Five FAQs on how we pick global companies in a rollercoaster environment

Here, I talk through some commonly asked questions about our investment thesis and selection process for – what we consider to be – exceptional global companies.

1. How are macro themes incorporated into your investment process?
We do not seek to take macro views, indeed we actively avoid companies that are overly exposed to economic conditions and the vagaries of the economic cycle. We believe that cyclical, mature, low-return businesses make for poor long-term investments as they generally struggle to increase their intrinsic value over time. By definition, investing in overly cyclical and low return businesses can only ever really be considered a short-term investment and only at the opportune stage of the cycle), which is difficult to time and more akin to speculation than true investing in our view. Furthermore, cyclicality introduces additional and often material volatility to cashflows, a trait that we also aim to avoid.

2. What are some fundamentals you look for when assessing a company?

We prefer predictable business models where demand growth is structural in nature rather than cyclical, which helps explain in our view the more stable portfolio cashflows of our portfolio vs the investment universe thus far, and our faster than market growth trajectory since inception.

Chart 1. Growth in Fundamentals (USD)¹

¹Past performance is not a reliable indicator of future performance. The inception date of the AMP Capital Global Companies Fund’s Class C which is now available for investment, is 30 March 2017. Total returns are calculated using the net asset value per unit for the relevant month end. This price may differ from the actual unit price for an investor buying or selling an investment. Actual unit prices will be confirmed following any transaction by an investor. Returns shown for the Global Companies Fund are before (gross) the deduction of fees, are before tax and assume all distributions are reinvested. Whilst the actual performance of the Fund is based on net asset value, which reflects the traded share prices of the Fund’s underlying share portfolio, with the Fundamentals we are seeking to show how the underlying fundamentals (being earnings and dividends) and valuation (multiple) of the Fund’s share portfolio have performed over the same period. Source: AMP Capital, Bloomberg to 30 September 2020. To see the net of fees returns for the Global Companies Fund, please visit ampcapital.com

We do seek structural growth trends that allows what we consider to be exceptional companies reinvestment opportunities at high returns on capital, even during tougher macro environments. We expect these structural trends to continue to take economic share over the long term and examples include store-based retail to ecommerce retail, off premise computing to cloud based deployments, robotic surgery, cash payments to electronic payments, small molecule drugs to biologics, rising living standards, digital connectivity and many more.

Importantly, growth trends (or themes) cannot in and of themselves create value, indeed structural growth trends can be a recipe for permanent value destruction if not treated carefully (shale gas being just one example). It’s only when these trends meet the pillars of competitive advantage (sustainably high returns on capital), strong capital allocation (careful stewardship to preserve and optimise long term value creation), and predictability (stable, frequent and ongoing demand), that growth can be reliably translated to stable and superior compounding of cashflows over the long term. In our view, this is the only way that companies can consistently raise their intrinsic value over time. Growth trends (or macro themes) are thus an important contributor to the wealth creation framework, but are useless in isolation.


3. Given the tech sector aligns with your philosophy of displaying structural pathways to growth, does this suggest a permanent overweight to the sector?

Technology is and always has been at the forefront of companies driving innovation, building new markets, taking economic share and displacing incumbent practices, but it is an inhomogeneous sector based on many different business models, multiple end markets, customer types and growth drivers. In our view it’s the most diverse and dynamic sector and our own exposure covers end markets such as marketing, semiconductor R&D, drug development, companion pet care, industrial R&D and product design, industrial applications such as connectivity and sensors, factory automation, smart cities, payments, retail, growth in data, healthcare to name but a few. The customers that underwrite the rents to our technology-based companies are very diverse with little overlap.

What is common to all our positions that are connected to 'tech' is that they are all strong representatives of the wealth creation framework - highly profitable and embarking on their own independent and idiosyncratic journeys that will be the ultimate determinant of their future cashflows and investment success. We do not invest in what we see as unprofitable ‘trust and hope’ tech stocks.

4. Is it fair to say the investment process is less valuation sensitive than many peers due to the long investment horizon? If so, is the fund more susceptible to de-ratings?
On a short-term basis perhaps, but we will never invest in a company that we do not believe ultimately offers good value and with a clear path to double digit returns over our time horizon.

We have sold entire holdings due to valuation and waited patiently for price corrections in stocks where valuation had previously prevented us from entering a new position. Q4 2018 as an example presented opportunities to add two new stocks to the portfolio from our bench that were previously too highly priced to warrant inclusion.

Equally we have avoided investing in what we would consider to be exceptional companies where we cannot see that clear path to double digit returns over our timeframe due to multiple headwinds.

5. What strategies do you think could be helpful for investors in the current climate?

Markets have responded to a rapid, coordinated and sizeable policy response to the pandemic, a lower discount rate for equities makes sense in this context, but investors can’t live off rerating's forever.

We have seen that fundamentals drive share prices long term – so we look for companies with stable fundamentals, high incremental profitability and access to growth trends that are less cyclical by nature. These companies we think are likely to increase their intrinsic value over time.

There are many trends that investors can participate in, but remember that trends themselves are not enough to make a good investment. You need the other pillars too to unlock superior and consistent cashflow compounding.