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Standard Life's Morris Likes Rockwell Collins, Schwab (Audio) · Bloomberg Intelligence

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  Speaker 1: Box and Kathleen Hayes on Bloomberg Radio. What to do
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  Speaker 1: with your money in an investment environment where rates are
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  Speaker 1: low and equities seem to be range bound. Let's find
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  Speaker 1: out from Jeff Morris. He is the head of US
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  Speaker 1: Equities for Standard Life Investments. They are based in Boston,
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  Speaker 1: home to Bloomberg twelve hundred am, and he joins us
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  Speaker 1: in the studio. Jeff, thanks very much for being with us.
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  Speaker 1: Good afternoon. Alright, so just give us the top down
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  Speaker 1: look right now about the investment world. Right. I can't
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  Speaker 1: get much by buying government bonds. Stocks can either make
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  Speaker 1: you're nervous or at least range bound for the time being.
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  Speaker 1: And commodities, well, we've all known what happens to the
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  Speaker 1: price of oil when we're not looking. So what do
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  Speaker 1: you do? Well, I'm focused on the on the equity market,
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  Speaker 1: and I have to say that given where the valuations
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  Speaker 1: are for for US equities, I wouldn't recommend, you know,
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  Speaker 1: broad exposure. I think it's important for investors to look
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  Speaker 1: at a selective investment ideas. You know, for the longest time,
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  Speaker 1: the beta trade worked for for for investors and tell
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  Speaker 1: people what the beta sorry, the beta trade is just
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  Speaker 1: playing the rising tide as as stops as stocks move
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  Speaker 1: up from the market goes up, so you can buy
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  Speaker 1: anything the market goes up. When you think about how
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  Speaker 1: we came out of the financial crisis, there was ample despair,
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  Speaker 1: you know, valuations were lower, and now the market is
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  Speaker 1: has moved up, as escalated for some time and now
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  Speaker 1: seems to be just chopping sideways trying to digest this
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  Speaker 1: environment of slow growth and relatively high valuations. So it's
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  Speaker 1: really a time I think that someone has to be
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  Speaker 1: more focused on how they think about the market. So
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  Speaker 1: what is your methodology to do that? Then we're about
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  Speaker 1: halfway through earning season stablesnar stocks that are noted that
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  Speaker 1: we're about just past the halfway marsfp uh what what
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  Speaker 1: how do you then decide? First you start with an industry,
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  Speaker 1: how do you just choose an industry? And how how
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  Speaker 1: do you choose your individual companies? Well, at Standard Life Investments,
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  Speaker 1: we use a focus on change investment philosophy, so we're
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  Speaker 1: looking for at times when when there's change occurring with
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  Speaker 1: companies or industries. We feel like during those transitions then
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  Speaker 1: the market doesn't really price in what's what's happening, and
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  Speaker 1: that's opportunities to buy you know, an undervalued security. So
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  Speaker 1: we really haven't understand you know, where there is where
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  Speaker 1: there is change occurring. Uh. The example of that right now,
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  Speaker 1: well and right now in technology, there's there's a there's
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  Speaker 1: a lot that's that's going on. We have old technology
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  Speaker 1: and new technology. You know. One of the companies I
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  Speaker 1: know is an opportune time to talk about it that
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  Speaker 1: Facebook is one that we've held substantial positioning doing well today.
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  Speaker 1: We really feel like there's a lot of a lot
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  Speaker 1: of transition that we're going to see as as media
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  Speaker 1: buying goes from you know, older sources to to more
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  Speaker 1: more more digital source of of advertising. So that's that's
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  Speaker 1: an example where changes occurring. There's also a change occurring
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  Speaker 1: in in in older companies too, and and and more
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  Speaker 1: established companies. I was thinking, for example, change in the
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  Speaker 1: aerospace industribute because you have more efficient jetliners. Wonder if
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  Speaker 1: you could speak to the issue of aerospace and defense.
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  Speaker 1: So for commercial aerospace, we've been through a long up
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  Speaker 1: cycle and we've seen the orders that Boeing has has
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  Speaker 1: received a you know, an order from from China, Eastern today,
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  Speaker 1: but there's been a long up cycle. In fact, the
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  Speaker 1: market's really trying to digest Bowing right now and understand
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  Speaker 1: if maybe that order cycle is starting to exhaust itself somewhat.
