Entry Points | Inflation Risks & Long/Short Equity

Brandon Smith, CFA, CAIA, Portfolio Analyst at Boston Partners highlights trends shaping long/short strategies.
24 September 2021
Brandon Smith, CFA, CAIA, Portfolio Analyst at Boston Partners highlights inflation risks and other trends that are currently shaping the opportunity set for long/short strategies. For questions or additional information, please contact us.
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Long/Short Equities Emerge as a Potential Inflation Hedge 

Inflation Worries Percolate | After a decade plus in which investors haven’t had to really consider hedging their portfolios, emerging questions about the prospects for inflation have many considering hedging strategies to help offset the risk. The caveat, however, is that thanks to historically low interest rates, what worked in the past won’t necessarily have the same effect going forward.

Fixed Income “Stability” Eroding | Many fixed income portfolios, for instance, reflect a tilt toward long-duration exposures, a response to the historically low interest rates. As a result, many fixed income allocations – rather than providing their traditional ballast function – are susceptible to any move higher in interest rates. This would likely be true in both a less-transient inflationary scenario as well as a Fed reaction to improving economic growth.

Traditional Hedges at Risk | More customary inflation hedges – namely precious metals and stocks – have their own shortcomings. A very large swath of the equity market, for instance, has benefitted for an extended period of time as rates fell or held steady at historically low levels. And growth stocks, in particular, are trading at multiples that assume uninterrupted, long free-cash flow streams for the foreseeable future.

Entry Points: Long/Short Opportunity Emerges | A value-oriented Long/Short equity strategy, alternatively, is uniquely positioned to provide investors with an inflation hedge. The most expensive areas of the market, which make up a large proportion of short books today, are also segments that would be disproportionately affected in a rising rate environment, whereas the undervalued corners of the market, in the long exposures of value strategies, could benefit from a tailwind.

Obstacles Confronting Growth | Looking at the top quintile of stocks whose price appreciation has been most correlated with the downward trajectory of treasury yields, the names in this in this cohort are trading at a roughly 70% premium to the overall market. Not surprisingly, the top industries in this grouping consist of software and internet services, medical technology, and biotech.

Value’s Tailwind |Conversely, the bottom quintile of equities showing the least correlation revolve around cyclical industries, including banking names and companies in the consumer finance, insurance, industrial equipment and machinery sectors. This grouping currently trades at its all-time largest discount compared its long-term average – reflecting a gap of approximately 40%. 

A Bottom-Up Determination | At Boston Partners, we’ve been utilizing a disciplined three-circle approach since our founding to identify and select undervalued stocks characterized by high-quality fundamentals and improving business momentum. Based on this analysis – versus any kind of top-down projection – many of the traditional growth industries that have benefitted from low rates are more likely to be found on the short side of our portfolios, while the cyclical, value-oriented stocks with room to grow are positioned to further benefit should rates begin to climb.

Active Strategy: Boston Partners has managed long/short value strategies for nearly 25 years, and currently manages multiple domestic long/short funds as well as strategies targeting global and emerging markets. Boston Partners’ long/short strategies seek long-term capital appreciation while reducing exposure to general equity market risk and volatility.

 

For questions or additional information, please contact us.

Boston Partners Global Investors, Inc. (“Boston Partners”) is an investment adviser registered with the SEC under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. The views expressed in this commentary reflect those of the author as of the date of this commentary. Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views. Past performance is not an indication of future results. Discussions of securities, market returns, and trends are not intended to be a forecast of future events or returns.

Molly Clements

Research Analyst

Ms. Clements holds dual B.A. degrees in Economics and Psychology from Hobart and William Smith Colleges. Ms. Clements began her career in the industry in 2024.

Ms. Clements is a Research Analyst for Boston Partners, serving on the Sustainability and Engagement team. She joined the firm in January 2024. Ms. Clements is responsible for original ESG/sustainability research on companies held in Boston Partners’ portfolios.

Matthew Donovan

Equity Analyst

Mr. Donovan holds a B.A. in Economics from the University of Pennsylvania. Mr. Donovan began his career in the investment industry in 2022.

Mark Donovan

Mr. Donovan is an equity analyst with Boston Partners specializing in emerging markets financials, telecommunications, food, beverage & tobacco, restaurants, hotels and personal products. Prior to this, he was a Research Analyst for the Boston Partners Sustainability and Engagement Team. He was responsible for original ESG/Sustainability research on companies held in Boston Partners’ portfolios. Mr. Donovan joined Boston Partners in February 2022.

Elizabeth Sheerin

Relationship Manager

Ms. Sheerin holds a B.S. degree in business management from Babson College. Ms. Sheerin began her career in the industry in 2009.

