The foundation for multi-decade investing

9 September 2019

GLTUStoryTopHighlight

It’s a good time to be a proper investor, it’s a good time to be a long-term unconstrained investor.

Foreward

Three years – an important milestone

We aim to find attractive stocks that we want to hold for the long term – like business owners, rather than stock market speculators.

These stocks are typically businesses with strong franchises, pricing power, high returns and good growth profiles, where the market’s short-term focus has failed to properly capture their compounding characteristics. This is the essence of our Long-Term Unconstrained Strategies, of which our Global (GLTU) strategy has marked its three-year anniversary, with our International (ILTU) strategy is approaching it’s fourth anniversary. Reaching this important milestone is an ideal time to look back at the journey travelled, looking forward to the journey ahead and the ambition we have to deliver further consistent performance for our investors. This is an exciting milestone to have reached, especially given that over this period, the strategy has delivered strong and consistent performance, and exceeding the peer group median across all periods*.

What is particularly exciting, in my view, is that we have delivered strong performance against the broader market, our peers and the quality index** – which is where we are focusing our research work. To me, it is important to ensure we deliver true alpha – that is, alpha versus the narrower part of the market in which we operate. Only by doing so can we truly claim to possess the stockpicking skills our clients demand.

Our aim – to be the most respected

Our GLTU and accompanying International and European strategies have developed from its ‘older cousin’ the Asia Long-Term Unconstrained strategy, which was launched in 2008. In the past four years we have built the franchise and launched various global and international long-term unconstrained sister portfolios – with European offerings established in the last 12 months.

Our ambition for the LTU franchise is not simply to grow assets under management, or even to be ‘Number One’. We aim to become the most respected investment team in the marketplace. This will mean we have delivered a good outcome for our investors, helping them achieve their return targets. This is what drives us to seek stocks with attractive upside every day of the week.

Reaching our goal

There are two essential ingredients in order to achieve this ambition of being ‘most respected’. The first, naturally is performance, as this is the reason investors entrust their assets to us. However, the emphasis is on consistency of performance. The second, is a structured and leading-edge investment process, to ensure performance is repeatable. In my opinion, you can’t have one without the other – at least not on a long-term basis.

Investing in excellence

In a market where investors increasingly focus on big data, we prefer to develop smart fundamental data, which gives us superior insights of a business’s long-term potential, rather than the short-term focus that big data inevitably brings.

Over the past 12 months we have been active in introducing innovative fundamental data analytics to further enhance our investment process, in terms of enhanced screening methodologies, additional accounting screens, and a more flexible approach to identifying the stocks we believe have sustainable growth characteristics. We have continued to push ourselves to innovate with the hope of leading not just us, but the industry, forward. The improvements are a crucial part of the journey we have already taken, and make the road ahead an exciting one for us to travel as we aim to deliver superior alpha to our clients on a consistent basis, while ensuring we continue to seek opportunities to improve.

It’s a good time to be a proper investor, it’s a good time to be a long-term unconstrained investor.

Part I) Long-Term Thinking, Long-Term Results

Strong performance since inception

The first three years for our Global Long-Term Unconstrained strategy have been successful by any measure. It has achieved its goal of long-term capital appreciation, by returning 67.1% since inception.

Not only that, the strategy has outperformed an indicative global index, the MSCI ACWI, and has been in the top decile for each period over the three years. It has also outperformed the quality index, a narrower part of the market where our research work is focused. This, in our view, is a better demonstration of our stock-picking skills.

GLTU Performance versus the index and quality since inception

GLTU MSCI ACWI NR ex Australia MSCI ACWI Quality NR
One year (%) 23.0 11.3 15.0
Two years (% p.a.) 19.8 13.1 16.5
Three years (% p.a.) 19.3 21.5 24.7
Since inception (% p.a.) 15.8 11.4 13.3

Outperformance of peers

Quartile Percentile
One year 1st 2
Two years 1st 5
Three years 1st 5
Since inception 1st 5
The strategy has outperformed an indicative global index, the MSCI ACWI, and has been in the top decile for each period over the three years.

The key elements behind performance

How has this been achieved? We believe being longterm and unconstrained in our mindset allows us to deliver strong performance.

Long-term & unconstrained

Focusing on finding the most attractive quality growth investment opportunities in the market, and harnessing their compounding characteristics has helped us generate the strong performance to date. With a 5–10 year time horizon, we look to buy and hold stocks that we believe have a strong upside potential over the holding period. Meanwhile, an unconstrained approach allows us to invest without index-exposure constraints, permitting us to avoid areas of the market where we see limited potential for companies to create value.

