A top fund manager shares how he built a portfolio that outperforms in bull and bear markets — and shares 8 of his favorite investments to make now (2024)

Despite all the changes in markets and the economy since August 2021, Erickson's track record has been a constant — as has his investing strategy.

"When we're thinking about macro, it's more from an adaptability, anti-fragility lens and constructing a portfolio that will be adaptable through a variety of different economic and macroeconomic environments," Erickson said in an interview with Insider. "And so we don't recalibrate the portfolio much year in, year out or rebalance it for different macro outlooks."

Target top-of-the-line stocks, but pay a fair price

Unlike many managers, Erickson only allows a few dozen stocks in his fund. His bottom-up stock selection process takes a careful look at each potential entrant to see if it's a high-quality business that can grow in any economic backdrop.

"We're looking for a combination of attributes with thresholds for each of those attributes being quite high, and that sets the profile of the fund apart," Erickson said. "It's on empirical measures, whether you're using style analytics tools or others. We have a much more statistically significant and consistent exposure to quality than our peers."

First, Erickson uses the eye test to ensure that a potential investment is differentiated from the rest of the pack. He's looking for a business' measurable, durable advantages — whether it's software code, patented technology, or global scale through a network built over decades.

Once he determines a business stands out among its competitors, he looks at its debt load and capital intensity to determine how it might fare in an economic downturn. But the best measure of a strong business is cash flow, Erickson said.

"We're focused on free cash flow per share as our measure of intrinsic value, and how that progresses through time is going to dictate whether or not we find the opportunity interesting," Erickson said. "All of the different attributes of our philosophy are built around increasing our conviction in the underlying progression of intrinsic value, again, as measured by cash flow."

Secondary metrics that Erickson uses include a company's internal rate of return (IRR) and enterprise value to EBIT or EBITDA. It's crucial to confirm that a stock is priced fairly relative to how much cash and earnings it will produce later to make sure all the good news isn't priced in.

"The critical thing is to find quality businesses, virtues in combination, and then not to overpay," Erickson said.

8 top investments to make now

Many US-based investors avoid international stocks entirely since the prevailing narrative is that the group is risky, given its heightened exposure to geopolitical conflict.

However, Erickson believes that's painting with too broad of a brush. Foreign stock indexes may have lagged the S&P 500 in recent years, but he said there are plenty of outstanding investing opportunities hiding overseas that can improve returns while diversifying a portfolio.

"For those that do have this home bias, that prefer the US, the competitive structure, the way that the economy is constructed, the US economy is replete with international businesses," Erickson said. "And so to participate in the US economy in a full sense, you need to own international businesses."

International stocks in four sectors look especially promising right now, Erickson said: consumer discretionary, consumer staples, healthcare, and information technology.

The portfolio manager said those groups have quality characteristics, are capital-light, and aren't overly dependent on external financing or the economy for their returns. Companies in these parts of the market can create growth on their own and often enjoy predictable recurring revenue.

One stock that Erickson loves is luxury goods maker Hermes (HESAY). The 186-year-old French fashion firm has a vertically integrated supply chain, he noted, meaning that it controls every aspect of its business. It's also less vulnerable in recessions than its peers, Erickson said.

"They have more waitlists for their handbags, and their clientele are the upper echelon of the affluent," Erickson said. "And so this creates an interesting asymmetry in their growth profile that they're more defensive than the typical luxury company in a market downturn but participate in all and sometimes more of the broader growth. And they do a very good job of balancing these paradoxes of scarcity and growth."

Defensive parts of the market like staples and healthcare also tend to hold up well in downturns since demand for their products and services doesn't usually wax and wane with the economy. He's especially interested in pharmaceuticals, medical devices, and healthcare services within that latter sector.

Erickson's largest holding is German software firm SAP (SAP), which is making a bigger push toward subscriptions with a multi-year conversion upgrade cycle for its enterprise resource planning (ERP) products. He believes that decision will drive stable sales for SAP for years to come.

Mastercard (MA) is Erickson's second-biggest position because it generates about two-thirds of its revenue outside the US. The credit card network has a massive competitive moat, Erickson noted, meaning that it's insulated from would-be competitors. It's also set to benefit from the continued boom in digital payments.

Lastly, semiconductor manufacturing titan TSMC (TSM) is a top-10 holding in Erickson's fund simply because it makes over half of all chips — including a staggering 85% of high-performance semis. An unmatched moat and rain-or-shine resilience makes TSMC a natural fit in the portfolio.

"To the extent that if an order is canceled and they have some capacity that frees up, there's a waiting list to get that capacity," Erickson said. "And so there's not much of a hiccup operationally when they do encounter some challenges. And so that speaks to some of the resilience characteristics that we look for."