CIO Insights: Market Downturns Create Opportunities for Active Managers

Market downturns create opportunities for active managers

There’s nothing better for long-term investment returns than an opportunity to buy great businesses at prices significantly less than what the companies are actually worth. It’s those highly volatile times in the market, when all stock prices seem to be declining, that the shares of solid businesses are perceived to be on sale. That’s the good news of market downturns and the volatility that typically accompanies them.

Read Davidson’s full Q2 2016 CIO Insight:
Market Downturns Create Opportunities for Active Managers

We do understand how downturns and volatility can be upsetting. Market declines can be discouraging and even cause panic. It’s important to understand that large moves up or down may represent emotion and uncertainty but do not necessarily indicate widespread fundamental weakness or a destructive pullback. In times like these, we strive to keep our emotions in check and rely on proven investment processes without giving in to the understandable fear that creeps in when markets go awry.

A Focus on Quality

Our investment strategy is based on the belief that markets are not always efficient. There are opportunities for skilled managers to capitalize on mispriced stocks of attractive companies. We accomplish this through fundamental research that helps us identify those companies.

We focus on companies with stronger balance sheets, quality assets, and defensible franchises. We invest in companies we believe have the financial means to work through issues causing their stocks to be undervalued. These companies may be subject to the whims of the market, but we believe they are better positioned to withstand downturns and prosper over the long term.

Volatility Creates Opportunity

Volatility allows us to sift for opportunities amid the wreckage left by the market’s frenzied trading. We take advantage of market volatility to selectively buy stocks meeting our criteria. When the markets gyrate, there is a tendency to “throw the baby out with the bath water.” Stocks of higher-quality companies have their prices pushed down along with the stock of lower-quality companies.

For example, stocks of strong industrial companies have been unduly punished in recent market downturns. Union Pacific’s and Norfolk Southern’s stocks fell in recent quarters to levels not seen since 2013. We believed those railroads were notable examples of companies with compelling value and were temporarily mispriced.


The market is volatile largely due to four headwinds. Oil prices collapsed from mid-2014 through early 2016. While good for consumers, the severe decline turned the energy market upside down. China endured one of its slowest growth years in 2015 and continues to struggle, along with most emerging markets countries. Our own Federal Reserve added to the uncertainty by starting to normalize interest rates in late 2015, but then pausing additional increases due to global turmoil. When combined, these factors induce an overall fear in the markets and the potential for an earnings recession.

The Good News

There is a silver lining. The U.S. unemployment rate has been about 5% since late 2015 and core inflation has been steady between 1.5% and 2.0%. Consumers are holding relatively low levels of credit card debt compared to amounts seen before the 2008 Financial Crisis. U.S. banks, an important part of our economic engine, are better capitalized due to the reformation that occurred after 2008. Importantly, we strive to exploit market volatility to leverage our time-tested approach of building exposure to companies with long-term value and exiting holdings of companies that no longer meet our criteria.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

The opinions expressed are those of Phillip N. Davidson, CFA, and are no guarantee of the future performance of any American Century Investments portfolio.

For educational use only. This information is not intended to serve as investment advice. Past performance is no guarantee of future results.