Walter McCormick believes that valuations in U.S. equity markets are still reasonable, thanks partly to low inflation and rock-bottom interest rates.
"The surprise to all market participants is that the market has resisted a fuller correction, as a result of having a combination of low interest rates and inflation," says McCormick, senior managing director at Boston-based Manulife Asset Management (US) LLC, and co-manager of the $280-million Manulife U.S. All Cap Equity.
"Those who look at the price-earnings multiples would probably say the market is fully or fairly valued," says McCormick. "I believe in this environment, with these two factors that I mentioned, that valuations are not stretched. You can still find pockets of opportunity. The glass is still half-full at this point."
A bottom-up stock-picker, McCormick works closely with Emory "Sandy" Sanders, co-leader of the U.S. core value equity team, and seeks well-managed companies that are mispriced or trading below their intrinsic value. They own 45 to 65 companies, limiting single weights to about 8%. There is currently a bias toward financial and consumer-discretionary stocks, although that is a result of the bottom-up process. They tend to own companies for three to five years.
A native of Providence, Rhode Island, McCormick joined the industry in 1970 after completing an MBA at Rutgers University. That was preceded by a BA in English literature from Providence College, where he developed an interest in investing after taking an elective course in finance. He landed his first job as a research analyst at Rhode Island Hospital Trust National Bank, a regional bank in Providence.
After spending 14 years at the bank, where he rose to senior portfolio manager and director of equity investments, McCormick joined Keystone Investments, a Boston-based mutual-fund manager. In 1998, after four years of being independent, the firm was acquired by Wachovia Corp. and folded into the Evergreen Investments division. But when Wachovia became insolvent in 2009, the division became part of Wells Capital Management.
In late 2010, McCormick and his team, which included Sandy Sanders, joined Manulife. Today, the team oversees about US$14 billion.
Launched in August 2012, Manulife U.S. All Cap Equity's Advisor Series returned 18% for the 12 months ended Nov. 30, trailing the median return in the U.S. Equity category by two percentage points. On a three-year basis, the fund returned 23.3%, ahead of the 21.7% median return.
McCormick's long-term holdings include cyclical picks such as Amazon.com Inc. AMZN , the dominant player in Internet retailing. "They have built a competitive advantage in its distribution system that would be hard for others to duplicate. It would take a massive amount of money and time to put up what this company has put in place," he says.
Holding Amazon hasn't helped the fund lately, however, since the stock tumbled about 20% on weak third-quarter earnings. Yet McCormick is undeterred. "This is a company that should be able to grow its top line in the vicinity of the high teens to the 20% level for quite a long time," he says, adding that the stock is trading at a 30% discount to its intrinsic value. "Once we get past the heavy investment phase, investors will wake up to the fact that this is not a profit-less company, but one that will be substantially growing its cash flow."
Another consumer-discretionary favourite is Lennar Corp. LEN, a leading home-builder that is based in the U.S. southeast. The Manulife team took a position in the 2009 downturn, after research showed that Lennar remained cash-flow positive throughout the financial crisis and its management had been investing in land at low prices. "Here was a high-quality company, with a highly capable management team and the industry was at the bottom," says McCormick. "We thought it would be a significant recovery candidate."
The position did well and was trimmed when it more than doubled in price and approached Manulife's target for intrinsic value. But McCormick began to rebuild the position last year when the share price had corrected by about 25% and, in his view, was poised to recover. "Things are setting up for a continuation of the recovery toward normal levels. The company will continue to post some nice growth numbers. And the stock is trading at about 80 to 85 cents on the dollar."
