Trends Watch: Cautious, but Opportunities are There

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Dan Micit, Founder & Portfolio Management, DM Capital.

What is your outlook for investing? What are the biggest opportunities and challenges?

Generally speaking, we're relatively cautious regardless of whether you're investing in stocks, bonds, real estate, etc.  More specifically, we think that easy money, benign inflation, and low interest rates have driven asset prices up across the board, and as a result, compelling bargains are hard to find.  We run a concentrated portfolio based on bottom-up fundamental analysis, which means we're only buying stocks if they're trading at meaningful discounts to our estimate of intrinsic value.  Given this Warren Buffett-type approach to investing, perhaps one of our biggest challenges in today's environment is simply finding investments with attractive valuations and appropriate margins of safety.  

However, that's not to say there aren't opportunities out there. Given the recent outperformance of growth stocks, we think slower growing companies with lots of free cash flow are relatively undervalued, and we've recently found a number of compelling opportunities within this group.  We're also looking at special situations, complex structures, and stocks that have been unfairly punished by some temporary company or sector specific issue.  

Why do you think concentrated investing is the most viable form of investing?

We think the market is MOSTLY efficient MOST of the time, so finding 40-50 companies that are all trading at compelling valuations seems unrealistic.  Furthermore, even if this were possible, taking money away from our best idea to put it in our 50th best idea doesn't make a lot of sense, at least not to us. 

As an active manager, what is your outlook for active management? 

Between the performance, tax efficiency, and low fees, we think passive investing actually makes a lot of sense for a number of investors.  Closet-indexes will probably struggle (deservedly so) and continue to be squeezed out by passive or passive-like strategies.  At the same time, we believe there will always be a place for active managers who are doing something different than the market.  It's also worth noting that passive vs. active performance is generally cyclical, and given passive's recent prolonged outperformance, active management could be due for a comeback.  

What keep you up at night?

We like to say that although we invest from the bottom up, we spend a lot of time worrying from the top down... So, with that in mind, trade wars, slowing global growth, and geopolitical tension certainly have us worried.  As I mentioned previously, we also think that easy money, benign inflation, and low interest rates have been a terrific tailwind for asset prices, so we're very concerned about what happens if/when this dynamic reverses.