Proven, Time-Tested Investment Strategies
Pictured left to right: Joe Bruening, senior partner; Paul Radomski, managing partner; Michael Schroer, managing partner & chief investment officer.
Photography by Daniel Smyth
Since 1978, the advisors at Renaissance Investment Management have seen stock prices and interest rates rise and fall and have watched the U.S. and global economies crash and burn, then rise from the ashes to rebuild.
Portfolio managers at the Covington firm have an average of 17 years experience helping clients grow their wealth. That kind of experience helps build the kind of judgment and market savvy clients can rely on, says
Michael Schroer, managing partner and chief investment officer at Renaissance.
The firm oversees $4.4 billion in assets under management, and its clients include institutions and high-net worth individuals.
Schroer shares his insights on a changing marketplace with Lead Magazine here:
LEAD Magazine: With interest rates expected to gradually increase, how is your firm preparing for that type of economic environment? In anticipation of this event, what adjustments are you making in your money management strategy?
Michael Schroer: We are not making any major adjustments to our underlying philosophy and process. We’ve been in business over 35 years, and have experienced a wide variety of interest rate cycles over that time. We’ve found that our approach is sufficiently flexible that we’ve been able to identify good investment opportunities throughout an interest rate cycle.
LM: In an economic environment where rates gradually increase, how do you expect stock markets to react short- and long-term?
MS: Over the past 25 years or so, stocks have generally performed reasonably well even after rates have begun rising. That’s not to say that stock market volatility hasn’t risen, and it’s true that there have been market declines for some short-term periods after rates have turned upward. Looking out a year or more after rate increases, however, stocks have on average performed well. Importantly, the extremely low interest rates we see today means that even with moderate increases over the next several years, rates will remain low by historical standards.
LM: What is your firm’s view on how best to prepare and monitor the markets to continue to provide clients with above average returns on equities while maintaining a reasonable amount of safety and stability in their portfolios?
MS: Sticking with an effective investment philosophy and maintaining portfolio discipline is key. Market and company fundamentals can change quickly, and having an investment philosophy that is flexible enough to capture a range of opportunities is important. However, you need to execute that philosophy consistently, and that’s where having the discipline to implement decisions, whether they be buys or sells, is really important.
LM: How does your firm determine what are the most important factors to consider when recommending investment products to your clients?
MS: Broadly speaking, we’re looking for three main attributes in any stock that we buy. First we are looking for growth and quality characteristics, such as high profitability and good management of cash flow. Secondly, we are looking for good momentum, both in terms of earnings expectations for the company and the company’s stock price. Finally, we’re looking at valuations, and how reasonably the company’s stock is valued on the basis of earnings and cash flow. Each of these attributes is important, but considering them holistically results in an even more effective investment process.
LM: The International Monetary Fund recently cut its 2015 economic growth forecast to 3.3 percent from 3.5 percent amid mounting threats from China and the Eurozone. That’s the weakest pace since the financial crisis. With troubles hitting the Global Growth Outlook, what are the positive investment opportunities your firm has identified for your clients?
MS: Overseas markets have dominated the headlines recently, in a negative sense, due to events in China and Greece in particular. Still, valuations overseas are generally very attractive, and it’s important to note that individual companies overseas can still present world-class opportunities to a U.S. investor. We’ve run portfolios of international stocks for over 20 years, and have found that investing when the headlines have been negative has oftentimes led to very good returns.
LM: Can you tell us about the unique partnership structure Renaissance has with Affiliated Managers Group (AMG) and how it benefits your clients?
MS: Our partnership with AMG goes back 20 years, and has been very successful. AMG invests in a variety of high quality investment management firms around the world, and offers them support in the areas of marketing, product distribution, legal support and administrative services, while allowing them complete autonomy with regard to investment and business decisions. In our case, it allows Renaissance to operate as a boutique-sized business but with the resources of a larger organization. This structure allows us to focus solely on our core competency, which is investment management.
LM: Can you explain the effect rising rates will have on equity investments and the money management advice your firm is giving to clients to prepare for it?
MS: Rising interest rates are clearly a negative for bond investments, due simply to the mathematical effect of rising rates on a fixed stream of payments. However stocks are different, as earnings and dividends have a growth component that adds to return. If rising rates are associated with a stronger economy, this growth component becomes even more significant. We believe that moderately rising rates will have minimal effects on equity investments.
LM: As rates rise, shorter-term debt and eventually cash will become more attractive versus long-term bonds. Does this mean investors should be particularly wary of chasing higher returns with high-yield and junk bonds due to their non-risk averse nature?
MS: Yes, although we’d remain wary for other reasons as well. Low rates in recent years has allowed many low quality “junk” companies to finance operations at unusually attractive rates, enhancing their profitability. Refinancing at more normal rates is likely to significantly reduce profitability, and perhaps even raise the risk of default for some businesses.
LM: Since the Fed isn’t expected to aggressively raise rates, does this mean income-oriented investors are going to be at a disadvantage for some time? If so, what is your firm’s advice on how to increase investors’ returns without a large degree of risk?
MS: It is likely that rates will remain low by historical standards for some time. As much as some investors would like yields to be where they were in the past, we have to invest in the present. Adjusting income goals downward and developing more of a total return orientation to the portfolio is probably the best solution to a low yield environment.
LM: What are your thoughts on the importance of having liquidity in a crisis and do you believe indifference to the need for liquidity exists in today’s market for such a potential outcome?
MS: Liquidity is always important, although the price for liquidity today is very high, given the nominal yields on cash equivalents. The bull market in U.S. stocks over the past six years has generally been accompanied by investor pessimism and higher than normal cash positions, so it doesn’t necessarily appear to us that investors are indifferent to liquidity.
LM: It’s been five years since Dodd-Frank became law and placed major regulations on the financial industry to protect consumers as a result of the financial collapse in 2008. Can you give us a fresh look on the impact it has had on the industry and consumers?
MS: Many of the regulatory interpretations of Dodd-Frank are still being worked out, so there’s still a good deal of uncertainty about the overall effects of the law. It does seem safe to say that the regulatory burdens of the law present a relatively high cost to smaller sized financial institutions. Banks in particular seem to be in a much stronger financial position today from a capital structure standpoint than was the case prior to the financial collapse, although not all of this is attributable to Dodd-Frank.
Renaissance Investment Management is located at 50 East Rivercenter Boulevard, Suite 1200, Covington, KY 41011. You can reach them at 513.723.4500 or visit their website at www.reninv.com.