Baltimore-area investors and wealth managers talk strategy for 2017

Baltimore-area investors and wealth managers talk strategy for 2017
J. David Wagner, manager of T. Rowe Price Group's Small-Cap Value Fund, was named 2016's top stock picker by Bloomberg News. (Karl Merton Ferron / Baltimore Sun)

Boeing's stock tumbled in December after President-elect Donald J. Trump questioned the cost of Air Force One. Markets plummeted overnight on news of his upset election win, then rallied to record-setting levels by the end of the year as investors took stock of his promises to cut regulation and taxes, and raise spending.

Earlier this year, Britain's vote to leave the European Union similarly sent shock waves through financial markets.


One of the most successful stock pickers in 2016 tuned it all out.

T. Rowe Price Group's $9.4 billion Small-Cap Value Fund, managed by J. David Wagner, had a one-year return of just under 30 percent in 2016, beating the S&P 500 and Russell 2000 Index, which reported one-year returns of 12 percent and 21 percent, respectively.

Wagner's strategy is straightforward: He bets on individual companies. Specifically, very small companies with strong books and low stock prices that are off Wall Street's radar and, as a result, undervalued. The 336 stocks in the fund are almost exclusively U.S. businesses in evergreen industries such as financial services, energy and health care that, even if they've had a rough year, will never go entirely out of style.

"We're focused on our companies. We don't worry that much about Trump or whether the Fed is going to hike interest rates," said Wagner, a vice president at the Baltimore-based money manager who has overseen the small-cap fund since 2014. "We want to create a portfolio that can be ready for everything, objective and agnostic as events unfold."

As investors and wealth managers in the Baltimore-area look ahead to 2017, they say geopolitical events and a new U.S. administration led by a businessman with no governing experience will continue to be leading factors influencing financial markets and shaping investment strategy. To navigate the new year, they'll apply lessons learned from 2016 and its success stories, like Wagner, to maintain a diverse portfolio, focus on the long-term outcome, and try to not freak out when something unexpected happens.

"It's not that we did anything different," Wagner said of the fund, which launched in 1988. "It's just our style came back into favor."

When it comes to Trump's domestic policies, investors and analysts are watching whether he delivers on promises to cut taxes, increase infrastructure spending and relax banking regulations, all which could spur economic growth and influence investors, said Dale Horn, a senior vice president of wealth management for UBS who is based in Baltimore.

Three areas that stand to benefit the most are financial services and banking, pharmaceuticals and technology, he said.

Community banks have struggled under tougher regulations that followed the 2008 financial crisis and could begin to grow again under looser rules, Horn said. If the Republican-led Congress pays less attention to rising drug prices, as some expect, that could bode well for pharmaceutical companies. And Trump's plans to encourage the repatriation of money stashed in foreign countries by U.S. businesses, largely technology companies, could spur investments in and acquisitions of smaller tech firms, he said.

Meanwhile, investors may have a more cautious outlook on global markets, as they wait to see what comes of Trump's campaign promises to renegotiate key international trade policies, his comments goading international leaders, and a perceived coziness with Russia.

"Whether it's real or not, it's perception, and perception is reality in the markets," Horn said. "Whether he behaves in that manner or not, it's fear and it's a risk."

Trump's election wasn't 2016's only market-moving event. Global events, most notably Britain's decision to leave the European Union, also rocked markets last year.

Analysts say there are plenty more international events ahead, with German Chancellor Angela Merkel's term coming to an end and other shifts in European leadership, and China's rising economic and military power.

Some of the uncertainty associated with such events is already priced into international markets, which are more accustomed to upheaval, said Paul Ehrlichman, a managing director and head of global value at ClearBridge Investments, a global investment manager owned by Baltimore-based money management firm Legg Mason.


For example, he said, while it took a few months for the waves created by Brexit to settle, markets recovered in less than an hour after Italy's prime minister announced his resignation following a failed attempt to change the country's constitution, a sign foreign investors anticipate and accept higher rates of political turnover in some countries, he said.

What's more, signs of growth in Europe, such as lower unemployment, job growth and a rise in manufacturing, provide some balance to the region's political uncertainty, and could make for a fruitful investment environment, Ehrlichman said.

"Investors get paid for courage, not comfort," Ehrlichman said. "Uncertainty and opportunity go together, particularly uncertainty related to bad news. If you go into those places, that's where there's money to be made and Europe is one of those places where there's a lot of uncertainty."

For Mark A. Johnson, an associate professor of finance at Loyola University Maryland, 2016 illustrated two investing values he tries to impart on his students: diversity and consistency.

Johnson teaches students to invest over weeks or months, rather than in one lump sum.

"One good workout isn't going to reach your goal," he said, "just as investing a lot of money all at once isn't necessarily going to get you to your goal."

Betting exclusively on domestic or international growth, small or large companies, active or passive portfolios isn't a smart strategy, Johnson said. Everyone loses at some point, and diversity helps hedge against losses in one area.

Passive investing, or a strategy that relies on funds that aim to mirror benchmark indexes rather that beat them and often have low fees, has been growing in popularity. But actively managed funds have been cutting their fees, and funds like Wagner's at T. Rowe that offer a unique strategy will be the ones that stand out, said Drew Cook, director of investment management for Berman McAleer, a Timonium wealth manager.

"What he is showing is we're really going to go to two styles of investing — benchmarking and truly active," Cook said.

With 336 stocks, Wagner's fund is invested in more companies than other small-cap funds at T. Rowe, a move the man identified by Bloomberg News as 2016's best stock picker said reduces the risk of investing in very small companies. To further spread the risk, no one company accounts for more than 1.3 percent of the fund's value.

Wagner's fund isn't a core holding for Berman McAleer, but it's something Cook offers clients looking to add more risk to their portfolio. Cook, who manages $700 million in assets, likes that the fund is full of diamond-in-the-rough companies that, as he said, "most of us have never even heard of."

Cook thinks T. Rowe's distance from Wall Street and Wagner's nose for sniffing out good off-the-radar companies gives the fund an edge on competitors.


"He blazes his own trail and deviates from the benchmark," Cook said.

At the same time, "that means in the future, there are going to be years he underperforms," Cook said, "and that's OK."