There’s no great secret to David Eiswert’s success. Like the famed boxer Sonny Liston, he wins through brute force.
“We’re not four people with a good idea hoping we get it right this year,” says Eiswert, the manager of the
T. Rowe Price Global Stock Fund.
“We are an army.”
employs 158 equity analysts worldwide, and Eiswert has access to every one of them. The fact that his fund (ticker: PRGSX) is a global stock mutual fund should appeal to anyone who’s a fan of active management.
“Clients today are more sophisticated and can simulate parts of the style box with index funds,” Eiswert says. “They can say, ‘I want U.S. large-cap growth stocks,’ manufacture that [with an ETF], and do pretty well at a very low cost. But what a global strategy gives us is the most degrees of freedom. We can go anywhere for opportunities.”
Eiswert is right when he says his clients are sophisticated. Although his mutual fund has $1.5 billion under management, he runs $8.7 billion in T. Rowe’s overall global stock strategy, primarily for institutional clients. He says they come to him for one reason: his proven record of beating his benchmark and peers on a risk-adjusted basis. Since Eiswert became the Global Stock fund’s manager in October 2012, it has delivered a 149% cumulative return, compared with 72% for the average fund in Morningstar’s World Large Stock fund category. And in the past three years, the fund has the category’s fourth-highest Sharpe ratio, a measure of risk-adjusted return.
*Holdings as of 12/31. Returns through 3/4; three- and five-year returns are annualized.
T. Rowe Price Global Stock
To deal with the complexity of working for a giant money manager, Eiswert tries to keep what he wants from every analyst simple. He has three dedicated analysts who work exclusively for the fund, and that team connects with other T. Rowe analysts.
“We spend 10% to 15% of our time going around the world, standing in front of our analysts, and saying this is how we make decisions: ‘We buy quality companies where we have an insight of improving economic returns in the future, and we don’t pay too much for them,’” Eiswert says. He asks each analyst to be specific about the drivers of his or her favorite company’s future growth—“Is it a new product, interest-rate cycle, government regulation, industry structure?”—and then provide a model for that growth.
The fund typically holds about 70 stocks, and for a new company to be added to the portfolio, another company must exit. “It’s not because there are only 70 good stocks,” Eiswert says. Rather, he believes that the discipline helps produce better results. “Clients are paying money managers to make difficult choices,” he says. “So, we go through this process: Is this new stock idea better than current ideas? That’s really painful because there’s nothing in the portfolio that randomly got in there. That process puts a lot of discipline into what we do.”
Previously, Eiswert was manager of the
T. Rowe Price Global Technology Fund
(PRGTX) from 2008 to 2012, so he has a history of investing in the market’s tech darlings. But he’s also not afraid of trading them for stocks in unfashionable sectors. This September, he dumped
stock (AAPL) because he wasn’t happy about the iPhone X launch and the stock had reached the high end of its historical valuation range. “When Apple fits, we bet,” Eiswert says “When Apple doesn’t fit, we don’t bet. We’re not thematic sector investors.”
As he was selling Apple, Eiswert was building a position in Essity (ESSITYB:Sweden), an unsexy Swedish tissue and paper-towel company.
“The biggest cost driver of Essity is pulp, and it has been in a two-year cycle where pulp prices have gone through the roof, compressing its returns,” Eiswert says. “But here’s the benefit of being at T. Rowe. I’ve got a whole group of people covering lumber, pulp, softwood in Brazil and Europe. And they start telling me pulp prices are going to fall, and if they do, Essity’s returns by the back half of 2019 into 2020 will go up dramatically. So I had an insight about improving returns in the future, and I’m paying a very reasonable price for the stock.”
Since the end of 2018’s third quarter, Essity stock is up 16%. It fell only 3% in the fourth quarter, compared with Apple’s massive slump.
Meanwhile, the big tech stocks collapsed in the final months of 2018—and Eiswert took advantage. In the second and third quarter of 2018, he trimmed his weighting in
stock (NFLX) by two-thirds.
“Netflix’s stock got up above 10 times its enterprise value [a measure of a company’s total business value],” Eiswert says. “We thought it was a pretty extreme valuation.” But, in December, he added back to his position, as “it had gone from 10 times EV to six.”
“People are vastly underestimating the addressable market for Netflix,” he says. “Netflix is not about broadband households. It’s about smartphones. They’re going to be hundreds of millions of people in emerging markets that are using Netflix in the next five to 10 years on their mobile devices.”
Eiswert also purchased other tech names, such as
(CRM), which had suffered in December. At 24% by year end, technology was his fund’s largest sector weighting, followed by health care at 14.7%.
One cautionary note regarding this fund is its turnover rate, a measure of trading activity: It was a high 104% in fiscal 2018. Turnover increases fund transaction costs, but also the potential for realizing taxable capital gains. Although the fund has so far managed to be tax efficient, Eiswert’s trading bears watching.
Sometimes, Eiswert’s portfolio shifts aren’t based just on the outlook for specific companies but for entire countries. He calls his approach to regional allocation “cautiously contrarian.” Last August, as emerging markets continued to sell off and the U.S. surged, he became interested in Brazil. He eventually bought shares of the bank
(ITUB4.Brazil) and the department store retailer
(LREN3.Brazil). After right-wing extremist Jair Bolsonaro won Brazil’s first round of presidential elections, Brazil’s market was still shaky but starting to rally. So Eiswert called Gonzalo Pangaro, who manages the
T. Rowe Price Emerging Markets Stock Fund
(PRMSX), and Verena E. Wachnitz, of its
Latin America Stock Fund
(PRLAX ), to ask their advice.
Based on their analysis, Eiswert concluded that Brazil was entering a pro-business climate in which loan growth for Itaú Unibanco and same-store sales at Lojas Renner should accelerate. He also knew that these two companies were the highest quality he would find in the country.
T. Rowe’s analyst army had already done the reconnaissance for him.