…But the story of our LTU franchise stretches back much further than ILTU’s inception date. We can trace it back to the original premise of its ‘older cousin’ Asia Long- Term Unconstrained (ALTU)…

Consistency of performance

We only focus on quality growth stocks. We believe that a persistent focus in this area is a reassuring feature for our investors. We do not try and time the market, nor do we try and shift exposure to capture style rotations, which are notoriously difficult to predict, both in terms of timing, duration and magnitude. The other aspect to ensure consistency of performance is our emphasis on portfolio construction - it is an important focus, to ensure that our risk exposures are deliberate and appropriately sized.

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All of this is underpinned by fundamental research analysis leading to the highest-conviction investing.

…But the story of our LTU franchise stretches back much further than ILTU’s inception date. We can trace it back to the original premise of its ‘older cousin’ Asia Long- Term Unconstrained (ALTU)…

Part II) Capitalising on Success

How we applied a successful strategy targeting long-term growth in Asia to develop a proposal for global equities.

Success in Asia

In 2008, the Asia team launched the ALTU strategy, designed to meet the needs of investors who were attracted to the Asia ex Japan region’s high levels of economic growth, but who were aware that region’s potential was not always matched by the returns of stock market indices.

The solution was to create a strategy which aimed to be a long-term owner of the region’s quality businesses, which are genuinely able to grow their value over time. This approach needed to:

  1. target businesses which could grow and deploy capital without diluting returns;
  2. break from the confines of a market-index construct, to recast risk as being a diminution of shareholder value and permanent loss of capital;
  3. take a genuinely long-term view on each investee company’s development prospects.

Since inception, ALTU’s central premise has been borne out. It has delivered returns commensurate with Asia ex Japan nominal GDP growth, as well as a higher annualised return than the broader market (MSCI AC Asia ex Japan).

A natural progression

But what about global equities? Just as Asian benchmarks were not fully reflecting the growth potential of the region’s best businesses, we felt the global markets also employed an excessively short-term focus and were ignoring the potential for companies to create long-term value for shareholders.

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It was a natural evolution to explore how the long-term unconstrained philosophy would work on a global scale. We believed by investing in high-quality companies that can deliver strong, long-term growth through their compounding potential, the Long-Term Unconstrained strategies could generate long-term risk-adjusted returns in excess of the broader equity market.

Creating value

The key to strategy’s approach has always been value creation, how over time a business improves the worth of its goods and services – which in turn will create better value for shareholders as their stake in the company appreciates.

As such, the strategy targets companies which demonstrate sustainable growth, generating a return on invested capital (ROIC) greater than its weighted average cost of capital (WACC).

In creating the strategy, it was our belief that the market is fundamentally myopic and frequently undervalues the compounding characteristics of quality growth companies. In-depth analysis of these companies, and targeting those that can demonstrate sustainable growth, would help us generate alpha with a lower risk profile over the long term.

In creating the strategy, it was our belief that the market is fundamentally myopic and frequently undervalues the compounding characteristics of quality growth companies.

Part III) Committed to Investment Excellence

How we’ve refined the investment process to take the strategy to the next level.

Continuous improvement

The most important aspect to maintaining consistent and strong performance is a structured and innovative investment process. Just as LTU has evolved from the original ALTU strategy, so we have continued to enhance the screens and frameworks which we use to research and construct our global portfolios.

1 Screening for the right investment ideas

1) Screening for the right investment ideas

We look for quality growth, companies that have historically generated a high level of ROIC on a consistent basis and have the potential to sustain high returns while retaining the compounding growth characteristics we look for. These companies will have a market cap of more than US$3 billion and low gearing.

2 Screening for the right investment ideas

2) Fundamental research

Much like a pilot goes through a systematic checklist before every take off, we examine a business’s sustainability and quality, via a checklist of eight criteria, analysing, environmental, social and governance (ESG) factors, corporate ethos, financial strength, growth drivers, the industry the company operates in, the company’s returns profile and its accounts. A crucial part of this highly research-driven approach also involves the integration of ESG analysis in the investment process, enabling investors greater oversight of the various risks that may impact the future economic value of companies.

3 Portfolio construction

3) Portfolio construction

Just as important to successful portfolio management as screening and research is how the portfolio is constructed. Enhancements to our processes in the last 12 months help us ensure that we are able to build high-conviction, concentrated, but diversified portfolios. This area is an important step that, in my experience, is often missed by other investors who describe themselves as stockpickers.

Not resting on our laurels

The key to success in our LTU strategy, I believe, has been the ability to invest in quality growth stocks where we have high conviction in their ability to perform over the long term. For continued success, however, it’s vital that we continue to enhance these processes when necessary in the future. For a strategy with a compelling performance record such as ours, one which is ranked in the top decile over the three years since its inception, some might consider this unnecessary. But for me, as we’ve already demonstrated in the enhancements since inception, analysing and refining our processes is absolutely the best way to continually enhance our ability to deliver long-term value for our clients. This, I believe, will allow us to continue to deliver outperformance well into the future.

