US Dynamic Large Cap Value Equity Strategy

Learn about what Brian Ferguson, John Bailer and Keith Howell Jr. do at Newton and their route into investment management.

Newton’s senior portfolio manager Brian Ferguson discusses his background, current role and market outlook.

Brian is the senior portfolio manager on the US Dynamic Large Cap Value Equity strategy at Newton Investment Management. Brian joined Newton in 2021 and BNY Mellon Investment Management in 1997.

What influenced you to choose a career in investment management?

At a very early age I developed a passion for financial markets and equity investing. I got the bug from my grandfather, who was an investor. He is really the one I credit with igniting that fire in me.

At that early age, I took interest in investment books and Warren Buffett’s annual letters to shareholders.

What made you choose value investing?

The people that really influenced me along the way and that I looked up to in this business early on were value investors. It’s just something that really resonated with me throughout my investment career. To this day I am in awe and always eager to consume what Warren Buffett, John Neff and others have said or written.

How would you characterize your style as a portfolio manager?

From pretty much the start of my career, I’ve been intrigued with the investment philosophy that starts with value but doesn’t stop there. I firmly appreciate supplementing value with an analysis of business fundamentals and business momentum. The power of that combination can help avoid getting tangled up with the value trap. It also helps find companies that can maintain and enhance their value per share.

How do you think about risks?

I believe that risk is something that is very important. My job isn’t just to seek good investment returns, but it’s also to seek good risk-adjusted returns. One of the best ways to manage portfolio risks starts at the individual stock level by adhering to a process of populating the portfolio with the best risk-reward opportunities.

I believe that one of the great aspects of value investing is buying a stock at a discount to what it’s worth. That discount is often referred to as the margin of safety; thus, the bigger the discount, the bigger the margin of safety. In addition, I have a myriad of internal portfolio risk analytics that are instrumental in the pursuit of strong risk-adjusted returns.

When you’re looking at a company, what metrics or qualities do you value the most?

There are so many, but if I had to call out one favorite it would be uncovering and identifying underappreciated improvements in returns on and of capital for a given company.

Is there a connection between your passions (outside of investing) and value investing?

I feel blessed my hobby and my passion is also my livelihood. I’ve been an investor for decades and it’s just something I really enjoy. I think country singer Luke Combs says it best in his song, Doin’ This: “I’d still be doin’ this if I wasn’t doin’ this.”

What’s the market outlook for dynamic large cap value equity?

In my view, there’s never been more value in value. In my 35 years of investing, I have never seen the future look so different from the past, which can create quite a compelling environment for active managers like me. I look to the future, analyzing which companies have the best business momentum on earnings and cash flow, driving intrinsic value. On the other side of the coin, passive investing largely is backward looking. Most passive funds are market-cap weighted, which can be driven by past performance.

After years of quantitative easing and free money, it appears clear that inflation will be higher for longer. Several secular tailwinds are driving this regime change including what I like to call the five Ds: deglobalization, decarbonization, divided wealth, and defense & destabilization. Looking ahead, we are investing in companies that could be poised to benefit from these tailwinds and are also being priced below their intrinsic value while maintaining good fundamentals.

Newton’s deputy head of equity income and portfolio manager John Bailer discusses his route into asset management, his career at Newton and the market outlook.

John is a member of Newton’s global equity income team and is a portfolio manager at Newton Investment Management. John joined Newton in 2021 and BNY Mellon Investment Management in 1992.

Tell us about your journey to working in investment management.

My grandfather gave all his grandchildren a small amount of money when I was 14 years old. I invested in a utility stock at his suggestion. After about a year, I complained that the stock seemed boring. My grandfather introduced me to his broker, who suggested I purchase equity in a company I was passionate about. I settled on a global leader in the beverage industry, a well-managed and high-quality company. I drank a lot of its main product!

In the stock market crash of October 19, 1987 (Black Monday), the shares fell 25%. That was my first investment lesson—to focus on fundamentals and avoid selling into panics based on emotion. I was forced to ask myself if the fundamentals of this business had changed. At that time, I discovered the famous value investor Benjamin Graham’s quote: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” I believe a good investor is someone who focuses on fundamentals and in doing so can avoid selling into panics based on emotion. Several weeks after the stock’s abrupt fall, it recovered almost all its value.

How would you characterize your style as a portfolio manager?

