Bob Doll wears two hats at Nuveen (NCB): He is chief equity strategist and manager of a suite of five Nuveen mutual funds, the largest of which is the $811 million Nuveen Large Cap Core (NLACX). In his strategy role, Doll, 64, writes weekly market commentaries and issues annual predictions that are widely followed by investors. After the market’s recent slide, which left the S&P 500 index (.SPX) trading about 15% below its 2018 peak, he is cautiously optimistic about the outlook for 2019. “I’m not a bear,” he says. “I don’t think we go straight down. The economy and earnings are too good. But a new market high isn’t close in the future.”
Investors might be less familiar with Doll’s money-management skills, but his investment approach and record also deserve notice. No matter his market calls, his funds maintain strict investment parameters. For example, Large Cap Core (NLACX) will always hold stocks in the Russell 1000 large-cap index (.RUI), even if Doll is bearish. “To win in this space, you need to have half a brain, a process that’s well-honed, and a lot of discipline,” he says.
So far, Doll is winning. Nuveen Large Cap Core (NLACX) has returned a cumulative 69% since its June 2013 inception, versus 53% for the average large-cap blend fund. What’s more, the fund has good risk-reward metrics, posting fatter returns than peers during market rallies and losing less during declines in the past five years. [Investors with a more negative than positive market outlook might prefer Doll’s top-performing Nuveen Equity Market Neutra l (NMAEX).]
Doll applies quantitative and qualitative analysis to Large Cap Core’s (NLACX) portfolio, a strategy fashionably known as quantamental, although he has been using it since the early 1980s. He works with three quantitative and 15 fundamental analysts to rank Russell 1000 stocks from best to worst. The two teams work separately, but Doll overweights only those Russell 1000 stocks that both teams rank highly. From that analysis, he builds a portfolio of about 100 stocks.
One rule regarding position size is especially helpful with risk reduction. The fund can’t overweight a stock relative to the Russell 1000 by more than one percentage point, nor underweight a stock by more than two percentage points. In practice, this still gives the fund plenty of latitude to be active, as only four stocks in the Russell 1000— Apple (AAPL), Microsoft (MSFT), Amazon.com (AMZN), and Alphabet (GOOGL)— have weightings greater than 2% of the index. Other than those four, Doll doesn’t need to have positions in other companies in the benchmark.
Underweighting, or eliminating some of the largest companies in the Russell 1000, is the most significant active bet Doll can make. “Once I worked with a veteran large-cap growth manager who reported to me, and it took a lot of me beating up on him for him to realize the biggest bet in his portfolio was not owning General Electric (GE), ” he says. “That was a time when GE was doing really well, but he didn’t get it: ‘I don’t own any GE. How can it be my biggest bet?’ he said. I don’t want my biggest bet to be the stock I don’t own and have that bite me.”
Consequently, Doll thinks a lot about the big tech companies that drove the market for much of this year. In the fund’s latest annual report, published in August, he noted that having too little in Amazon stock hurt returns. “We’ve been underweight for too long,” Doll says. “But the fact is, left to my own devices, I’d have zero in Amazon [due to valuation concerns], and it would be the biggest bet in my portfolio. But the risk-management rules we have in place prevented that from happening.”
As of Nov. 30 the fund had a 1.6% Amazon weighting versus the Russell 1000’s 2.6%.
Initially, Doll says, he used only a handful of factors for quantitative screens. Now he uses 56 factors, as quantitative analysis has become more competitive. Factors vary by industry; on a simplistic level, he will use the price-to-sales ratio as a valuation metric in the retail sector but price-to-book in banking.
There are also rules for sector and industry weightings. The fund can’t have more than a 10-percentage-point difference between its sector weightings and the Russell 1000’s, nor more than a five-point difference in sector subindustries.
Consumer-discretionary stocks accounted for 19% of Doll’s portfolio as of Nov. 30, versus the Russell 1000’s 10%. He is particularly fond of bricks-and-mortar retailers, which are responsive to the domestic economy. “The U.S. consumer is in pretty good shape,” he says. “Job growth and wage gains are beginning to pick up, and the savings rate is good for this point in the economic cycle.”
Doll likes Target (TGT) and Best Buy (BBY). “Amazon is gaining market share and giving bricks-and-mortar retailers a wake-up call, but they’re not all going out of business,” he says. “Target is spending a lot of money to remodel stores and now has better same-store sales, more innovation in merchandising, and more of a digital strategy.”
Doll added to his Target position in November, when the stock fell sharply after the company missed earnings estimates. He likes Best Buy because it is moving beyond in-store retail to tech support and web-based businesses, and closing unprofitable stores.
Energy accounts for 12.8% of Doll’s portfolio, versus 5.3% for the index. He favors refiners such as Marathon Petroleum (MPC), which has more pricing power because of pipeline constraints in Canada, he says. Yet Marathon shares have fallen 30% in the past three months as oil prices have declined. “The temptation is, ‘There’s a dog. I’d better sell it,’ but we were digging into the fundamentals and decided to add to the stock instead,” he says. “We have the confidence that the quantitative model and the fundamental research combined will win over time.”
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