Elizabeth Sheerin

Ms. Sheerin is a member of the Relationship Management team at Boston Partners and she joined this team in 2011. She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining our firm in June 2011, she was a Client Service Representative at Putnam Investments. She also held several financial services related internships including working for Merrill Lynch Global Wealth Management and State Street Global Advisors.

Kara Pattipati, CFA

Product Manager

Ms. Pattipati holds an M.A. in International Relations from the University of St. Andrews. She holds the Chartered Financial Analyst® designation. Ms. Pattipati began her career in the industry in 2012.

Kara Pattipati

Ms. Pattipati is a member of the Relationship Management team at Boston Partners. She works with many of our key domestic and international clients in a client service and relationship manager capacity. Prior to joining Boston Partners in November 2016, she was a business development associate at Geode Capital Management.

Marlon Thompson

Equity Trading Assistant

Mr. Thompson holds a B.S. degree in finance from Boston College. He began his career in the investment industry in 2011.

Marlon Thompson

Mr. Thompson is an equity trading assistant for Boston Partners. Prior to assuming this role, he worked as a portfolio operations analyst. Before joining the firm in May 2021, Mr. Thompson held several roles including Vice President of Operations at Benefit Street Partners LLC and positions at International Fund Services (IFS) and Pioneer Investments.

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Edward Stansky

Equity Analyst

Mr. Stansky holds a B.S. degree in economics from Duke University and a M.B.A. from NYU’s Stern School of Business. He began his career in the investment industry in 2016.

Edward Stansky

Mr. Stansky is an equity research analyst with Boston Partners specializing in the energy, metals & mining sectors of the equity market. He joined the firm in September 2021. Prior to this role, he worked as a high yield and leveraged loan analyst at DDJ Capital and as an investment banking analyst in debt advisory at BofA Merrill Lynch.

Jonah Frank

Equity Analyst

Mr. Frank was a student at Boston University where he earned a B.S. degree in business administration with a concentration in finance and management information systems. Mr. Frank began his career in the investment industry in 2021.

Jonah Frank

Mr. Frank is an equity research analyst with Boston Partners specializing in emerging markets energy and materials sectors of the equity market.

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John Zhao

Equity Analyst

Mr. Zhao holds a Bachelor of Arts degree from the Richard Ivey School of Business at Western University and an MBA from Harvard Business School. He began his career in the investment industry in 2015.

John Zhao

Mr. Zhao is an emerging markets industry analyst with Boston Partners specializing in the emerging markets technology sector of the equity market. He joined the firm in November 2021. Prior to his role at Boston Partners, Mr. Zhao worked as a Private Equity Associate in Salt Lake City and an Investment Banking Associate in Hong Kong.

Jack Birmingham

Product Specialist

Mr. Birmingham holds a B.A. degree in political science from Hobart College. He began his career in the industry in 2018.

Jack Birmingham

Mr. Birmingham is Product Specialist for the Boston Partners value equity strategies based in the Boston office, responsible for clients, consultants and prospects outside of North America. Prior to this role, he joined the firm in June 2018 as an RFP Writer and Database Coordinator in the Marketing Department, where he supported all of the firm’s equity strategies.

Sam Lieberman

Client Advisor

Mr. Lieberman holds a B.S. degree from Northeastern University and the FINRA series 7, 22, 63 and 65 licenses. He began his career in the industry in 1989.

Mr. Lieberman is a Client Advisor at Boston Partners. In this capacity, he is responsible for delivering Boston Partners investment solutions to premier financial advisors at the major wealth management firms. Prior to joining the firm in 2024, Mr. Lieberman held similar roles at Angel Oak Capital and Putnam Investments.

Jason Reid

Senior Compliance Manager

Jason holds a B.S. degree from Fitchburg State University as well. He began his career in the industry in 2004.

Jason Reid

Mr. Reid is a Senior Compliance Manager for Boston Partners and Chief Compliance Officer of Boston Partners Securities, LLC, our limited purpose Broker/Dealer. He joined the firm in August 2022. His primary responsibilities are Sales and Marketing Compliance, and Broker/Dealer regula-tory oversight. He is a member of the GIPS Committee and the Governance Committee. Previously, Mr. Reid was a member of the Boston Partners Sustainability and Engagement team where he managed the proxy voting process on behalf of the Governance Committee, pre-pared all engagement materials with issuers regarding proxy matters and did original ESG research on issuers held in Boston Partners’ portfolio. Prior to joining Boston Partners, he was a Compliance Manager, Assistant Vice President, at Natixis Investment Managers. He holds the series 7, 24 registrations and has successfully passed the Chief Compliance Officers Qualifying Examination.

