Not all elite equity managers think alike: it can pay to be a black sheep. And David Eiswert, manager of T Rowe Price’s $9bn Global Focused Growth fund, is happy to deviate from the pack.

It pays to ‘have that mindset where we are not comfortable with a groupthink’, Eiswert, who has been at the firm for 19 years, tells Citywire Amplify.

And it’s certainly worked for him. He has 87 consecutive months with a Citywire Fund Manager Rating, Of those, 58 are the best AAA rating.

Eiswert distinguishes between identifying great long-term themes and timing his investment in them. Nvidia, which makes computer graphics chips, is an example. Many top managers hold the stock – but not Eiswert. He describes the stock as a ‘thematically great’ company that he made money on from selling and that is at the wrong price to buy back into.

We spoke to Eiswert to find out more.

Citywire Amplify: How would you describe your investment approach?

David Eiswert: We want to have a repeatable process, for which you need two things. You need a competitive advantage, and that, for us, is our investment research platform. We have over 170 around the world, sector funds, and the people that run them, who are aces in their respective sectors.

Our investment research platform continuously generates ideas and information. It also gives us incredible access to companies. We own 15-18% of companies. Even more important is our framework. Investment managers get paid to make difficult choices, and our framework is the way we make difficult choices.

The second big element of our investment approach is being difficult to imitate. In the age of passive investing, active managers have to be able to prove that you can’t just replicate performance with beta or factor. I can look at a lot of growth managers that have put up really good numbers in the past 10 years, and you can look at seven or eight of them that are exactly the same. Their risk-return profiles are the same, and they own the same 50 companies.

No one should pay me for that. I tell my clients: ‘If you just want these 40 super-mega-growth companies, don’t pay a management fee. Build it for yourself, and run it yourself. You don’t need me.’

We want to make money for our clients every 12 to 24 months. People will say to me: ‘I want to be a long-term investor.’ Well, I am a long-term investor. If I can own something forever, and never sell it, that’s great, but usually, investment ideas go through 12- to 24-month theses, and you have to then find the next 12- to 24-month thesis. That could be the same stock, or it could be a different stock.

How would you describe your approach: top-down or bottom-up?

Number one, we want to own great assets. What are the great companies in the world?

Secondly, what is the return mechanism that makes the stock go up and down? Why did this stock outperform in the last 30 years? What drove it? What drove that sector?

The third is valuation. How is the asset being valued? Where in the valuation lifecycle is it? Is this business at the peak or trough of a return cycle?

The last element is the world around you. In the last three years, you’ve had a pandemic, which is an external hit that changes the investing landscape. You had an invasion of Ukraine by Russia. It was a shock to global oil prices and agricultural prices around the world. You now have the Federal Reserve raising rates faster than they ever have.

How are you sourcing good stocks?

We have those 170 analysts all over the world from Hong Kong to London to Baltimore. They’re researching companies with whom they have relationships, producing ideas. At any one time, there are 900 stocks on our platform that are buy-rated by our analysts.

Some of those stocks might be buys for someone else, but not for us because they don’t fit our framework.

Sometimes salespeople will describe a global stocks fund as a best-ideas product, but we’re not a best-ideas product: we are a machine that generates alpha. We don’t always get the best ideas, because the best ideas don’t always fit our framework, but we always have the framework.

I have three people on my team and we’re divided by sectors. Nabil Hanano is my associate portfolio manager and I have two team analysts. We spend time on our own, going to conferences, meeting companies, and coming up with ideas. I spent half my career just as an analyst. My real hardcore training is in picking stocks. It’s not like I’m some specialised portfolio manager, I’m part of the team finding ideas.

We’re not a best-ideas product: we are a machine that generates alpha. We don’t always get the best ideas, because the best ideas don’t always fit our framework, but we always have the framework

Citywire’s Fix the Future team has written about Nvidia recently as a stock other elite managers were holding. Can you tell us more about it?

I think Nvidia is an amazing company. I held the stock and sold it sometime in early 2021. I sold it too early, and it kept going up, but I sold it at a good 18x sales. It’s currently at 11x sales and has gone up to 28x at one point.

So, which part of the bubble do you want to exit in?

You don’t need me to tell you that Nvidia is a good company. Anybody who’s ever built a gaming PC knows they get an Nvidia GPU. You use Nvidia GPUs to mine crypto. If you’re at a data centre, you use GPUs for inference and learning, for AI.

All of that is 100% true, but if you pay the wrong price and buy it at the wrong point in the cycle, you’re going to lose money. In Q4 of last year, the market lost its head in mega-cap tech. They went parabolic and there was no price discovery. People were so wrapped up in these profits during the pandemic that they were willing to pay anything for stocks. That’s not right. That’s not how you manage your clients’ risk.

Thematically, Nvidia is great. Does that mean you should be buying it at 28x sales? No, not at the peak of its year-on-year growth, which was November of last year.

