Market star calls emerging markets

An award-winning US chief investment officer calls Mexico and China as his hottest market tips over US equities.

Summary: Where will the investment winds be most favourable over the coming cycle? While many yachtsmen are angling their sails towards the United States, a veteran chief investment officer and former Olympic sailing contender is turning towards emerging markets, particularly Mexico and China.
Key take-out: Harold Pitcairn is recommending that 22% of a portfolio be parked in non-US equities, and a well-researched 20% stake in multi-strategy hedge funds.
Key beneficiaries: General investors. Category: Portfolio construction.

Harold F. “Rick” Pitcairn II, 53, the chief investment officer of the Pitcairn multifamily office in Jenkintown, Pennsylvania, viscerally understands the competitive advantage that wealthy families have in the marketplace—they are among the few players that can genuinely invest for the long term. That understanding has allowed him to be a contrarian of a rather profound sort.

In early 2009, Pitcairn became the firm’s chief investment officer and immediately began urging clients to buy US equities. It was the darkest days of the financial crisis. The weakness of a lot of wealthy investors intent on preserving their capital, he says, is that they buy and sell too late, piling into a rising market well after a bull run has started and then selling well after the bull has been felled. The opera-loving Texas scion of the 19th century Pennsylvania family that made a fortune in glass, colourfully drawls, “I’ve always been convinced that the five- to seven-year investment cycle is longer than the emotional psyche of investors.”

What emotion doesn’t distort, politics does. “Last fall,” he notes, “my friends on the right felt compelled to reposition their investments because they were sure the country was going down the tubes after the election. Subsequently, many missed the November-December rally.” In early 2013, his friends on the left, upset by the sequestration and convinced austerity would kill the rally, took the action they thought appropriate. “They, too, made the wrong call.” His advice: “Don’t let your politics overly influence your portfolio decisions.”

The Pitcairn multifamily office, founded in 1923, is an advice-only shop with 100 clients and $3 billion in assets under advisement. While assets have fallen 20% this past year, that is attributed primarily to one major client who died; the surviving family members decided to split up and go their separate ways.

It’s a generational change also happening inside the firm. Many long-term Pitcairn employees, including former CEO Dirk JungĂ©, have retired or shifted roles during the past 12 months, as the new CEO, Leslie Voth, promotes younger staff and brings in iPads and 21st century techniques, all in the hopes of attracting a younger clientele.

Don’t let these disrupting generational shifts underway in the backroom blind you to the firm’s front-room smarts. While Pitcairn won’t reveal his cards completely, he does tell us, “Our one-year and four-year annual return measures are in the mid-teens and high-teens, respectively, and comfortably exceeded their benchmarks.” In June, the Family Office Review recognised his wise calls throughout the Great Recession and named him its Chief Investment Officer of the Year.

So we took him to lunch, and asked, What should long-term investors be buying? “Things don’t look so wonderful in emerging markets right this second,” he says, noting that the drubbing is coming from a strengthening US dollar, falling commodity prices, and the improving fortunes of developed markets. While “everyone is now saying, ‘Buy US equities,’” Pitcairn is “more interested in the single-digit price/earnings of emerging-market stocks.” These countries are going to come back. “The advisors who are able to guide their clients through that process are going to do very well,” he says. Specifically, Pitcairn is recommending that 22% of a portfolio be parked in non-US equities; Mexico and China offer the most promise in the current landscape.

Pitcairn also recommends a well-researched 20% stake in multi-strategy hedge funds, which he views as good portfolio ballasts and hedges against any future rises in interest rates. That, and the fact that hedge fund managers are again going long equities. Back in 2011, he says, the long/short hedge fund managers were mirroring the defensive crouch of retail investors, and he claims this new attitude “should lead us to stronger returns in alternatives over the next few years.”

Last December, Pitcairn, a former Olympic sailing contender, told his clients that investing in the US was like racing sailboats in a light breeze. He recalled how he once struggled to maintain momentum in a race, until he noticed the direction of the feeble wind had imperceptibly changed. Pitcairn angled his sail accordingly and won.

The wind has changed; the S&P 500 is up 155% since its March 2009 low. Despite the richer valuations, he still thinks the US bull market is “in the second or third inning, rather than in the eighth or ninth.” Pitcairn says he will look for an exit strategy when the market hits a multiple of 18 forward earnings, a 30% upside from the current multiple of 14.

If he is as good reading a bear market as he is a bull market, Pitcairn will be out the door before others see it is time to bail.

This article was first published in Barron’s, and is reproduced with permission.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free