The world is experiencing enormous change in 2020, precipitated by the COVID-19 global heath pandemic, but the impact of these changes will come to characterise the decade and have a profound impact on the economic and investment environment.
As ever change spawns both threats and opportunities. Some business models will not survive the new environment or will fail to adapt swiftly enough; others will thrive. We have identified seven investment themes that we believe are particularly relevant in the new environment and these will help guide our investment decision making over the coming years:
In a series of articles over the coming weeks, we will explore these investment themes in greater detail, identify their defining characteristics and highlight some of the challenges and opportunities that companies face. In this article we will focus on our first theme of global leaders.
This is not a new theme but has become perhaps more relevant today than ever before. We describe a global leader as having the following characteristics:
This might be a company that is already a dominant leader and will remain so or alternatively might be a company that is rising to prominence or even a fallen angel rising again. What is important is that it will be globally significant and an acknowledged leader in their industry within 5 years. These are the companies that set the agenda and are the most highly rated by the market.
England Rugby Coach Sir Clive Woodward famously commented on his strategy to win the World Cup in 2003: ‘those that win at tech, tend to win’. A surprising comment perhaps for a rugby coach but a crucial insight. England’s success at that time was driven by the use of technology providing instant feedback on strengths and weakness and the effectiveness of winning strategies. The approach worked spectacularly and was subsequently copied by every team who now sport data tags on their shirts and 360-degree camera tracking in stadiums.
Technology is not just about IT systems. Technology is about the use of knowledge (data), tools, systems and processes to step change the effectiveness and efficiency of an organisation. There are really no examples of leading companies that do not have continuous technological progress at the heart of their success.
Excessive remuneration of senior executives, particularly in the absence of results, has rightly become a focal point for shareholders and all stakeholders in an organisation. However, it is a mistake to believe that all management teams are equal. Poor management can destroy even the best strategy and technological advantage, whereas the right management team can create success out of almost any circumstances.
COVID-19 has illustrated perfectly that we cannot predict the future. What seems like solid foundations for a business today can become derailed almost overnight. This is particularly true today as the giddying pace of perpetual change constantly challenges all assumptions.
The only way to defend against the ‘unknown unknowns’ is to maintain a strong balance sheet with minimal leverage; a quality, robust and sustainable business model with diversified revenue streams; as well as a business architecture that is adaptable and can respond to change quickly. Survivability is an important feature of the global leaders that we seek to invest in.
In the early phases of development of any business or industry, capital expenditure tends to be high and earnings and cash-flow is low. Some of these businesses will go on to be the investment stars of the future, but the risk of failure or disappointment is very high. Until a business or industry is able to demonstrate strong earnings growth and positive cash flow, they remain speculative and not an investable global leader.
By definition, this will mean missing the early stage growth in a shares price; however, invariably the greatest growth occurs once earnings growth and cash flow can be demonstrated and this is also the period of minimum risk.
There is a time for everything, as they say, and timing of investment into stocks is no exception. Our investment themes aim to identify underlying economic and behavioural trends that ultimately drive business and individual stock performance. Even the greatest companies will struggle to swim against the tide, and to be a Global Leader in 3 to 5 years time, these companies will need to benefit from one or more of these prevailing trends. It is important, therefore, to seek individual stocks that are positioned to benefit from one or more of our investment themes and become true global leaders in portfolios.