-quality end of the spectrum. This can often apply to companies with resilient business models in more defensive sectors such as financials, industrials or healthcare. 

Value stocks are typically well-established companies with steady profits that are trading at a discount to what they're intrinsically worth. They tend to have reliable, sustainable business models and often pay dividends because of their regular cash flows. 

They tend to be found at the less exciting end of the market (in contrast to growth stocks whose share prices are expected to grow at a pace which is higher than the market average), but they shouldn't be overlooked. Typically, value stocks include battle-tested companies which have often emerged stronger from disruptive environments. For patient and pragmatic investors, this can lead to favourable investment outcomes over the long term. 

While there are different ways to measure a company's intrinsic value, Wellington fund manager Nataliya Kofman, who manages the equity portfolio of our SustainableLife fund range, looks for companies that fit her definition of quality value - and resilience is one of the key aspects that she focuses on.  

Resilience is a measure of future quality

Firstly, while quality and resilience often go hand in hand, resilience is a measure of future quality. Nataliya used to be an engineer designing car engines, so it's no surprise that one of the first examples that comes to mind for Nataliya relates to cars. 

While all cars lose their value over time, high-end luxury cars tend to be known for depreciating at the fastest rate. But quality that endures and improves over time—or resilience, as Nataliya likes to think of it—is special. 

Resilience is also revealed in the face of adversity. There's a reason you're often asked in an interview to share an example of a time you've faced adversity - a person who has successfully navigated difficulties is likely to have learned coping skills that make future stresses easier to manage.

These two beliefs combine to shape Nataliya's philosophy as a fund manager. She believes that resilience is an underappreciated facet of quality - and companies that successfully navigate periods of difficulty may have an edge when it comes to adapting to changing competitive, regulatory, social and climate forces. Crucially, these periods of difficulty can offer value to long-term investors, allowing them to buy high-quality companies at attractive entry points. 

For Nataliya, one of the main challenges to the investment process is the fact that large-cap investing is an efficient market. How can you exploit market inefficiencies to find undervalued growth potential? And how does this transition into a repeatable process? 

How to find quality value

Nataliya always focuses on buying stocks at a discount to their current market price. Unless a company is trading at a discount, she won't take it any further. 

A common transitory reason a company might see its share price trading at a discount is because of complexity or controversy. The market is quick to price in negative information but slower when it comes to taking a long-term perspective. 

When the market dismisses a company, Nataliya often takes it as a signal to take a closer look. Is the negativity justified - or are short-term roadblocks distracting from a more positive long-term outlook for growth?  Nataliya initiated a position in LyondellBasell, a chemical company with operations based in the US and Europe, in 2022, at a time when the share prices of chemical companies were cyclically depressed. This caused the company to trade at the low end of its historical valuation and provided an attractive entry point.

Analysing resilience is more art than science 

Resilient companies tend to demonstrate deep expertise in their fields, creating enduring value for their clients. They also tend to benefit from scale, providing operating leverage and natural barriers to entry for competitors. 

Strong balance sheets make it more likely that a company will be able to continue paying dividends, but balance sheet flexibility is particularly important when assessing for resilience, pointing towards the potential to invest and sustain dividends, which may dampen volatility for investors over time. 

Above all, Nataliya believes that resilient, dividend-paying companies purchased at a discount can present compelling long-term investments. She thinks that these companies are able to evolve over time and work through market turmoil, as well as having the potential to provide downside mitigation in a variety of market environments. 

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