Green Investing

In the dot-com-crazed ’90s, a good number of investment firms chased big returns by employing high-risk strategies. As equity markets produced double-digit gains, portfolio managers seemed to view any tech venture as a boundless opportunity to reap huge profits. That is, until the dot-com boom went bust. “People in the ’90s invested their money in technology and dot-com stocks. They focused on returns and didn’t really think of the risk they were taking in pursuit of those returns,” recalls Isaac Green, a managing partner at Loomis Sayles & Co. in Bloomfield Hills, Michigan, at the time. “And that means people were concentrating their portfolios, not diversifying them, and not thinking much about risk management. That was more of the norm of the industry in the’80s and ’90s.”

While others followed the herd of tech-obsessed investors, Green devised a different approach to investing than his stock-picking brethren. And since starting Piedmont Investment Advisors (No. 10 on BE 100s Asset Managers list with $1.8 billion in assets under management) in 2000, his portfolio has consistently outperformed the benchmark S&P 500. Here’s how he got started, built his business, and most importantly–where he sees the investment opportunities in 2010.

RISK ASSESSMENT

At the end of the last century, equity markets were enjoying record gains, led primarily by high-tech and dot-com stocks. But Green knew the great 20-year bull market couldn’t last forever, and that institutional and individual investors were going to need to manage risk while pursing returns. So Green did what most folks with a revolutionary concept and entrepreneurial aspirations do–strike out on their own. He left the firm, headed to his hometown of Durham, North Carolina, and started his own asset management company.
In 2000, along with a band of former Loomis Sayles employees, Dawn Alston-Paige and Sumali Sanyal, he launched a small operation with a risk-aware investment strategy that stressed diversification and quality stocks to manage volatility while driving returns. “We built a real stock-picker’s portfolio–it typically has fewer than 40–and is diversified so that the results we achieved are a function of how good our stock picks are in each part of the market,” he says.

The Duke and Columbia University graduate had to contend with some lean years before his brainchild established credibility and a successful performance track record. Patience, as well as the firm’s cash reserve, was put to the test until clients were comfortable placing their trust in his fledgling firm. The turning point came when Green & Co. landed their first major accounts–the North Carolina State Treasurer’s office and General Motors Asset Management. “Those were big breakthrough accounts for us. Here are some of the biggest pension plans in the country, they’ve looked at what we’re doing and they think it’s attractive so we must be onto something here,” recalls Green.

Within a decade this upstart grew into one of the nation’s largest black-owned money management firm. Its large-cap equity portfolio (managed by Green), which was its first product, has for years outperformed the benchmark S&P 500 since inception. These days, the firm manages  44 clients and has a total of 68 accounts.

MANAGING A DOWNTURN

The past year was a roller coaster ride for nearly all asset managers. With volatility in the financial markets being the name of the game for much of the year and firms being paid based on ever-fluctuating assets under management, CEOs running businesses in this sector are facing a new series of loops and inversions. The recent economic downturn, however, has provided a business opportunity for the firm. In 2009, Piedmont, along with two other firms, was selected by the U.S. Treasury Department to collectively manage a securities portfolio worth roughly $218 billion that the federal government purchased though its TARP Capital Purchase Program (See “Piedmont to Manage Piece of TARP Pie”).

Through the program, Piedmont, New York-based AllianceBernstein L.P., and FSI Group L.L.C. of Cincinnati are expected to manage preferred shares, senior debt, and other securities to provide capital for more than 500 financial institutions. While Piedmont’s management would not comment on terms of the deal, their agreement with Treasury will run though April 20, 2014.

NEW YEAR, NEW OPPORTUNITIES

As Green eyes opportunities for Piedmont, he shares investment possibilities with investors. He believes 2010 will be a better year for investors and the economy will grow. “A lot of times when you come out of a recession you expect strong economic growth in the early days but we think the economic momentum will build more slowly,” he says. He does

admit that there could be speed bumps but says there’s room for the market to rise another 10% to 15% from its October 2009 levels. With the economy in a recovery, he doesn’t foresee the financial system confronting the same problems as it did last year.

For individual investors, Green practices what he preaches–value and diversity. “There’s risk and there’s opportunity out there. The opportunity is that the stocks look relatively cheap versus corporate profits and there are a lot of high-quality companies with high dividend yields now,” he says. However, there’s a caveat. There’s danger that the U.S. government’s ballooning deficit could further devalue the dollar and perhaps lead to inflationary pressures in the economy over the next few years.

Green likes large global consumer product companies such as Coca-Cola Co. (KO) and Procter & Gamble Co. (PG) that are currently undervalued and have high dividend yields–the dividend per share divided by the price per share. With strong product sales overseas, many benefit if the dollar is weak.

