AllianceBernstein's quality, stability and price strategy driving growth
This article was produced in partnership with NEI Investment.
“If you want to access growth and innovation, equities are where you get that,” says Chris Marx, senior investment strategist at AllianceBernstein (AB). AB is a global investment management and research firm with U.S.$769 billion of assets under management (as of June 30, 2024) and the subadvisor for the NEI US Equity RS Fund. “I'm very bullish on equities long-term. It’s the greatest long-term wealth creator out there.”
AB believes the U.S. equity market today shows significant concentration, with a few large companies dominating market performance. This environment poses challenges for investors seeking diversification and risk-spreading options. AB’s investment approach focuses on quality, stability, and price (QSP), a philosophy designed to balance growth opportunities with risk management by investing in high-quality companies that offers relative stability at an attractive price, a strategy particularly relevant in today’s U.S. equity market.
AB prefers businesses that are not overly sensitive to economic cycles, market fluctuations, or interest rates. Instead, it looks for companies with consistent and predictable business models, and that have a track record of being unaffected by external factors beyond their control.
Going beyond market concentration to find investment opportunities
Marx acknowledges that North American markets are currently in a challenging environment due to market concentration. However, it is important to provide some context before discussing how to address this issue.
“Throughout history, there have been periods where market concentration has occurred. Therefore, this is not a new phenomenon. We’ve witnessed similar situations, such as the concentration in the banking sector during 2008 and in the technology sector in 2000.” Marx says.
Marx believes Apple, NVIDIA, and Tesla are massive, cash-generative companies that are not going anywhere. Unlike the early 2000s when valuations of many companies were based on extreme extrapolations, these companies have solid foundations.
AB evaluates each company in isolation to determine if it fits their investment criteria. If it does, they consider owning it. Marx says, “The market has started to show more discernment this year, with increased attention to individual company performance. For instance, Tesla is facing price competition due to the proliferation of electric vehicles (EVs), leading to pricing pressure and a subsequent impact on earnings, which the stock market is responding to. This kind of differentiation is natural and healthy for the market. Previously, many stocks moved in unison without much discretion.”
While attention often focuses on a few high-profile stocks, there are many other companies on significant growth trajectories. For example, although NVIDIA is a leading chipmaker, numerous other companies in the same industry also stand to benefit from growth trends without having the same high-profile status. Investors can find potential opportunities in these lesser-known names to access similar trends.
Moreover, Marx points to other exciting secular growth areas in the market. For instance, the development of GLP-1 agonists for weight loss is a remarkable story, highlighting that there are many significant growth narratives
Beyond these obvious growth areas, there are many “sleepier” parts of the market that are also quite attractive. AB has been examining sectors like grocery chains in various markets and technology enablers. The firm has a long history of investing in back-office technology, which may not make headlines daily but is critical to the functioning of phones, credit card transactions, and internet infrastructure. These companies manage internet registrations, data storage, and cloud services, and though they may not be household names, they are successful and generate strong cash flows.
The 90/70 approach: balancing upside and downside
AB’s 90/70 approach aims to capture 90 percent of the market's upside while limiting the downside to 70 percent. This strategy emerged from the 2008 financial crisis when many investors struggled with significant losses. Marx highlights two key insights: first, limiting downside losses makes recovery easier and enhances long-term performance; second, providing emotional stability by limiting losses during drawdown periods helps clients avoid the common pitfall of selling low and buying high.
“Protecting capital on the downside drives long-term better results for clients,” Marx asserts. By identifying companies with lower market sensitivity and more fundamental stability, AB believes that their investments can weather economic downturns. Marx explains that industries like healthcare offer more fundamental stability than sectors such as financials, which are more cyclically sensitive. “People need drugs, good economy or bad economy, they need their blood pressure medicine,” he notes, highlighting the importance of selecting companies that can help maintain stable earnings through various market conditions.
Despite short-term uncertainties, Marx remains optimistic about the long-term prospects of the U.S. equity market. “While fixed income options are attractive given current interest rates, equities remain crucial for capturing innovation and economic growth,” he says, emphasizing the need for a disciplined, long-term investment strategy.
Marx highlights that while the market may face periods of volatility, the fundamental drivers of growth remain strong. He points to the continuous innovation and economic expansion that equities capture, which are essential for long-term wealth creation. “You have to stay in it for the long period, stick it out during downturns like 2022 and not panic. You still want to be on that trend for the long-term. Staying invested, and not panicking, is the key, and providing some peace of mind during the inevitable downturns can keep people on their long-term plan. Equities remain the greatest wealth creator out there,” he asserts.
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