Jeffrey B. Travis, CFA
August 26, 2019
Q: Jeff, you re-joined Oak Associates Funds earlier this year as a Portfolio Manager on the Investment Team, after having started your career at Oak in the late 90s. What has changed at Oak since then?
A: Let me start by saying how excited I am to be back on the Investment Team at Oak. I would also like to point out what has not changed over the years – Oak’s culture and commitment to clients. This, as well as the many familiar faces, made the decision to return an easy one.
Oak’s investment philosophy taught me early on that the best way to outperform the market over time was to invest in concentrated, low-turnover portfolios. This remains true today. An investor’s greatest chance of success is uncovering strong companies with superior prospects and robust business models that have a long-term horizon. In order to achieve this objective, investors in concentrated portfolios sometimes endure increased volatility or risk over short-run time periods. I have seen a greater focus on identifying, understanding and managing this risk within the portfolio in my return.
Q: Has this changed the types of companies in which Oak invests?
A: No, the same top-down, bottom-up approach is used to identify potential investment opportunities. We look for strong companies in targeted sectors and with specific characteristics such as a sustainable competitive advantage, attractive valuation and a shareholder-friendly management team. Our ultimate objective is to own quality equities that compound strong cash flow at above average returns of investment capital and where the gap between valuation and intrinsic value is skewed heavily in our favor.
Q: You’ve been in the industry for over 20 years and have certainly witnessed many ups and downs in the market. How does the current market feel to you? Do you believe a recession is looming?
A: There will always be another recession. And though no one knows exactly when it will occur, news outlets delight in foreshadowing its arrival. As we discussed in more detail in our Second Quarter 2019 Commentary, softer economic data such as slower manufacturing numbers and the inversion of the yield curve certainly demands a watchful eye. However, the strength of the consumer should not be discounted. Unemployment remains low, incomes have been on the rise, and household saving rates are higher now than the late 1990s and mid-2000s, suggesting the economy’s biggest contributor, the consumer, is still in good shape.
In my experience, market peaks coincide with unfettered buying of stocks, pushing prices well beyond even the most optimistic of fundamental outlooks. Today, valuations remain reasonable and inflation absent. More telling from a contrarian perspective is that, for over three years now, US equity funds & ETFs have experienced net outflows in favor of bond funds. These conditions are not suggestive of a major market top.
Q: Were you surprised by the Federal Reserve’s recent decision to lower rates? Do you think it is a net positive or net negative for the economy?
A: We were a little disappointed by the Fed’s most recent rate cut, believing a pause in taking any action would be the more prudent course on the path to re-arming its toolkit. At face value, however, this appears to be more of a precautionary move against slowing growth abroad rather than a declaration of weakness here at home. Since the Fed’s statutory objectives are to maximize employment and prevent inflation/deflation, an interest rate cut at these levels is decidedly defensive.
Q: Where does Oak see opportunities in the current market environment?
A: Oak's Investment Team is always on the lookout for reasonably priced companies that can innovate and grow independently of cyclicality in the overall economy. With this and current events in mind, we are beginning to see interesting opportunities in both the technology and health care sectors. Trade disputes in technology and reform concerns around health care have pressured the stock prices of good companies along with bad. We are finding great businesses with valuations reflecting a worst-case scenario rather than the more probable moderate outcome. This is precisely the type of mispricing we attempt to exploit in the market.
Q: Since its founding, Oak’s core investment principles of staying fully invested, concentrating in our best ideas, and focusing on the long-term merits of an investment rather than short-term factors have been its guiding philosophy. How are these three tenets relevant in today’s market environment?
A: Those core philosophies are as important today as ever. Outperforming the market is already difficult enough without making it even harder on yourself. With short-term trading or market timing, an investor has to be right twice – once when selling what may be a top and again when buying back in at a perceived bottom.
The market has had a great run the past ten years and we have benefitted handsomely. What most investors conveniently overlook is during that run, the market has seen numerous pullbacks of 5%-10% and a couple of 15% or more - the most recent coming in the fourth quarter of last year. By remaining invested, our portfolios have realized the market’s entire return during this prolonged expansion and simultaneously avoided the risk of timing errors associated with each of the aforementioned retracements.
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