Green maintains commodity stocks are good buys due to global demand and the fact that investors use them as a hedge against a weak currency. Among those he favors: Freeport-McMoRan Copper & Gold Inc. (FCX). “We’ve had positions in copper off and on for the last several years and as the market got really weak in the middle of ’08, we took profits and moved away from some cyclical stocks but then at the end of 2008, we thought the fundamentals were still strong for copper on a global basis because of continued growth rates and demand in the BRIC countries (Brazil, Russia, India, China),” he says. “So we went back into that stock at very low prices and have had a very solid return since then.”

He also says technology stocks are reasonably priced right now, and in the U.S. where the consumer market is weak, the marginal dollar is being spent on technology–by consumers and businesses. His leading tech stock pick is Nvidia (NVDA), a manufacturer of graphic processor chips used by video gamers on computers as well as the Xbox video game console. “We’ve had that in the portfolio throughout the last year or so and the stock has gone up and down but their

fundamentals have been strong on a pretty uninterrupted basis and it’s been a very strong performer in the portfolio,” Green says. “That’s based on strong demand by consumers for more video content in their technology via cell phones, video games, or PCs.”

On the flip side, Green isn’t a fan of the retail sector. “The things that require big-ticket consumer spending, I don’t like very much. Retail, home building, those areas, I’m nervous about because people are struggling with large amounts of debt and housing values are depressed and it’s not clear if that’s going to change any time soon.”

Green is also bearish on community banks. “We know about the big bank problems. They’ve been widely publicized. Large amounts of write-offs have been taken and capital has been replenished at the big banks,” he claims. “The small banks weren’t doing securitization and those types of things but what they were doing was lending a lot of money to real estate developers on a local and regional basis. And a lot of that was for commercial development–think strip malls.” He believes those commercial real estate loans are going to haunt smaller banks in the coming year. “A lot of people are concerned about the potential for rising default experience in commercial real estate and that would hit the smaller banks harder.”

The important thing to remember–both in investing and in asset management–is successfully balancing out the risk—reward equation. “The key for us is to generate solid returns for our clients through all of this and to be very thoughtful about the amounts and types of risk we’re taking in our portfolios and to be open minded about where the opportunities exist for generating positive returns,” says Green “We’ve had to have a balanced approach over the last couple of years, for looking at companies that had strong fundamentals and that represented good upside opportunity but also making sure there were plenty of stocks in the portfolio that had strong financial quality and therefore would offer stability through turbulent times.”

The stocks Green likes for 2010 fall under four themes:

1. Their reasonable valuations, high-quality names, and improv

ing fundamentals
2. Solid global investment in new infrastructure and industrialization in emerging markets that will lead to per capita growth in consumption of industrial metals and commodities
3. Increasing global sales as a weakening dollar supports U.S.-based multinational firms
4. Unit growth in PCs driven by both enterprise and consumer spending and supported by the Windows 7 launch

J.P. Morgan Chase & Co. (JPM) is a high-quality, conservative, diversified financial services company that continues to be one of the best positioned large-cap banks equipped to deal with any further deterioration in financial market conditions. The bank has a strong capital base and has been well ahead of its peers in provisioning for loan losses.

Johnson & Johnson (JNJ) remains the largest globally diversified healthcare company with a strong balance sheet and robust cash flow. Its diverse revenue mix in terms of products and geographic footprint should benefit in a challenging U.S. macro-economy in combination with the improving news flow on the pharma pipeline side. The stock currently carries a 3% dividend and it reiterated its earnings outlook amid restructuring plans.

Chevron Corp. (CVX) has the best production growth profile amongst all “super-major” oil producers and is experiencing robust sequential growth in its Exploration and Production segment. The company is executing well on its capital projects and its return on capital employed (ROCE) is improving coupled with aggressive cost cutting.

McDonald’s Corp. (MCD) is well positioned for steady unit growth internationally, particularly in BRIC countries. Currently, 64% of its sales come from outside the U.S., making the company a prime beneficiary of a weakening dollar. MCD is enjoying steady same-store sales growth and is generating plenty of free cash flow.

Microsoft Corp. (MSFT) benefits from the upside potential in the adoption of the Windows 7 operating system in combination with the possible rebound in IT spending and enterprise PC upgrade cycle. The stock is poised for further upside as the product cycle kicks in and generates strong cash flow over the next few years.

Intel Corp. (INTC) is enjoying robust revenues and gross margins as the PC supply chain strengthens. The company’s product roadmap is strong and it firmly remains the market share leader in the desktop, laptop, netbook, and server segments. Intel raised its dividend and currently has a yield of about 3%.

This article originally appeared in the January 2010 issue of Black Enterprise magazine.

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