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James Abate expects that his fund distinguished itself this year by maintaining a traditional bottom-up perspective on stocks. The fund manager has maintained a stellar track record through his Centre American Select Equity Fund (DHAMX) , which he started in 2011, that is in the top 1% of funds in its large-cap blend cohort over the 1-year, 3-year and 5-year period. That performance garnered the DHAMX five stars from Morningstar. What’s more, the U.S. large cap growth fund is down just around 3% this year, compared to a 18% loss in the category average, outpacing 99% of its peers in 2022, according to Morningstar. “The real distinguishing characteristics of what we do, and in particular with the American Select Equity Fund, is that it’s rooted in a very sound, financial footing, looking at all aspects of a company in terms of capital investment that they make,” Abate said. “We’re the antithesis of ARK and basically momentum-based investing,” he added. “We’re the opposite.” The flagship fund of Cathie Wood’s ARK Invest, the ARK Innovation ETF , is down 28% this year. Strong earnings momentum Abate’s focus on fundamentals, as opposed to an approach tied to price momentum, has led him to focus on companies with strong earnings momentum and pricing power in what he expected would be a risk-off, rising interest rate environment. The fund manager maintains a concentrated portfolio of 35 to 50 of his best ideas. Over the past 18 months, this search led him to overweight allocations in two sectors: energy and materials. A 24% allocation to energy, far greater than the category weighting of just 4% in the sector, helped the fund ride the surge in oil and gas prices this year. Major oil and gas companies in his fund include Exxon and Chevron, as well as other firms such as hydrocarbon firm EQT and natural gas company Range Resources. A 23% allocation to basic materials, compared to the 2.7% average weighting in its category, boosted the portfolio. The investor highlighted chemical company Corteva, as well as fertilizer stocks such as CF Industries and Mosaic, as some notable outperformers. The fund manager said he expects that a lot of the easy money has now been made in the two sectors, as investors may have mostly benefited from the opportunity when it presented itself back in October 2020. Still, he believes there’s still some upside to be had. “The market is perhaps more balanced,” he said. “But it’s very difficult to see how, with many people expecting things to just reverse back to the way they were, which is a disinflationary tech driven world, the structural issues that are still embedded in most of the analysis that we’re seeing is that this bear market —and it is a bear market — still needs to traverse quite a bit more.” The fund manager also incorporates hedging techniques, specifically put options, from time to time to fortress the portfolio during periods of volatility, such as during the pandemic. This year, the fund had put options on the Nasdaq 100 at the start of the year, sensing a correction in the offing in tech stocks. Taking up health care Regardless, the investor is changing tacks somewhat to prepare for higher inflation for longer. “Our expectation, regardless of the economic contraction or recession, is that inflation is going to remain much more persistent than people expect, mainly because the supply side, that capital discipline that we talked about in most commodity producing companies and areas, is something that’s not well appreciated,” Abate said. “And because the Federal Reserve can only destroy demand, and not create new supply, it’s very likely that we’re in an environment that’s more stagflationary than what people have experienced over the last 20 or 25 years,” he said. The fund manager said he’s tempered his exposure to materials over the past several months, and has been profit taking somewhat in the energy sector, though he has continued a preference for natural gas over liquids. Abate has also substantially increased the fund’s exposure to the healthcare sector, where the fund had previously been underweight, particularly in established biotechnology names. Key stock picks include Biogen , Gilead Sciences and Amgen . To be sure, the fund does have one drawback highlighted by Morningstar, which is a hefty 1.46% expense ratio. It’s ‘adult swim time’ Abate expects that his success with his fund, which he started in 2006, mainly has to do with the key fact that he has managed money through multiple business cycles, whether that is through current Covid-19 pandemic, the 2008-2009 mortgage crisis, the September 11 attacks, and the dot-com bubble. Before founding Centre Asset Management in 2006, Abate started his career as a manager of valuation services at PriceWaterhouseCoopers in 1987, according to LinkedIn. He was the head of U.S. active equity at Swiss investment bank Credit Suisse from 1995 to 2000, and then an investment director at GAM until 2006. Abate expects that markets will continue to remain difficult for a while, and urged investors to maintain a fundamental approach to markets, as opposed to taking up what he calls “faddish investments.” “This is adult swim time,” he said.
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