Q&A With Stephen Lee of Logan Capital Management

If there’s one word to describe the stock market today, it’s “irrational.” While the world is living with unprecedented uncertainty, the stock market is soaring along as if nothing at all were amiss. Just the opposite: Investors seem to think the future is a bright and valuable place — at least if their current valuations are anything to go by.

To get insight into just what is driving this irrational exuberance, we spoke with Stephen Lee, founding principal at Logan Capital Management, where he plays an active role in the Logan Capital Large Cap Growth Fund (ticker: LGNGX) and mid-to-large-cap Logan Growth portfolios. He talks about what we’re seeing, strategies advisors can use to mitigate risk and capitalize on opportunities for clients and the argument for taking an active management approach to long-term investment. Keep reading for edited excerpts from that interview.

What do you think is driving the markets lately? How should advisors respond?

(The recovery in the markets) can look irrational at first glance given the global headlines from the pandemic and other social issues. Digging a little deeper at what has driven the performance of the equity indices, things start to make a little more sense.

Coming into 2020, investors were already rewarding those companies with the ability to adapt to an increasingly digital economy. Before the global pandemic, many wondered if the valuations of those digital leaders were justified and had concerns about the significant weighting the FAANG stocks had in the benchmarks. The changes in behavior, which we all needed to make to protect ourselves from the health challenges, accelerated the existing trends in favor of the digital leaders and, to some extent, away from those companies with management teams that have been slow to invest in new technology and ways of doing business. This allowed the benchmarks with overweighted FAANG positions to perform relatively well in the first half of 2020.

[SUBSCRIBE: Get the weekly U.S. News newsletter for financial advisors. ]

We think advisors need to focus on the fundamentals of what they own. Fortunately, the passive investor had a large position in the leading digital players coming into this crisis. The benchmarks now are so overweight those leaders that it’s important to take a look at the risk in the passive portfolio. As active managers, we are looking to redeploy profits in obvious digital leaders into companies that have done an excellent job of adapting but may not be household names. Take our Large Cap Growth strategies, for example. They were up over 30% in the second quarter, during which our worst performer was down 1%, Waters Corp. ( WAT), while our best performer was The Trade Desk ( TTD). This is a lesser-known company that allows businesses to target advertisements on streaming media.

We think the well-known names may now have realized the “innovators” premium, and the performance going forward may reflect more the overall economic situation than it has so far in 2020 rather than be rewarded for innovation. If the economy stalls, earnings may feel the impact of a slowing economy, and those shares may suffer along with the broader market. If the health situation improves, the less well-known companies may have an opportunity to regain market share and outperform their larger peers. When we look at the relative winners from a price perspective during the second quarter, performance leadership was already reflecting a move to the less well-known innovators. As a result, we think advisors need to take the time to make sure their clients have exposure to the next level of innovation.

What are some strategies to help mitigate risk while still capitalizing on opportunities for clients?

We think it is very important to be mindful of the exposure the passive indices have to the FAANG stocks. If anything changes in investors’ perspectives regarding the dominance of those companies, the passive benchmarks will react. Risks include both economic and regulatory factors. We think maintaining prudent exposure is critical. Take some profits and find the next generation of leadership.

Why should advisors consider taking an active approach to long-term investments for their clients?

Frankly, we are hard-pressed to think of a time during which fundamentals have mattered more than they do now. The global economy has seen years’ worth of behavioral change in a matter of months. Some change will remain, some will not, but adaptability is a key strength.

Management teams just don’t have the typical amount of time to adapt and financial resources have become scarce in new areas. Think of the change in attitude toward working in city offices — the timeline for when employees return has a significant impact on those businesses dependent on people working in offices. The valuation of those businesses will reflect that timeline. Similar issues abound throughout the economy and things that have had intrinsic value over the past 10 years may not in the future. Think about the valuation of retail-oriented real estate if online shopping continues to dominate.

What is the drawback to active management for long-term investments?

We have found the challenge to an active strategy is having the conviction to maintain the strategy through volatile times. Active management is as much about preparing for the unexpected as it is predicting future trends. We have seen investors exit components of a thoughtful active strategy due to recent underperformance right before that segment became necessary to achieve the desired overall results.

The key is involving clients in the thought process and the long-term objectives so critical allocations can be made, and perhaps added to, in challenging times. Our team remembers well how hard it was to invest in “boring” quality dividend-yielding stocks in 1999 after a period of underperformance — a time that was right before the dot-com bust, which required investors to have defensive positions to protect their wealth. Therefore, much of what is true of investors making allocations into today’s leaders was true in 2009.

[READ: What Is a Financial Plan?]

Any predictions for the second half of the year and into 2021 in terms of economic recovery?

We would like to think that the economy will recover and this health crisis will see some improvement sooner rather than later. That being said, we think the adaptable will prosper regardless of the timeline for recovery. It is important to note that millennials, the largest demographic group in the U.S., are aging up to the years where they start families. We think there is a significant opportunity for investors who are able to find those companies that benefit from millennials moving forward with their lives. Companies that can use new technologies to meet the needs of this generation as they move forward will likely do well.

This is provided for informational purposes only and represents the views of the speaker, which may not represent the views of Logan Capital.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to the accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

More from U.S. News

What Does a Financial Advisor Do?

How Technology Can Help Advisors Better Serve Clients

The Best Podcasts for Financial Advisors

Q&A With Stephen Lee of Logan Capital Management originally appeared on usnews.com

Related Categories:

Latest News

More from WTOP

Log in to your WTOP account for notifications and alerts customized for you.

Sign up