Riding Structural Tailwinds
Market and industry conditions will often play a role in determining the long-term performance of a company—not just the condition of the company itself. Companies enjoying structural tailwinds may be more likely to reward investors with favorable financial results.

James Ayer, portfolio manager of the Oppenheimer International Equity Fund, applies a disciplined process in search of stocks with these characteristics around the globe.

The Investment Philosophy

Ayer says the fund is benchmark-agnostic, meaning that rather than building a portfolio around a benchmark, the investment team structures it around themes with long-term potential—such as company restructuring—or structural tailwinds that will help companies outperform over time. This characteristic is what differentiates the fund from many growth funds that are managed around earnings momentum.

The Investment Process

The fund screens companies according to themes and subthemes in order to identify businesses in which to invest. One example is the theme of mass affluence, which leads the team to favor certain companies that stand to benefit from rising demand for air travel—a subtheme.

Looking at businesses by themes and subthemes enables the investment team to screen out large numbers of roughly 2,000 companies that make up the fund’s index. That generates a manageable universe, from which the team creates a watch list—companies monitored more closely for investment—of about 150 stocks, in addition to the 75 or so that exist in the portfolio.

Price Targets

Rather than establishing price targets for a stock, the team looks at developments at the company (such as reorganizations or share buybacks) as well as valuation metrics, such as price-to-sales ratios, price-to-cash-flow ratios, cash-flow yields, EV/EBITDA (or the ratio of enterprise value to earnings before interest, taxes, depreciation and amortization), and the price-to-forward earnings ratio. It then examines these metrics relative to the company’s history, competitors and the market.

In certain cases, the team will set price targets on base-case, bull-case and bear-case scenarios. The team’s analyst, in partnership with Ayer, will then conduct a scenario analysis for each investment and look for skews that favor upside with limited downside.

For more, read the Ticker Magazine feature titled “Riding Structural Tailwinds.