Newcomb Cole

Consultant Relations Director

Mr. Cole holds a B.S. degree in finance from Syracuse University. He also holds the FINRA Series 7 and 63 licenses and began his career in the industry in 1990.

Newcomb Cole

Mr. Cole is a Consultant Relations Director, with distribution and relationship management responsibilities for consultants and investors in North America. He joined the firm in January 2023 from Intech, where he was a member of the consultant relations team. Prior to this, Newcomb was in a similar role at The Boston Company.

Kathryn Y. Burke

Head of Client Service

Ms. Burke holds a M.A. in East Asian Studies from Duke University and a B.A. degree in Asian Studies from Dartmouth College. Ms. Burke holds FINRA licenses 7 and 63. She has seventeen years of industry experience.

Kathryn Y. Burke

Ms. Burke is the Head of Client Service for Boston Partners. In this role she has management responsibility for the firm’s client service associates and proposal team helping to ensure the client’s needs are met with world class service and satisfaction while driving new business initiatives to develop and enhance relationships in our Institutional and Sub advisory businesses. She joined the firm in February of 2023. Prior to that, Ms. Burke spent fifteen years at Putnam Investments as Director of Client Service managing day-to-day oversight of their Japanese and North American clients, and before that, two years as an Account Executive and Proposal Writer at Fidelity Investments in their institutional division.

Timothy Strakosch

Investor Relations

Mr. Strakosch holds a B.A. degree in finance from the Carroll School of Management at Boston College and holds the FINRA securities licenses 7 and 63. He began his career in the industry in 2013.

Mr. Strakosch is responsible for business development and relationship management of the firm’s Public Fund and Taft-Hartley clients. He joined the firm in 2023 from AllianceBernstein where he was a vice president in the Institutional Client Group with responsibility for Public Fund and Taft-Hartley clients throughout North America. Previously, he was at Putnam Investments responsible for marketing Putnam Investment solutions to Financial Advisors at the wire house firms. Mr. Strakosch is a member of the Leadership Advisory Council at The Cristo Rey Boston High School and a team captain for the Pan-Mass Challenge. He serves on the Gold Leadership Council at Boston College and is a Class Agent at The Belmont Hill School.

Connor Watson, CFA

Relationship Manager

Mr. Watson earned a B.A. degree in economics from the College of the Holy Cross. He holds FINRA Series 3, 7, and 63 licenses, and the Chartered Financial Analyst® designation. He began his career in the industry in 2012.

Mr. Watson is responsible for relationship management and business development for the firm’s Public Fund and Taft-Hartley clients across the U.S. He joined Boston Partners after nine years at BNY Mellon Investment Management where he was a Vice President in the North American Distribution group with responsibility for multi-employer, public and other clients. In prior roles, Mr. Watson was with The Boston Company Asset Management as a Client Service Analyst, and he started his career at State Street Global Services.

Jacqueline Kelliher

Relationship Manager

Ms. Kelliher holds a B.S. in business administration from the University of Richmond and is currently pursuing an M.B.A. at Babson College. She holds the FINRA Series 7, 24, 63, and 66 licenses and began her career in the industry in 2014.

Ms. Kelliher is a member of the Investor Relations team and joined the firm in March 2023. In this capacity, Ms. Kelliher has business development and relationship management responsibilities of the firm’s financial intermediary relationships. Prior to this, Ms. Kelliher was a Director of Platform Distribution at John Hancock Investment Management. In this role she supported the Investment Research and Due Diligence efforts of the gatekeeper and professional buyer clientele within broker-dealer platforms and financial institutions. Additionally, she managed a team of internal sales professionals supporting the Broker-Dealer/Platform and DCIO channels. Before that, Ms. Kelliher held various sales roles across channels including RIAs, Family Offices, and Bank/Trusts.

Jett Dziama

Equity Analyst

Mr. Dziama holds a B.S. degree in business administration with a concentration in finance and a minor in economics from Boston University. Mr. Dziama began his career in the investment industry in 2023.

Mr. Dziama is an equity analyst with Boston Partners. Mr. Dziama is focusing his analytical efforts on banks and the financial services sector of the equity market. He joined Boston Partners in August 2023.

Stephen Ferrara

Equity Trader

Mr. Ferrara holds a B.S. degree in business management from Suffolk University. He began his career in the investment industry in 2014.

Mr. Ferrara is an equity trader for Boston Partners. Prior to joining the firm in June 2023, he held the position of senior trader at Man Group.

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