In the first of a new podcast series, Zehrid Osmani, Head of Long-Term Unconstrained offers you his opinion on:
- Upside/downside - why our portfolios are beating the market
- Why supply chain analysis is our immediate focus
- A summary of why portfolio construction is key – not just stock selection
- Uncertainty and fear in markets - the opportunity for long-term investors
Sign-up for the next, exclusive podcast that will feature:
- Market update – our response and action
- New trades - the upside based on current valuations
- Structural demand - how we plan to take advantage
This is a first podcast, one of a series that we will be releasing over the next few weeks to update our investors about market thoughts and also fund performance. I wanted to kick off this podcast based on two parts, first one is to give you an update on the market and our views around it and secondly to talk to you a little bit about what we are doing in Global Long-term Unconstrained.
Starting with the market, clearly this is an unprecedented crisis brought up by this pandemic risk of the coronavirus and it is putting major downside risk to global economic activity starting with China and Asia, but now spilling over into the rest of the world of which Europe and the US in particular.
This is quite unprecedented in so much that this both a supply and a demand shock simultaneously. Both of these shocks are almost globally synchronised as well. There’s major downside risk to GDP estimates China we think could dip well below 5% GDP growth and in Europe we think that region will be flirting with recession again notably Italy and Germany, Japan we think will be in that camp as well. Finally, as far as the US economy is concerned this should also be a sharp slowdown in each one as a result of the lockdowns that are being imposed.
What it means in terms of recoveries is very difficult to assess at this stage. There are sizable policy responses, both monetary and fiscal, it is almost globally synchronised and you can see that it is very sizable in nature. We are talking about almost 10% of GDP in some instances.
How fast these policy responses make their way into the economy will in some part dictate how quickly we recover from this sharp slowdown. In terms of earnings for corporates clearly there is sizable downside earnings risk in the near term. There have already been may profit warnings from companies across sectors, some companies are altogether suspending guidance, so clearly very difficult to get a sense for the picture near term, but we think that again we need to look at it from a long-term perspective. This is an exogenous shock, we ventured into that shock with an economy in a good shape generally. Private sector balance sheets stronger than they were ahead of the global financial crisis and policy responses are very rapid and very sizable, so there is a chance as we get back to normal that the economy recovers quite rapidly. So we would be willing to look at this market pullback on fears of earnings downgrades and recession risk as an opportunity for long-term investors to get involved at levels that are now becoming much more attractive than they have in the past.
We spend a lot of time looking at the stocks in the portfolio and assessing any downside risk as well as ensuring that the stocks we have can withstand the current recessionary environment that we are entering. We are generally comfortable, we spend a lot of time assessing balance sheet strength in particular and also looking at supply chains, dependencies in particular, and assessing the risks along the supply chain from any of its holdings, whether its suppliers that are running out of business, or whether its customers that are not able to pay the bills, and therefore give rise to bad debt risk. So an important part of what we are doing and we will be updating our listeners in the next few podcasts around that work and the outcome of that.
Turning to how the portfolios have behaved, and I am talking here about all the portfolios that we manage in the global long-term unconstrained investment philosophy and just as a reminder for our listeners we have got Global Long-Term Unconstrained products, European Long-Term Unconstrained, US Long-Term Unconstrained and also for US investors we provide International Long-Term Unconstrained products, so we are able to cater to various investing needs. What we are pleased to see from the performance through this volatile environment, is that portfolios have been holding up very well, and in fact we have been providing a lot of downside protection to our investors. At the same time in rising markets we have been able to capture more rises over our management period and since inception, so very attractive upside and downside protection on the funds in the way we have shaped them and the reason for that is that we are investing in sustainable business models with an attractive quality gross profile, strong balance sheets, quality management and companies that generally are leaders in the space that they operate in, typically that space they operate in tends to be niche and tends to be well protected from competitive pressures and therefore gives this company strong pricing power and the ability to generate higher returns and strong compounding cash flows. We think as a result of all these characteristics the portfolios have behaved well in a sharply falling market, but at the same time these companies have got attractive long-term gross prospects and therefore are able to keep up well in rising markets as well
A quick word on activity on the portfolio as well, as long-term investors we do not tend to change the shape of the portfolio much, and in this sharp pullback in the market, we have been assessing upside to price targets, we have obviously been assessing the downside risk to our forecast near term, but the important aspect to mention is that on a long-term basis the picture does not change much in terms of profit and cash flow outlook for the holdings we are invested in. Therefore, we have kept the shape of the portfolio broadly unchanged. We have been looking for opportunities that are more structural in nature and it is something that I will be touching in one of our next podcasts, around what opportunities do we see from this pandemic crisis in terms of changes that will be structural in terms of demand. Something that we are quite excited about because we can see some attractive new ideas potentially coming through. I would like to now turn to the actual philosophy of Long-Term Unconstrained and the way we run our client’s money. Very quickly a background of myself, I joined Martin Curie in May 2018 to take over the leadership of Global Long-Term Unconstrained, to me the excitement of joining of Martin Curie is at focus on long-term unconstrained investing and focussing on building portfolios on high conviction, best ideas away from index exposures
We think that is the best way to harness the potential alpha that we see in the market and to manage our client’s money on a long-term prospective which we see as 5-10 years. The 3 important cornerstones of what we do is that we are long-term unconstrained investors which we have already defined, with quality growth in the type of stocks that we look for and we find them using fundamental research that we do on a systemic basis. We go into a lot of detail in our research analysis and we certainly have a lot of innovative proprietary fundamental research tools that help us pick the right stocks and build portfolios that are high conviction but diversified at the same time.
Our investment process is a 3-step process, first step is the idea generation that is where we screen for quality gross ideas and from that we move into step 2, the invest fundamental research which is where we are analysing companies that we want to invest in a very great deal of detail. We then move to step 3 which is building portfolios that are high conviction but diversified at the same time. The importance of that step 3 cannot be underestimated. Stock pickers typically focus on step 1 and 2, we think step 3 portfolio construction is just as important as step 1 and 2, and in fact is where we deliver portfolios with no unintended risk exposures. In later podcasts, we will zoom in on some of these steps, but just to highlight the way we screen for quality gross ideas, we are looking for companies that have got sustainable business models, have got a high return on invested capital and that have got an attractive gross profile, strong balance sheets and generally good quality management. This permits us to focus our research efforts on genuinely good quality gross companies that we think will be able to have an attractive compounding characteristic over the long-term, which we typically see the market as missing the opportunity because of its focus on short-term earnings rather than the long-term picture.
In the next few podcasts, we will zoom in on step 2 and 3 specifically how we have a structured research platform where we systematically analyse all risks to an investment case and the third step which is building portfolios that are high conviction and diversified at the same time. At this stage, I would like to end this podcast by again coming back to the market conditions, yes there is a lot of uncertainty in the markets, there is a lot of fear as well in the market and that usually for long-term investors is a great opportunity to get involved. We think there are some very attractive stock ideas that we want to gain more exposure to or stocks that were on the bench that we are able to now find attractive upside and that we are able to therefore get involved in. Again, the importance of being long-term investors mean we can look through these short-term fears and this short-term recessionary environment we are going through and looking at picking stocks with great business models, strong cash flow characteristics, high returns and strong pricing power that will be able to withstand this crisis and will be able to come out of it as long-term winners in their industries, so with that being said we think being long-term investors is a great opportunity at the moment and we are looking forward to updating you on the rest of our investment process in some of our next podcasts, as well as giving you regular updates on market thoughts as part of that.
Thank you very much listening and for your attention.
Wishing you all a very good day.
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