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  Speaker 1: Both Boeing and Airbus got orders for about, you know,
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  Speaker 1: a thousand plus jets last year. So far this year
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  Speaker 1: it's maybe a hundred and fifty two hundreds, So it
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  Speaker 1: really feels like that order pipeline is starting to to
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  Speaker 1: to soften. So that's one thing where you have to
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  Speaker 1: understand now, you know, the focus on change philosophy you're
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  Speaker 1: looking is are we seeing a change here in the
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  Speaker 1: commercial aerospace cycling? Is it's starting to soften? On on defense,
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  Speaker 1: you know, there's the demand, is the demand is increasing
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  Speaker 1: overseas for for demens defense assets is uh, you can
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  Speaker 1: just look at the headlines and understand where that comes from.
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  Speaker 1: But then also the domestic defense budget is starting to
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  Speaker 1: inflect higher and finally we're starting to see some growth
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  Speaker 1: in in that domestic spending, which is benefiting many of
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  Speaker 1: the large defense primes, some which we've we've invested in.
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  Speaker 1: Is an industry like defense, one that is by necessity
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  Speaker 1: where you you're watching the elections, not so much like
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  Speaker 1: sentiment and all that, but you know, at some point
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  Speaker 1: do you did your team have to assess, boil boy,
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  Speaker 1: if Trump's the president or Hillary Clinton and whoerever it is.
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  Speaker 1: And of course the Congress is so important here too,
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  Speaker 1: right if Republicans control the House, etcetera. That how I
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  Speaker 1: would think that's something where you really have to focus
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  Speaker 1: very closely on policy because spending driving defense and driving
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  Speaker 1: these companies is the biggest thing. Clearly, the defense budget
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  Speaker 1: is something to keep an eye on. You know, the
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  Speaker 1: the analysis over over many decades and many different political
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  Speaker 1: parties and in the White House and in Congress indicates
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  Speaker 1: it's it's and there's not a tight correlation between which
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  Speaker 1: parties in power. It's really the threat environment that drives
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  Speaker 1: defense spending. And and that's what we're we're looking at.
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  Speaker 1: We're thinking about how, you know, what's what's the evolution
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  Speaker 1: A powerful change that's going on in the defense industry
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  Speaker 1: is to try to create a more technologically advanced soldier,
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  Speaker 1: you know, with more modern equipment. And and that spending
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  Speaker 1: is really accruding to those that are providing the best
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  Speaker 1: in the way of defense assets. So there's there's sort
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  Speaker 1: of a technological change. But then also you know, unfortunately
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  Speaker 1: the threat environment is right now that that that that
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  Speaker 1: spending needs to needs to increase. I was just going
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  Speaker 1: to bring up the topic of you get these big
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  Speaker 1: contracts and then they have a life seemingly of their own.
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  Speaker 1: For example, the contract for the F thirty five Joint
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  Speaker 1: strike Fighter right Lockheed Martin, because I was noting that
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  Speaker 1: the Pentagon's top weapons tester was explaining to Congress earlier
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  Speaker 1: this week that the F thirty five remains immature and
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  Speaker 1: provides limited combat capability, and yet they just ordered a
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  Speaker 1: leven more aircraft. So is that that kind of company?
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  Speaker 1: What What do you want to hear from a defense
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  Speaker 1: contractor that makes you confident to want to be a shareholder.
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  Speaker 1: What you want to hear is is a few things.
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  Speaker 1: First of all, that the new programs are progressing as anticipated.
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  Speaker 1: That the joint strike fighter has been in the news
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  Speaker 1: for for years in terms of having a variety of
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  Speaker 1: of technical issues here and there, but it's but it's
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  Speaker 1: a solid program. In fact, you know, the capability that
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  Speaker 1: comes from a fifth generation fighter is is just crucial
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  Speaker 1: um in the world that we live in. I think
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  Speaker 1: that one has to realize the complexity of of of
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  Speaker 1: this program. This is one of the most sophisticated pieces
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  Speaker 1: of technology that people have ever really created. So that's um,
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  Speaker 1: it's understandable. There's going to be parts of it that
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  Speaker 1: the occasional be glitches from time to time, but it's
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  Speaker 1: it's it's moved along. You know, they're getting to the
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  Speaker 1: point where they're seeing larger and larger contracts for it,
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  Speaker 1: and it's and there's also you know, relatively strong international
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  Speaker 1: demand as well as well too. So one of the
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  Speaker 1: things you want to look for the defense attractors are
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  Speaker 1: the solid are the major programs? Are they solid? And
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  Speaker 1: then also what do they do with the capital? And
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  Speaker 1: that's one thing that Lockheed has done an exceptional job
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  Speaker 1: with is returning capital to shareholders in the form of
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  Speaker 1: share repurchases or elevated dividends. And this is something that
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  Speaker 1: investors have really appreciated over over a number of years.
