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Fortune’s 2020 Investor’s Guide is out this week, and it makes for excellent weekend reading.
We
asked a roundtable of investing experts to share their best advice for
2020. This year’s panel included Savita Subramanian, head of U.S. equity
and quantitative strategy and head of global ESG research at Bank of America
Merrill Lynch; Josh Brown, CEO of Ritholtz Wealth Management; Karina
Funk, co-manager with David Powell of the top-performing Brown Advisory
Large-Cap Sustainable Growth investment strategy; Rob Sharps, head of
investments and group chief investment officer at T. Rowe Price; and Angela
Strange, general partner at Andreessen Horowitz.
Here is an excerpt of the highlights from their discussion.
Where do you see the greatest risks and greatest
opportunities in 2020?
Brown: I genuinely believe that most of the market is
expecting some extreme move out of interest rates. They either think this whole
thing is a fake-out and there’s going to be a bout of inflation, or that rates
are headed to zero. But what if there’s just more of this as far as the eye can
see? There have been 100-year spans where there wasn’t much volatility in
interest rates. So it’s entirely possible that people with extreme opinions
will lose and people that are doing asset allocation will win.
The biggest risk is you. You are your own biggest risk. Last
year, we had a 16% drawdown in winter. We followed it up with a 20% rebound.
How did you act? What did you do? Did you call your broker, “Get me out”? If
you did, then recognize that you are the one doing the things that will have
the bigger effect on your portfolio. It’s not the Fed, it’s not Trump, it’s
you. The minute you get that through your head, you start becoming a better
investor.
Funk: There are a lot of risks, whether it’s interest
rates, geopolitical, trade wars, and there’s a whole lot out there that we
can’t predict and we can’t control. Frankly, I worry about what I can control,
which is going out there, doing the research, and finding great companies.
Health care has been a poor performer in the past 12 months.
But some companies there are very, very strong. So tools, diagnostics companies
that are helping with drug discovery, and the move to this trend from small
molecule chemistry-based drugs to large molecule. There’s a lot more legs in
digital transformation whether it’s transforming business-as-usual processes,
moving that to the cloud, and just modernization. And then finally I’ll mention
this trend of resource constraints. That’s not going away.
Sharps: There was a sentiment poll cited recently
that had the fewest number of bulls in the history of the poll. But the
opportunity for me is to lean away from safety and lean into cyclicality and
unexpected earnings growth.
I like industrials in the U.S., names like Union Pacific
or UPS where you can get double-digit returns. If you want to take on a
little more risk, you could buy United Airlines or even GE. GE is
messy right now. But they’re stabilizing the balance sheet, and you have a new
CEO, with a proven track record, who can build on some strong underlying
franchises.
In terms of risks I do think that there is an outcome from
the election where political leadership implements some antibusiness policy
that raises cost, that increases the regulatory burden, and ultimately will
lead to a negative productivity shock. It could be particularly acute in
sectors like financial services or energy.
Angela, what’s the greatest—
Strange: Not risk! [Laughter] I’m too
positive. Venture capital! I think the biggest opportunity is to create
companies that will serve the 50% of the U.S. and the more than 2 billion
people worldwide that are under-banked or unbanked. I often state that the
Amazon Web Services era is coming to financial services. What that means is, there
are several different infrastructure companies that will partner with banks and
package up the licensing process and some regulatory work, and all the
different payment-type networks that you need. So if you want to start a
financial company, instead of spending two years and millions of dollars in
forming tons of partnerships, you can get all of that as a service and get
going.
So what does that do? It will unleash all of these
experiments, some of which will become large companies of the future.
CHINA’S PRIVATE EQUITY CHAMPION: The next piece of
recommended reading is by my brilliant colleague Shawn Tully. In a
revealing profile, he focuses on Weijian Shan, the leader of Asia’s largest
private equity firm. “The trade war is yesterday’s conflict,” Shan says. “The prize
is winning the Chinese consumer.”
Shan is a successful dealmaker, managing $35 billion in
assets. He’s also a U.S.-trained Ph.D. economist and former business-school
professor. Here, from Shawn’s story, is how Shan was able to win big.
So where has Shan been reaping his gains? From the start,
PAG has focused on businesses that cater to consumers and require relatively
little capital to grow. Some of its earliest successes were outside China. PAG
was a big investor in the Universal Studios theme park in Osaka, Japan, for
example. Japan’s own growth was tepid, Shan explains, “but we thought [the
park] would take off because of the explosive growth of visitors from China and
other Asian countries. And that’s what happened.” PAG’s original investment was
$120 million. In 2016, it sold its stake for $1.25 billion.
One of Shan’s biggest scores has been in digital music.
Shan saw huge potential in an owner of music copyrights called China Music
Corp. “It was a vehicle for purchasing the rights to songs, lyrics, and music
labels,” Shan explains, “and it owned 70% of all the digital rights in China.”
The problem: The streaming platforms at the time were paying no royalties. But
Shan anticipated that legal trends in China would turn against music piracy. In
2014, PAG invested $100 million in CMC, enabling it to buy two popular
streaming services—vertically integrating a musical rights holder with a means
of transmission. And in 2016, he helped orchestrate a merger between CMC and QQ
Music, the streaming platform of tech conglomerate Tencent, to create Tencent
Music Entertainment. Today, that service’s dominant position has swelled its
audience to 800 million active users—and strong copyright enforcement means
it’s earning huge revenue. Late in 2018, Tencent Music went public on the New
York Stock Exchange, and PAG’s $100 million investment is now worth around $2
billion. Tencent Music’s pop-oriented patrons don’t include Shan himself, who
says, “I only listen to classical music, and I don’t mind jazz.”
Polina Marinova
Twitter: @polina_marinova
Email: polina.marinova@fortune.com
