One of the key tenets of the strategy we use in managing the Oppenheimer Main Street Fund is maintaining an all-weather orientation. That means we try to position the portfolio to outperform in various market and economic conditions, whether interest rates, commodities, the U.S. economy or any of several other factors rise or fall.
In managing the Oppenheimer Main Street Fund, we aim to always have at least some winners in the portfolio (as any manager will do), but we aim to do so no matter what the macroeconomic conditions may be at any given time. Keeping this all-weather orientation allows us to focus on what we believe we do best: bottom-up stock selection.
Preparing for All Conditions
The following examples may better illustrate our concept of, and approach to, an all-weather orientation for the Oppenheimer Main Street Fund.
Oil: If oil prices rise, companies that explore for and produce oil are likely to perform relatively well. We own Chevron and other oil companies to position us to capitalize on rising oil prices. However, they are not the only types of energy companies we own. If oil prices fall further and exploration and production companies lag, pipeline companies such as Magellan Midstream Partners – a business with primary drivers other than oil prices- should do better than other energy companies, all else being equal. Moreover, we own companies in other sectors that should benefit if oil prices fall.
Interest Rates: If interest rates rise, banks should see their profitability expand thanks to widening net interest margins. Our stakes in Citigroup and other banks would probably do relatively well in a rising rate scenario. Conversely, if rates stay low or fall even further from current levels, banks will continue to have a wet blanket on their earnings growth; however, non-lender financials in our portfolio such as CME Group-an industry toll-keeper that is dependent on trading activity, not lending conditions-should be in much better position to grow earnings than the banks.
These are just two of the macroeconomic factors we position for. Among the other exposures we consider are the overall cyclical conditions, the U.S. dollar, the Chinese economy, dividend yield, growth versus value stocks, and many other factors.
Playing to Our Strengths
Our goal is not to remain perfectly neutral on all macroeconomic factors at all times. That is impossible. Rather, our goal is to not get left too far behind should a given factor exert a large influence on the markets. We aim to have at least some winners, no matter what conditions come to pass. We know there will be rain and we know there will be sun, so we carry both an umbrella and sunscreen.
We have come to this strategy partly through practicality and partly through humility. As noted in our previous blog, it is important to know what is-and what is not-within one’s circle of competence. We admit that accurately and consistently predicting outcomes of complex macroeconomic factors is largely outside our circle. We focus our energies on our strength and where we think we have an edge, which is bottom-up stock selection.
In other words, we may not know where oil prices are going, but we can see that Chevron should have above-average production growth in the years ahead. In our view, Magellan has an attractive portfolio of pipelines, does not have a general partner making growth more difficult, and is relatively conservatively financed, giving it the opportunity to pick up assets from peer companies that are on the ropes. We can see Citibank currently trading at a significant valuation discount to its peers (trading materially below both stated and tangible book value) despite having one of the best balance sheets in its industry.
You don’t have to know which investments will be in style if you can successfully choose the picks of the litters.
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Special Risks: Mid-sized company stock is typically more volatile than that of larger company stock. It may take a substantial period of time to realize a gain on an investment in a mid-sized company, if any gain is realized at all. Diversification does not guarantee profit or protect against loss. Past performance does not guarantee future results.
As of July 31, 2016, Oppenheimer Main Street Fund’s holdings were 3.0% in CME Group; 2.55% in Chevron Corp.; 2.40% in Citigroup Inc.; and 1.05% in Magellan Midstream Partners.
The mention of specific holdings is subject to change and does not constitute a recommendation on behalf of the Fund or OppenheimerFunds, Inc.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.