Advisory Blog
Following a period of indiscriminate selling, we see opportunity in high-quality stocks

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Joe Hudepohl, CFAPortfolio Manager, Atlanta Capital

      Atlanta - Eaton Vance and its affiliates seek to actively capitalize on opportunities presented by volatile investor sentiment, while ensuring that the portfolio risk profile remains appropriate for the specific strategy. The following are excerpts from a recent conversation with Joseph B. Hudepohl, CFA, Managing Director and Principal, Atlanta Capital Management.

      What we are seeing: Every market decline is different, and the speed of this decline — down more than 30% inside of a month's time — is nothing that we have ever seen before. What is similar to other market declines, however, is that correlations are spiking across equity markets. We call it the "sell what I can sell now — and ask questions later" philosophy. As an example, low quality has been leading high-quality segments of the market through this period, particularly in the large-cap growth category. Higher-quality companies typically have consistent earnings, strong balance sheets, significant free cash flow generation, growing revenues and meaningful competitive advantages, where as the opposite is true for their lower-quality counterparts. But, in our view, high correlations and indiscriminate selling tends to dissipate over time, as we have seen in past market declines. We strongly believe that high-quality investing will differentiate itself once the initial shocks to the market have been absorbed.

      What we are doing: We have been trimming positions with strong relative performance and adding to some of the weaker names in our portfolios. We are also selectively adding positions, particularly underperforming stocks whose permanent structure has not been changed by the recent crisis. As a result, portfolio turnover has picked up a bit as of late, but we are generally sticking with the vast majority of high-quality names that have been in the portfolios and expect to stick with those names throughout this cycle. Moreover, we think this is a chance for a lot of high-quality businesses to actually gain share and position themselves for the post-crisis environment.

      What we are watching: We are analyzing our holdings in light of current events in three different ways. The first is to evaluate short-term issues. Businesses are being closed for weeks and potentially months at a time, which is unprecedented and our focus is on issues related to liquidity. The second is to understand whether a business will undergo a permanent structural change. Obviously, this analysis is going to be most important from an ongoing perspective in terms of a company's opportunity to absorb shocks, compound over time and remain well positioned over the long term. The third is to assess the impact of a recession on a company's growth prospects. From our perspective, we're using 2009 as a starting point to analyze how companies performed during that period. There is going to be a nuance to this analysis, but we are favoring well-capitalized businesses with intact value propositions. Thus far, we are optimistic that many companies in our portfolios will emerge from this current crisis even stronger than they had been previously.

      Bottom line: Over time and during markets like these, we remain confident in our high-quality philosophy. We believe sticking to our discipline will provide the long-term benefits of equity investing if the markets move higher and may protect if markets face continued volatility or declines.