Profits over prophets: Seeking opportunities and mitigating risks in turbulent equity markets
Global Investment Insights
with Sunil Thakor, Senior Portfolio Manager, Research Analyst, Sands Capital
Sunil has been with Sands Capital since 2004 across a number of roles and currently holds the position of Senior Portfolio Manager, Research Analyst. Sands Capital is an active, long-term investor in leading innovative businesses globally, combining rigorous fundamental analysis with creative thinking to identify high-quality growth businesses that are creating the future.
Sunil shared some of his unique insights on what is driving global equity markets right now; the types of businesses investors ought to be looking to capture in their portfolios, which are poised to play an important role in building the future we are heading into; he discussed themes and trends that are likely to drive long-term growth in equities; and, explained how much emphasis investors should place on where valuations sit relative to fundamentals when deciding where to allocate capital into global equity markets.
Q. What is driving equity market valuations at the moment and how do you view where valuations sit relative to fundamentals?
A. Currently, markets appear to be sentiment-driven, with news about vaccination progress, reopenings of economies, and short-term economic data driving the market.
In the first quarter of 2021, fundamentals dislocated from prices on many occasions, as we saw stocks for many high-growth businesses sell off despite positive quarterly results and guidance.
As a long-term, fundamental investor, my focus centres more around the five-year earnings trajectory for businesses than a stock’s performance over a day, quarter, or even calendar year.
While many of the businesses we are invested in benefited amid the pandemic due to their digital nature, there is evidence that their business prospects also improved during this time. In many cases, their competitive moats widened and leadership positions strengthened, enabling even stronger growth potential than expected pre-pandemic.
Q. What are some common characteristics of businesses that tend to sustain growth over longer periods of time?
A. Time and time again, through rigorous research and analysis, businesses that are capable of sustaining above-average growth over long periods of time have shown a tendency to share several common characteristics:
They are market leaders in promising business spaces,
They have significant competitive advantages which helps them maintain and grow that leadership,
They are led by strong management teams with a clear mission and a value-added focus,
They exhibit strong balance sheets and transparent business models; and lastly,
They have rational valuations relative to their long-term growth prospects.
Q. What themes or trends do you seek to capture in your global equity portfolios that you expect to drive long-term growth?
A. Businesses that meet the criteria often fall into one of two categories: innovators and disruptors, and businesses delivering needs over wants.
Innovators and disruptors create or benefit from secular change within their industry. They often make their own weather and grow much faster than peers. Today, we see significant innovation and disruption driven by digitalisation, a trend accelerated by the pandemic. The expectation is that digitisation will proliferate faster than pervious technology-driven shifts (e.g. the telephone, electricity, personal computers), and with unprecedented scale, touching nearly every aspect of commerce and daily life. Businesses can reach more customers faster than ever, a dynamic that is expected to lead to quicker margin expansion for the select few businesses driving and/or benefiting from the digital shift.
Businesses delivering needs over wants can often consistently grow at above-average rates and remain resilient during economic and market downturns. Examples include convenience retail, broadband connectivity, pest control and hygiene.
Q. How much should valuations matter to investors when deciding where to allocate capital into global equity markets?
A. Valuations matter for investors with short time horizons, or for investors in portfolios that track broad indexes.
For investors that seek to selectively own businesses and hold them over a long time horizon, history shows that fundamentals (earnings growth and dividends) are a far larger contributor to returns than multiple expansion.
Importantly, the math of compounding can enable leading businesses to outgrow seemingly high near-term valuations. Mathematically speaking, a business needs to achieve merely 15% annualised earnings growth over five years to offset a 50% P/E decline.
In my experience, high valuation has rarely been the root cause of a bad investment outcome. Typically, a bad outcome is due to a mistake in the analysis and the business not tracking expectations, with high valuation as a secondary factor.
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VIRTUAL ROUNDTABLE - REGISTER
WHEN: Thursday, 13 May 2021 from 10am-11.15am SHARP (AEST)
WHERE: Dial-in via video call for an interactive discussion and Q&A with your peers.
SEEKING OPPORTUNITIES AND MITIGATING RISK IN TURBULENT EQUITY MARKETS
The market is increasingly driven by headlines, such as vaccine progress, political narratives and speculative excesses that distract investors from what matters most to achieving
long-term return outcomes and buying the index can carry heavy opportunity costs. The speakers will discuss how investors can tune out the noise and look beyond short-term events to find growth while mitigating risk by investing in quality, and explain how digitalisation is driving the next generation of market leaders
Points to be addressed:
Overview of current market dynamics playing out across global equity markets
Understanding why valuation matters less than investors think
Assessing the opportunity cost of buying the index over the long-term
Steering your equity portfolio towards where growth lies: identifying enablers and beneficiaries of digitalisation
Importance to investors of thinking like business owners
Why an in-depth understanding of the value chain of a high-quality company can present new opportutnities
How to be comfortable with risk: case study examples in capturing opportunities
NOTE: Participation is strictly limited in number and open only to senior representatives of asset owner organisations.
SUNIL THAKOR, SENIOR PORTFOLIO MANAGER, RESEARCH ANALYST, SANDS CAPITAL
Sunil is a Senior Portfolio Manager, Research Analyst at Sands Capital and has been with the company since 2004.
Prior to that, he spent five years with Charles River Associates as an Associate and Analyst across their Los Angeles and Boston offices.
Sunil holds an MBA from Columbia Business School, Columbia University and a BA in Economics-Mathematics from Colby College. He is also a CFA charter holder.
Disclaimer
The views expressed are the opinion of Sands Capital Management and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change.
This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. Readers should not place undue reliance upon these forward-looking statements.
There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results.
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