With all the “noise” in the equity market, many may be surprised that we are in the midst of the second-longest bull market on record. That said, there have been several important macroeconomic trends and events (i.e., timing of Federal Reverse rate hikes, decelerating emerging market growth, competitive currency devaluation, negative interest rates abroad, and the impact of Brexit) that have increased both uncertainty and the probability of elevated market volatility.

Investors who need to stay in the market to pursue long-term goals may be wondering if the passive approach―of simply investing in a vehicle that mirrors an index―is the best way to go, or whether there are active managers who may provide a better experience for investors. In other words, are there managers who can swim against the tide, and not simply get lifted or sunk by it?

Managing for Upside Capture, Risk Mitigation

In managing the Oppenheimer Main Street Fund, we seek to provide a better ride for U.S. equity investors by both keeping pace with the broad market when times are good, and trying to mitigate risk when times are not so good. How do we seek to do this? By following four key tenets:

  1. As investors, it is important to know what is and what is not within one’s circle of competence. We humbly admit that accurately and consistently predicting outcomes of complex macroeconomic factors is largely outside our circle. As such, we strive to keep the portfolio in an all-weather orientation. Whether rates, commodity prices, currencies or even whole economies go up or down, our goal is to have a portfolio we believe is positioned to outperform, no matter the environment.
  2. If our strategy includes not making oversized bets on any macroeconomic factors, a reasonable question is, “What types of risks are you willing to take?” We believe identifying companies with sustainable competitive advantages (or economic moats, if you prefer), is squarely in the middle of our circle of competence and a way for us to add value for investors.
  3. We also believe we have the skills to identify company management teams that are likely to successfully execute on their plans.
  4. Lastly, correctly valuing stocks and seeing what expectations the market is pricing in are also within our skill set. It is not by accident that we weight the portfolio more heavily towards companies that have structural competitive advantages and/or management teams that are executing well (e.g., gaining market share, expanding profit margins), and that have at least reasonable stock valuations.

Stock Selection Key in All Conditions

Allow us to use a metaphor. If managing the portfolio was like running a team of race cars, we’d readily admit that we cannot predict what the weather or track conditions will be on any race day. But we don’t think knowing that is necessary because we do believe we can find the strongest cars (companies with advantaged business models), the best drivers (management teams that execute effectively), and see when the payoffs for the race are in our favor.

To offset our agnostic position on the conditions, we make sure to have a group of cars in the stable so that at least some will win no matter what the weather conditions are. Simply put, our strategy boils down to stock selection.

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