As markets pass the mid-way point of 2021, some of the outsized post-Covid returns may be harder to come by.

But opportunities still remain for investors that take a “nimble” approach to portfolio construction, and keep some cash on hand to capitalise on any pullbacks.

That’s the view of Harvery Migotti, co-manager of the International Shares Fund at Forager Funds Management.

Speaking with Stockhead this week, Migotti discussed the outlook for the second half of the year and how the Forager management team is assessing investment opportunities.

The year to-date

As portfolio manager for an international equities fund, Migotti is focused on key drivers in global markets and in that context, developments in US equity markets still play the central role.

He noted the rotation back into value stocks in the wake of last year’s vaccine news, before a shift into defensive quality through the middle of this year as inflation chatter moved to the forefront.

“Since May, the S&P500 has moved higher by around 2%. And gains in the big tech stocks such as Microsoft and Apple accounted for around 40% of that move,” Migotti said.

“That’s quite an incredible stat and it shows how money moved back into those larger quality growth names, rather than what you might call turbocharged growth.”

Now that inflation has moved back to the forefront, Migotti said a key indicator to watch for is the relative strength of the US economy.

“There’s still plenty of stimulus, with pent up demand and supply chain issues across board. Almost every company I speak to talks about certain labour pressures, whether hiring people or wage inflation,” he said.

“So if the economy slows down a bit from here some of that naturally dissipates. But if it only falls to where inflation holds at, say, 3.5%, then you have a mismatch between what the Fed’s doing and where the market sits. And I think that’s what investors are trying to figure out at the moment.”

Valuation methodology

While Forager’s international equities team takes a value-based approach to investment, Migotti said the definition of value has been “hijacked” to some extent in the ‘growth vs value’ debate.

“We always gravitate back to valuation, and trying to find opportunities where the ‘herd’ is missing something,” he said.

“But we don’t think of value as, say, ‘this stock is trading at 6x earnings’.” In other words, a single-digit PE ratio isn’t a guarantee of value.

“Never buy something just because it’s cheap (on those metrics),” Migotti said.

“You can have stock which trades on 20% top-line growth and 25% EPS (earnings per share) growth. It might not trade with a single-digit PE multiple but there’s still have a tremendous amount of value there if you form a strong view on the growth outlook.”

Investing strategy

With inflation on the rise and some indications that the global post-COVID rebound is starting to fade, the mid-point of 2021 makes for a slightly more complex investing environment.

In that context, Migotti said it’s important to take a “nimble” approach if bouts of volatility increase.

“It’s interesting if you look over the last four or five weeks the Russell 2000 (US small cap index) has pulled back, and a lot of small cap names got hammered,” he said.

“But it creates a situation where markets throw the baby out with the bathwater. And there were a number of small-to-mid cap names that got caught in the selloff.”

Forager “used that opportunity over the last few weeks to re-enter one of our longer term holdings, which has been the biggest contributor to our fund’s performance in the past 12 months,” Migotti said.

“We like volatility because it gives us these opportunities. So you need to be a bit nimble and I’d say you you want portion of your portfolio in cash to take advantage of those rotations.”

“Another way of approaching it for a retail investor is to allocate money to a fund, so you have someone to do that portfolio construction and bottom-up stock picking.”

Migotti said Foragers’ International Shares Fund has recently joined the Macquarie Wrap investment platform along with the Netwealth financial advisory group, which makes it easier to access for retail investors looking to allocate funds to a professional investment manager.

“We do limit the amount of money we take on so that we keep that ability to be agile. But we have increased distribution through a number of investment platforms, so it should be relatively easy for retail investors to gain access,” he said.