Nvidia was an $800bn market cap in November 2021. It’s $400bn today.

You mentioned Covid and its effects. Expedia was trading at about $48 during this time. You bought the stock in March last year at $172. It went beyond $200 but is now back at less than half that price.

The price of the stock is not the future returns. We bought Expedia for a couple of reasons.

One, we really liked the CEO, Peter Kern. We think he’s changing the business and he has made it structurally a higher-margin business.

Number two, Expedia was going to go into an accelerating returns phase as travel returned. Vrbo [a vacation rental marketplace that came with Expedia’s 2015 purchase of its parent HomeAway] was worth a lot more than people understood. We thought Vrbo was going to be a hedge in Covid to get to hotels and airlines, which is happening now. And it was cheap. It was 20x earnings, even at $170. Expedia is a $94 stock today (1 July). It trades at about one-times sales, and I think at about 13x earnings.

Expedia was a top holding of some hedge funds and I think they are liquidating. They were de-levering and they can’t yet buy back stock.

It’s been a disappointing stock. Sometimes, that happens. The stock has experienced other pressures in a short period. That’s where you ask yourself: ’Do I really believe in my framework?’

It’s also in a discretionary bucket, and people think we’re going into recession.

We are currently in an inflationary climate and a crisis fuelled by the Russia-Ukraine war. What’s your view of the market over the coming months?

Russia is uninvestable for us. It’s always been uninvestable for me. When I was at university, I had a banking professor who said: ‘The first thing you have to worry about is the return of your money, before you worry about return on your money.’ If you buy something in Russia, you don’t own it. Putin owns it.

We looked to react to what Russia does by finding the places that we thought would drive higher returns in those businesses. For example, we bought a company called Nutrien, which is the largest potash fertiliser miner in the world, located in Canada. Some 40% of the world’s potash and nitrogen comes from Belarus and Russia and so that was going to be cut off from the market. Agricultural prices were going up, which means fertiliser prices would go up. It takes time to fix these shortages.

If you buy something in Russia, you don’t own it. Putin owns it

In terms of what I think about the current climate – we are all boiled frogs. Covid has boiled us.

Everyone bought a puppy and everyone bought a Peloton. It was this strange mass consumer behaviour, eight billion people all doing the same thing at the same time. They stopped using Uber and Lyft and went and bought a new car. They stopped using public transport. They downloaded Zoom. They bought three PCs. They got a new phone. They got a new camera. They got four different pairs of headphones. They did all these certain things that were very predictable, and they happened en masse.

What’s happening now is all this inflation. Around half of this is still being driven by Covid distortions.

I put the Fed into that as well, but the Fed is also reacting to Russia. The Fed took away all price discovery when they cut rates. No-one knew what anything was worth because if you discount cashflows at zero, you get massive dilutions.

Now the Fed is raising rates and we’re seeing behavioural change. The Fed’s slowing the economy dramatically. We’re probably in a recession, but a weird recession because there are some areas of the market that are still doing really well.

We’re also in a weird recession because there’s no credit problem. Nobody borrowed any money, both consumers and businesses. The high-yield market looks really good. There are some small pockets of high yield that are at risk, but a lot of the high yield market is energy companies and they’re printing money. So they’re not going to default.

When the Fed slows, you’re going to want to have bought a bunch of great assets that are on sale now. I’m talking about things like [US mass market broker] Charles Schwab, which is trading at 13x earnings and there’s no credit risk. It benefits from higher rates. It consolidated the industry. It’s on the right side of change.

China will likely stimulate its economy next year as it comes out of zero-Covid. So that also should act as a growth shock absorber next year.

We’re not going to have 5% or 6% inflation a year from now. I expect inflation to be 2-4%.

When the Fed slows, you’re going to want to have bought a bunch of great assets that are on sale now

You seem quite optimistic.

It pays to be optimistic! Think about equity markets over the last 100 years. Did you ever become a big winner by being pessimistic?

I’m perfectly willing to sell stocks that are going down, but if I buy a great business at a really good valuation that has accelerating returns, the chances that I don’t make money are low.

Jonas: Another elite manager, JP Morgan’s Felise Agranoff, called her process a ‘differentiated perspective’. Do you believe that being a contrarian enables fund managers to excel?

Yes, alpha is always contrarian because, whether it’s that a stock can keep going up or whether that stock stops going down, it’s always different from the pack. I don’t want to be in the group and I’m not comfortable if everyone is agreeing.

It sounds similar to what Charles Mackay called The Madness of Crowds more than 150 years ago?

It is, because people feel safe going down together. We wrote a piece in April 2020 called ‘Still comfortable being uncomfortable’. We said, ‘We don’t know what’s going to happen, but these are great companies and they’re cheap and you need to act.’ People were terrified.

Out of the office