PM Corner: In conversation with Rick I. Singh
U.S. Equity Portfolio Manager and Managing Director Rick I. Singh discusses protecting returns through a market shock, identifying the companies that will have structural advantages over five years and the value of curiosity.
Q: How would you summarize your investing philosophy?
Singh: Losing money sucks; make as much return as possible for clients while being very mindful of downside risk. I ask myself, Is there a way to pick stocks that reduces the number of ways exogenous shocks or macro factors can rock the portfolio? And when you find those great risk-adjusted ideas, make them big contributors with sizing. Protecting capital is incredibly important.
Q: Especially during this unusual period we’re living through?
Singh: Oh, absolutely. In periods of great uncertainty, our process becomes even more important. In Q1 2020, Opportunistic Equity Long/Short was up 2% when the market was down 20%. We think very carefully about risks—portfolio level and stock by stock. If the risks are unknown or outside the acceptable range, we reduce our exposure to that investment. But the converse is true; if we see green lights, we are not afraid to deploy capital. As such, the strategy is up over 20% this year even after protecting from downside drawdown earlier in the year.
Q: How do you think about the “growth vs. value stock” paradigm?
Singh: We don’t think about the world this way. We had to rethink how we categorize stocks in the last couple of years. The world is going through massive secular change, and cyclical downturns only further accelerate that secular change. We created three categories of companies in the context of this landscape: survivors, thrivers and diers. The cloud has allowed companies to gain market share where cost was once prohibitive, so the company with the technological advantage, not the market share leader, has the advantage for the next five years. We seek to find who those thrivers and survivors will be across all sectors. There’s almost no price at which I want to own a dying company, but we’re willing to pay a premium for thrivers, which should be captured in long-term free cash flow generation. We’re also willing to pay a certainty premium, although the future is never guaranteed.
Q: Please say more about your valuation framework.
Singh: At a basic level, stocks are defined by growth and certainty. For shorthand purposes, the more certain the outcome, the lower return we’re willing to accept, and that means a higher P/E. Similarly, the higher the growth, the higher the P/E we are willing to accept. This framework reorients what valuation means, though to truly value a company, we ask, If we owned it privately forever and received the entirety of those free cash flows, what would the rate of return on our capital be? This also normalizes the rate of return across companies and industries.
Q: Let’s discuss the portfolio. Have you changed any allocations recently?
Singh: We’re quite nimble. About half our portfolio is invested in what we deem great companies, with excellent management, strong competitive position, higher growth than industry peers and high free cash flow generation—and we hope to own them for years.
The other half is in companies with underappreciated positive change—whether in sales, margins, capital efficiency, industry structure, the regulatory or legal landscape, or our certainty about their earnings growth. We hope to capture something the market doesn’t see because we’re early or stronger in our differentiated view.
Q: Let’s turn to you personally. What has motivated you most in your career?
Singh: We’re in a measurable business where you can see your judgment, analysis and decisions play out in a quantifiable way. It’s exciting to see the tangible results of your efforts. Sitting at the intersection of analysis of global economies, changing industries and corporate strategy is very compelling for someone who’s curious. And although it’s a numbers business, there’s an art to predicting the future that is perhaps the most fun challenge.
Q: Can you share a career lesson that had a strong influence on you?
Singh: Sure. This one is vivid in my mind. I was a 22-year-old investment banker on a small team working on a big project—making a presentation book for our managing director. Securing the client obviously mattered a lot, and you only get one shot. He made the pitch, and that night he called the team from the client site to say he’d found 20 mistakes in the presentation book, and on speakerphone he painfully detailed each one, page by page. He won the business, but you better believe my contributions went to an A game after that.
That taught me what attention to detail means. It means while perfection may be unattainable, good isn’t good enough. I saw that there’s another level you can go to—make no mistake that’s avoidable. And we do that today in our modeling and research processes. We review an incredibly long checklist, and when we learn something new, we incorporate that into our analysis. And especially never make the same mistake twice!
Q: What concerns you most as a U.S. equity portfolio manager today, and what makes you feel most optimistic?
Singh: The answer is the same for both questions. Like that saying, “Your greatest strength is your greatest weakness,” the market’s greatest strength is low rates combined with the printing of money. Access to capital is nirvana for stocks. But becoming more dependent on those capital flows is the market’s greatest weakness. For how long is it sustainable? It seems too easy for this to be a free ride. We have zero historical precedent. How does it end? When does it end? These questions are the market’s greatest fear but also its greatest source of exuberance.
Hometown: Fairfax Station, Virginia
Education: B.S. in Commerce from the University of Virginia
Hobbies: Skiing, wake surfing on Lake Hopatcong, NJ and being an NBA fan—favorite players include LeBron James and the Ball brothers, and former players/coaches Steve Nash, Mike D’Antoni and Kareen Abdul-Jabbar.
Last book that made a strong impression: The Life-Changing Magic of Tidying Up by Marie Kondo and Living with a SEAL by Jesse Itzler