Transcript:

What we’ve seen this year is an exceptionally high rate of earnings growth across markets, but that’s not going to persist. It’ll start to moderate as we move into the second half of this year and slow further as we get into next year. And companies are going to be tested and judged in a way that they haven’t been over the last 18 months. And really, that’s where the role of a fundamental active manager is in identifying quality across the companies in their portfolio.

I think with quality, it’s really about trying to understand where you can see sustainable cash flows. Where are there solid business drivers, where is there a sustainable competitive advantage? And that’ll mean different things in different portfolios. Within value, that’s looking for companies with lower leverage, with capital discipline, with high levels of return on equity. Whereas in a growth portfolio, it’s going to be much more around things like looking for high return on assets or high return on invested capital.

Within the value cohort, it is important to find not just companies that are cheap, but companies where we have a clear view on the sustainability of their earnings going forward and where there’s a clear catalyst as well. Interesting, the pandemic has thrown open many opportunities here, you know, as companies have been disrupted. But an understanding of what a new normal might look like is helpful in trying to identify many of those underlying drivers.

I think in the market environment that we went through last year, there were plenty of companies that didn’t protect themselves terribly well, raised capital at a bad time in the cycle simply because they needed to survive and destroyed equity value through, through doing that. There were others that quickly adapted to much more of the new normal and charted a pathway to success through that.

I think in identifying quality that’s sustainable within the growth universe, it’s important not just to look at next year. It’s important to look further out and really understand what’s driving the business and what their opportunity to continually reinvest to drive growth is, so that we can see that sustainable growth in cash flow over multiple years.

We’ve lived through a period where hypergrowth companies have been rewarded as investors just search for growth anywhere in the market last year, as the pandemic was hitting. I think more sustainable quality, though, is actually sifting through the growth universe and trying to understand where are the companies that have high levels of returns and critically high levels of marginal return on invested capital, i.e. they’re able to continue reinvesting in their business and earn attractive returns through doing that.

Given the testing times that we live in and the various crosscurrents that we see in the market, it is important to remain diversified. It’s going to be very hard to choose the perfect timing for growth versus value. That’s why we do think quality is, is an important attribute in any portfolio. But as you look more broadly around the globe, there are some areas of the market where valuations do look more attractive compared to some of the elevated valuation levels we see in the US. So, for example, now could be an interesting time to broaden horizon and look to emerging markets, but also into Europe, where we have a lot of cyclical sectors that look cheap compared to their history. And while quality is rarely the star factor, it’s a consistent factor. And with all of these crosscurrents, we believe now is an interesting and attractive time to look for quality within our portfolios.