Latitude Investment Management Managing Partner Freddie Lait has shared his advice for investors on how to create a low-risk, high-return portfolio. With the macroeconomic outlook entering choppy waters against a backdrop of high inflation and uncertainty about central bank monetary policy , Lait said recent volatility in stock markets is here to stay and markets could see further pullbacks. "Our belief is that these big cycles between value and growth and cyclical and defensive will happen through time and we are at the end or the middle of a very large growth against value rally," Lait said. Growth stocks are those which are expected to grow significantly faster than the market, while value stocks are those deemed cheap relative to the company's fundamentals and financial performance. Cyclical stocks tend to align with the performance of the wider economy, while defensives offer consistent dividends and stable earnings performance irrespective of the trajectory of the market. The last decade has seen growth stocks consistently outperform the wider equity market, while defensives have been buoyant of late. "Our model is to try to find great businesses across the spectrum through cycles, so we are always investing in great defensive businesses which give us the balance to the portfolio, we are always investing in great cyclical businesses and some great growth and tech businesses alongside," Lait said. "As long as we believe the quality is there and the earnings growth and the intrinsic value growth is there, we will generate a far smoother return for our clients as a result, while still getting the benefit of those individual businesses doing well." Last year, Latitude was buying more cyclical and value stocks on the belief that they were trading at a heavy discount. After those stocks, including the likes of Wall Street giant JPMorgan , performed strongly from November 2020 through February 2021, Lait opted to take some profit on them and has been investing in defensive and growth stocks where he sees relative value opportunities. Low risk, high reward Lait, whose Latitude Horizon fund has returned 94% since its inception in October 2012 and has a three-year annualized return of 6.44%, said in-vogue portfolios which are heavily weighted toward growth stocks such as big tech players run two major risks. Firstly, it runs the risk of being too concentrated in one sector, he said, but more importantly, there is a risk that the portfolio as a whole becomes overvalued, exposing it to a market downturn. Lait highlighted that these increasingly prevalent portfolios can trade at anywhere between 25 and 35 times earnings. Latitude retains around a 50-60% allocation to those types of stocks, which he said are "fantastic for future growth and secular trends within the market." However, he suggested investors can create a "lower risk, higher return" portfolio by including some of the more cyclical stocks. "I personally believe that the short-term cyclical outlook looks very strong and the government switching its stimulus from consumers to infrastructure and real asset investment can drive a decent, strong economy, and the consumer is in rude health," he said. Within its cyclical exposure, Latitude likes U.S. banks JPMorgan, Bank of America and Goldman Sachs , positions it has held for around five to six years but added to in March and April last year. Lait also flagged European infrastructure stocks such as French companies Vinci and Eiffage , due to their high proportion of investment in "quality assets" with recurring revenue streams, such as toll roads and airports. He also pointed out that they are trading at around 11 times earnings while retaining "decent growth rates and great opportunities to invest their surplus cash flow." Energy and semiconductor stocks are also on Latitude's radar within the cyclical space, as Lait looks to bring down the average valuation of its portfolios. "As a result of splitting those two, some of the defensive and quality growth stocks, with some more very, very cheaply valued cyclicals, our portfolio trades on just under 15 times earnings, and we believe has a superior potential growth rate of maybe 15% a year over the next five years," he said.
Latitude Investment Management Managing Partner Freddie Lait has shared his advice for investors on how to create a low-risk, high-return portfolio.