So it was a very strong year for broad equity benchmarks around the world, but it perhaps didn't feel like a great year for many investors. There's economic uncertainty for sure. There's geopolitical uncertainty in various areas around the world. There's regulatory uncertainty. So how should we really position against such an uncertain world?
We focus on individual companies and look for high-quality companies that have clean balance sheets. Look for companies that derive a lot of consistent profitability and companies that have strong moats where they can maintain their profitability going forward. That really will help you drive long-term returns.
I think the second ingredient to that though is to make sure that we're not putting all of our eggs into one basket. A lot of different types of strategies will work very differently, depending on what kind of environment you're in. So it's very important to make sure that your portfolio is well diversified to be able to withstand all those turns in the market.
Where do you see the greatest opportunities for investors rolling into 2024, and how would you advise people to position to take advantage of those?
So if we look through value, defensive or secular growth, there are a lot of opportunities in there.
One example is within value. There's a lot of reinvestment going on across manufacturing across the world, and we see some companies with great profitability going forward.
If you look at companies that are defensive, this high-rate environment is really good for insurance companies.
Finally, looking at secular growth. Here, you're looking at maybe disruptive companies, like some of these new energy drink companies that can take market share away from a lot of the incumbents.
With the environment that you anticipate, should investors be actively invested or passively invested?
If you look at the Russell 1000 Growth, 45% of the market is in just seven companies. Those same seven companies make over 25% of the S&P. So by taking the passive approach, you're actually gaining a very concentrated portfolio.
Now that could be great, because those seven companies are good companies, but there's so many opportunities that you're missing and you're also risking that concentration of the marketplace. So we think that active is really a better place to be for long-term, well-balanced returns on a risk-adjusted basis.
So obviously, we're in a different type of environment today, with higher interest rates than we've seen in the last decade, higher inflation than we've seen in the last decade. So what does that mean in terms of how investors should position and where the opportunities really are?
So if you just think on a free-cash-flow yield basis, for example, if you look at equities right now, very similar to bonds, but equities has that growth potential. Within just a couple of years, we expect the free-cash-flow yield of equities to be much higher than what we're seeing in the bond market.
We've seen these types of markets before. After a period of very concentrated types of markets, over time, the trends change and that's really where the opportunities that we've discovered can do phenomenally well. We saw that post the dot-com bust. We saw that after the pandemic, and we can see ourselves benefiting from that again as active investors.