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  Speaker 1: How do the big players in aerospace and defense stack
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  Speaker 1: up for you? You just mentioned Lockey, but Boeing, raytheon
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  Speaker 1: General Dynamics, etcetera. So we've been we've been selective amongst
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  Speaker 1: the aerospace and defense company. So we we we don't
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  Speaker 1: own any Bowing right now. We feel like it's a
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  Speaker 1: fantastic company with a large backlog, but feel like the
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  Speaker 1: shares are are are fully valued. We like companies. You know,
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  Speaker 1: Raytheon is a company that reported today and and there's
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  Speaker 1: a little bit of concerned about the margins, but they're
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  Speaker 1: very well placed to participate in international growth. So we
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  Speaker 1: like that that particular stock. We also, you know, Rockwell
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  Speaker 1: Collins is one that's that's attractive as well too. They're
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  Speaker 1: a components supplier both on the commercial aerospace on on
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  Speaker 1: the defense side, so we're able to find our um
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  Speaker 1: you know, find our find our spots there and and
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  Speaker 1: there's you know, there's opportunity when when you're looking for
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  Speaker 1: changes occurring in industries and companies. You know, Rockwell Collins
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  Speaker 1: is one where they're they're they're participating in some of
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  Speaker 1: these new narrow bodies, like like Boeing's new seven three
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  Speaker 1: seven UM that's that's going to be a powerful driver
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  Speaker 1: for their for their fundamentals going forward. Can I get
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  Speaker 1: your thoughts on the finance and banking industry for example,
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  Speaker 1: maybe not huge banks, but you know First Republic as
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  Speaker 1: well as maybe Charles Schwab and then a big bank
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  Speaker 1: City Group. So you know, with First Republic, this is
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  Speaker 1: one that we UH that that we really like. They
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  Speaker 1: have an opportunity to expand their wealth management business. It's
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  Speaker 1: it's a geographic expansion story as they build out from
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  Speaker 1: their heritage in San Francisco and into other other markets
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  Speaker 1: in the northeast. UH. They're doing a great job of
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  Speaker 1: acquiring more my financial advisors and more wealth management assets,
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  Speaker 1: and we think that's something that they can they have
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  Speaker 1: room to run. Many of the larger banks, as you
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  Speaker 1: mentioned City really have a difficult time growing at you know,
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  Speaker 1: growing at rates that are quite frankly any faster than
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  Speaker 1: the overall economy. So a smaller bank has that has
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  Speaker 1: that opportunity to be able to grow. Also, the regulatory
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  Speaker 1: burden is IS is much less on those on those
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  Speaker 1: smaller banks. Charles Schwab is is also UH, you know,
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  Speaker 1: a stock with a very attractive um. It's attractive in
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  Speaker 1: the in the sense that they're able to gather gather
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  Speaker 1: assets and and they've been able to we think about
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  Speaker 1: innovation that's occurring. It's been one of the most innovative
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  Speaker 1: companies and in financial services. With UH, you know the
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  Speaker 1: innovation of of discount brokerage and the r A business
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  Speaker 1: and so forth. So it's it's it's one that we like.
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  Speaker 1: They're also very well positioned to benefit from when interest rates,
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  Speaker 1: when short term rates ever start to increase. Who knows
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  Speaker 1: when that will be, but at some point we'll start
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  Speaker 1: to see rates go up, and and Charles schwab By
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  Speaker 1: their uh By, their balance sheet is is positioned well
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  Speaker 1: to benefit from that. Jeff Morris, thank you so much
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  Speaker 1: for joining us today right here in our bloomberhou stood
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  Speaker 1: in the New York City. Thank you very much, glad
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  Speaker 1: to be here. He is head of US Equities at
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  Speaker 1: Standard Life in Investments. He is interested in the defense
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  Speaker 1: and aerospace industry, looks for change driven companies. This is
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  Speaker 1: taking stock on Bloombergradio