Understanding the economics of a business is in my DNA, and it makes me a passionate value investor. I look for catalysts that may change the momentum of a business and seek to identify whether there are concerns of a secular, cyclical or temporary nature. If they are cyclical ones, a company could turn them around and become a great stock, whereas secular concerns may turn a stock into a value trap. In the words of Warren Buffett: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

If a company is raising its dividends, it tells me company management believes that free cash flow is sustainable for the business. In my experience of working with boards of directors, they tend to be very conservative, and when a company is raising its dividend, it’s a very good indication that there is real momentum in the cash flow.

The key for me is having a consistent dialogue with management. If I start hearing anything that suggests momentum is deteriorating, I dig in to try to understand why. I need to determine if the slowdown in momentum is secular in nature and I need to move on from that stock, or whether it is temporary. Concentrating on good valuation characteristics, growing dividend yields and identifying momentum in a business are ways to avoid emotion and fear that often dictate how people invest.

What is the most memorable time period of your investment career?

From a professional standpoint, there’s no doubt the 2008 financial crisis stands out the most for me. I don’t claim to have a crystal ball and didn’t foresee the extent of the downturn, but I was well-positioned because I wasn’t finding many attractively valued cyclical stocks. In 2007, there was a lot of the excitement about the economy and a belief that economic growth was going to last forever. To me, this suggested a move out of areas that were very cyclical.

What do you most enjoy about your job?

It is incredibly important to be connected to the people who ultimately are the beneficiaries of what it is we are trying to do, and a key part of my role is to represent the strategy to our clients, be they financial advisers, charities, or institutional clients. I work with a range of stakeholders both internally and externally and my role is to convince them that our investment approach is sensible and disciplined, and I believe it is. I’m very lucky to have found a job where hard work doesn’t feel that hard because of my passion for investing. 

What do you like doing outside of work?

I have three children who are actively engaged in community service and play several sports, so there is a lot of running around to deliver them to their various activities. I enjoy seeing them progress in their interests and don’t mind being a taxi service. Additionally, I have taken on a few board leadership roles which have given me new perspectives on team dynamics. When I have spare time, I enjoy reading biographies (recent reads include Elon Musk by Walter Isaacson and Going Infinite by Michael Lewis), listening to podcasts and learning about new investment opportunities. 

Newton’s portfolio manager Keith Howell Jr. discusses his background, current role and market outlook.

Keith is a member of Newton’s equity income team and is a portfolio manager for the US Dynamic Large Cap Value Equity strategy. Keith joined Newton in 2021 and BNY Mellon Investment Management in 2006.

Tell us about your journey to working in investment management.

I began my college years at Harvard with a vague sense of wanting a career in “business” and chose to pursue a degree in Economics. Investment banking was a popular path for other students, so I cracked open a career guidebook titled The Vault Guide to Investment Banking. Within the pages I found a description of proprietary trading – the use of the firm’s money to trade securities for profit – and the idea of investing capital immediately struck me as fascinating. The following summers, I gained hands-on exposure to investing during internships, which solidified my passion for investing in companies. After college, I began my career in the industry as an equity research associate covering technology and telecommunications stocks.

How would you describe your style as a portfolio manager?

I’m heavily process-oriented and continuously focused on further improvement while still having an appreciation for the art of investing in companies.

What do you most enjoy about your job?

Playing cornerback for my college football team honed my passion for competition, which has translated nicely to the competitive realm that is asset management. Trying to deliver outperformance requires the same grit, tenacity and discipline as football, and I enjoy having a scoreboard (performance metrics) as a measurement of these qualities.

What is the most memorable period of your investment career so far?

Before becoming a portfolio manager, I was an analyst for 15 years. During those years, I began managing capital directly in a sleeve of one of our analyst-run portfolios. I particularly enjoyed that point in my career as I was able to manage capital while still making recommendations to portfolio managers across the firm. The experience allowed me to express my views directly and develop my approach to position sizing, timing and other aspects of portfolio management.

What excites you most about investing in large cap value companies?

The market repeatedly offers compelling risk/reward opportunities in the large-cap value space, stemming from current market debates or a change that is not being fully appreciated by the market. I feel my passion for competition, rigorous processes and even-keeled temperament are well suited to investing in large cap value companies.

What do you enjoy doing outside of the day job?

While mastering the trumpet and consuming detective-fiction audio books are a couple of my favorite activities, I feel particularly energized when cycling, weightlifting, hiking and playing sports with my family – basically any opportunity to be physically active.

During the Covid pandemic, I even began completing solo hundred-mile bike rides. I enjoyed the methodical practice of planning my routes and measuring my progress.    Additionally, exploring familiar towns from different angles cleared my mind and created space for new and creative investment ideas.