The key to success in our LTU strategy, I believe, has been the ability to invest in quality growth stocks where we have high conviction in their ability to perform over the long term. For continued success, however, it’s vital that we continue to enhance these processes when necessary in the future.

Long-term thematics

The themes a company is exposed to are critical to understanding the future drivers of its growth and returns potential. In my view, building a portfolio focused solely around the more ‘conventional’ market exposures – such as sector or country is essentially looking in the rear-view mirror.

We therefore assess how our portfolios are positioned to harness three long-term megatrends – demographic change, the future of technology and resource scarcity.

Through this analysis we are able to look at the world in terms of long-term growth trends, assessing dynamics and opportunities. As such, we are able to better understand how our portfolios are exposed to the various themes that feed into these long-term mega-trends, and this enables us to point our research efforts in areas where we need to do more work.

Source: Martin Currie and FactSet as at 30 June 2019. Representative Martin Currie Global Long-Term Unconstrained account shown

Company classification

We assign each company a classification based on its quality and growth attributes. Ranging from high cashflow mature companies, steady value creators, future disruptors and long-term value destroyers. Quality is measured by a company’s ROIC, while growth is measured using the earnings per share (EPS) FY2. The classifications allow us to maintain a diversity of business models that can either offer more defensive or outright growth characteristics to deliver a more consistent return profile.

A holding moving into the ‘danger zone’ is an automatic flag to reassess the investment thesis and consider whether we need to exit the holding. Long-term value destroyers would not make it past our initial screens.


Story of GLTU Chart 2 - Company Categories

Source: Martin Currie and FactSet as at 30 June 2019. Representative Martin Currie Global Long-Term Unconstrained account shown

We assign each company a classification based on its quality and growth attributes. Ranging from high cashflow mature companies, steady value creators, future disruptors and long-term value destroyers.

Industry lifecycles

We assess companies by where they are in the industry life cycle, be it; introduction, early growth phase, accelerating growth phase, maturing growth phase, declining growth phase, or renewal. Companies would typically have different characteristics depending on which part of their industry life cycle they are in. For example, a company in the early growth stage will have high sales growth, but is likely to have low profitability due to a lack of scale – ROIC will also therefore be lower due to the ongoing need for a high level of investment. Whereas a firm in the maturing phase would see sales growth slowing as the company matures, profitability improve as scale reaches its peak, while cash flows and ROICs improve strongly as the investment needs decline.

GLTUStoryAbstract4

Story of GLTU - Chart 3  Growth phases

Source: Martin Currie. Data is shown is representative to demonstrate the stages we classify in a company’s lifecycle.

Geographical revenue

Finally, we find breaking down the portfolio by the geographic source of revenue provides greater insight than constructing the portfolio based on a stock’s country of listing. In an increasingly globalised and connected world, companies across the market-cap spectrum are growing, or are more dependent on overseas revenues. By analysing this we ensure the portfolio is sufficiently exposed to the world’s growth markets while not taking undue risk. As this is an unconstrained portfolio we are neither building nor measuring our country exposure in terms of index weights. What is important to us is where the underlying companies we invest are directly exposed to, and as long-term investors we are more interested in longer economic cycles. Therefore, this is a greater risk management tool than an index active or underweights that are more reflective of shorter-term market risk that we seek to invest through.

Geographic source of revenue (%)

Source: Martin Currie. Data is shown is representative to demonstrate the stages we classify in a company’s lifecycle.

Source of revenue versus MSCI ACWI

Story of GLTU - Chart 4  Relative exposure

Source: Martin Currie and FactSet as at 30 June 2019. Representative Martin Currie Global Long-Term Unconstrained account.

Successful portfolio management is a fine balance between picking the right stocks and portfolio construction – that is, building portfolios that are diversified, with deliberate positioning and no unintended risk exposures.

It is a miscomprehension that the job is only about picking stocks. An equal emphasis on portfolio construction is required, employing the same high-quality data from the research process. This allows us to build robust portfolios, capable of capturing future growth and delivering long-term risk adjusted alpha to our clients.



*Past performance is not a guide to future returns.
Source: Martin Currie and eVestment, performance data is shown to 30 June 2019; All data presented is the Martin Currie Global Long-Term Unconstrained US$ composite. Figures are quoted gross of fees. If the effect of fees and other such expenses where included, performance would be reduced. The figures provided include the re-investment of dividends. Inception: 30 June 2016. Please note that this strategy is unconstrained by any benchmark. We show it against the MSCI ACWI for illustrative purposes only. eVestment peer group is the Equity Global All Cap Core Equity. Performance displayed is supplementary to the GIPS compliant information at the end of this document. The performance record noted above is clear representation of the strategy’s performance over the period shown. Performance information since inception in complete 12 month periods is available upon request.

**MSCI ACWI Quality.


Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.