Wave of consolidation
Despite its volatility in recent years, he describes his top stockpick as being greatly undervalued. “Biogen has more than $21 of earnings power today, trades at a little bit less than 15 times earnings and is generating a tremendous amount of free cashflow.
“It has a lot of pipeline assets we think are tremendously undervalued.”
Bauman paints a similarly optimistic picture for his other top holding, biopharmaceutical company Amgen, which has experienced the same volatility as Biogen over the past year.
Brushing aside concerns, he says most of the fund’s holdings, which are concentrated in biotech, energy, IT and media in the US, are undervalued, with a price/earnings ratio “three or four turns below the market”.
As the healthcare sector has fallen out-of-favour with the markets in the past year and a half, Bauman says the valuation multiples of some of the sector’s larger companies have been driven down to unustainable levels.
He predicts that as a result there will be a wave of mergers and acquisitions among the bigger biotechs over the coming year, against a backdrop of crowded trades in mega cap, consumer and internet.
“The healthcare sector is very under-owned right now. The likelihood of substantial consolidation among the big, innovative, biotechs is very high.
“To me, these valuation multiples are unsustainably low.”
Turning to energy and commodities, he picks out holdings Anadarko Petroleum Corporation and Freeport McMoRan, which just 18 months ago were in a bear market but have become two of the biggest contributors to the fund’s performance during the past six months.
He has encountered difficulties running such a large and risky fund where the weighted average market cap of a company is $45bn, the main one being liquidity.
In 2001, Bauman was forced to put a cap on inflows, raising the minimum on US retail accounts following a year where the portfolio had beaten the market by more than 60%.
“We had investors chasing performance. If we cannot do that, if we have to go up the market cap spectrum, then we will close it.
“The key to what we do is remaining true to ourselves, and telling people when we feel good, and when we feel not so good,” he says.
Bauman says he overcomes this by taking advantage of liquidity events, such as earlier this year in commodities, where “you had a giant margin haul” in the sector.
“It is about being patient and letting cash build at times, but also being aggressive when there is a market like the one we saw in January and February. Then you had much higher volumes, a lot of panic and fear. Those tend to be the times when we are buying,” he says.
The new normal
When asked about the US presidential election, Bauman says the markets are priced for a Clinton victory. He adds, however, that his investment discipline relies less on political outcomes and more on choosing the right firms that can beat earnings expectations.
Despite the prevailing economic sentiment being so negative, he has never seen the market at such an all-time high.
“You have people sceptical and nervous, you have low rates, and the US Federal Reserve has made it clear that if and when it raises rates, it is going to be at a very measured pace, with the new natural rate being much lower than it has ever been.”
Bauman believes this bodes well for the fund’s outlook over the coming 12 months, but he is focused on the long term. “The overall backdrop for US equities right now is pretty good. I cannot say I am as bullish as I was five years ago. I cannot say I am as bearish as I was in February, because the markets had a nice rally since then.
“Longer term, we are still pretty constructive on US equities. This is a fund that does not necessarily need a bull market to make good money.” LW
