A conversation with Joe Overdevest, portfolio manager at Pyramis Global Advisors
After six years as an analyst, Joe Overdevest became a portfolio manager in October 2008. “The first day I took over a portfolio, I had stocks down 15%,” he says. So he bought companies with strong financial positions that would withstand the changing economy, like CN Railway.
Though the market has improved, his investment process hasn’t changed. While managing Canadian equities at Pyramis Global Advisors, a Fidelity Investments company, he relies on his analysts’ ideas, meets CEOs and understands a company’s finances before making an investment.
Helping him are 22 analysts and portfolio managers in Toronto and Montreal, and more than 800 in Europe, Asia and the Americas. His Canadian team covers more than 300 companies, with 40 to 50 stocks making it into his portfolios.
“With a smaller team, you wouldn’t be able to do this much analysis, so you might have to go toward more sector bets,” he says.
Building a portfolio on the merits of individual companies, instead of using a single economic prediction, means each decision carries less risk, he adds. “I would have to make at least 50 different decisions wrong to have the same outcome as being wrong on a China macro view.”
Q: How do institutional portfolios vary from retail ones?
It’s not about whether it’s institutional or retail, but what the client wants from us.
While many managers have clients with different time horizons, I regard the timelines as similar between the two classes. All my investors would like returns over multiple years, sometimes over a decade. They may like things to be strong over a decade [from now], but they are looking closely on a one-, three- and five-year basis.
Q: How do you find companies?
Our Canadian investment team covers the fundamentals of more than 300 companies. Analysts come up with their best ideas, and then those companies go down to about 100 stocks.
We have more than 1,250 CEO visits every year within the Canadian group. I meet with one CEO, on average, every business day. For one hour, we go over the business, including a strategy update, their competitive environment and capital allocation.
I ask, “What are they doing with it? How are they investing it? What are the returns?”
We will meet with people at companies we own, as well as companies we don’t own, assessing their potential. Or we’ll look at their competitors and suppliers.
Q: With a Canadian focus, how do you handle the risks of a concentrated portfolio?
I don’t take analysts’ picks at face value. I do my own analysis. I meet the company management, [look at] the income statement [and] cash flow, read reports and make my own judgments.
You also have to watch for unintended consequences. You might not have started with a macroeconomic or sector bet, but maybe the materials analyst likes lumber, so you think of buying some lumber stock. And the consumer discretionary analyst who covers automotives says, “I think the demand for autos is improving,” so you may buy an auto stock.
They’re in two different sectors but they’re both geared toward the U.S. economy. So even though your sector levels aren’t out of line as a whole, you’re depending on the success of the U.S. economy.
Q: Is there a limit to how much you buy in any sector?
It’s plus or minus 7.5%. So if a sector is 10% of the portfolio, I can only go up to 17.5% of the assets, or down to 2.5%. The sector weights are determined by bottom-up stock picking. A sector’s weighting is determined by the attractiveness of its individual stocks. If they’re not [attractive], we’ll own 0% in [that sector].
Q: Any other considerations?
We can own companies as small as $200-million market cap. Smaller companies historically total 5% of the portfolio, but there’s no hard minimum or maximum. It’s based on the individual security, and its risk and return potential.
Still, I don’t make major investments in small companies. It’s not appropriate for most of my clients. I was taught early on that many small companies never become big companies.
Jessica Bruno is content editor of Advisor Group. jessica.bruno@rci.rogers.com
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