Quality Growth
Based in New York, we offer global equity portfolios driven by deep, company-by-company research. For over 35 years, we have been dedicated to institutional and intermediary investors around the world.
Today’s market turmoil: a reminder that investing is a marathon, not a sprint
Quality Growth Boutique
Since the Covid lows of 2020, US markets, particularly technology companies, have run up quite significantly. We saw a decline and pause in 2022, before rebounding strongly throughout the first half of 2024.
It is no secret that we have been living in a sentiment driven market, as investors seem to have a 2-track mind – Fed interest rate policy and AI. This has resulted in a momentum driven run up, record levels of market concentration (i.e., Magnificent 7), and irrational exuberance that has driven perceived AI beneficiaries through the roof.
This has meant that investors have almost been blind to anything else, losing sight of the importance of cyclical earnings resilience. There has been quite a bit of complacency in the market about a soft landing, failing to recognize the impact of higher for longer rates; however, investors have suddenly woken up to their prolonged impact. This delay was likely tied to the unprecedented pandemic savings supporting consumer spending for a significant period. While we do not know when the next recession will hit, we aim to focus on companies with resilient earnings even through an eventual economic downturn. This is when the merits of our approach have historically been most appreciated.
We also saw investors happy to chase their favorite AI names around the track, without considering how these companies could sustain this level of earnings growth for a prolonged period or even through a recession. Essentially, we saw investors sprinting the first 500 meters, rather than worrying about how they would sustain themselves for the marathon that is long-term investing.
It seems as if, with a flip of the switch, these sprinters leading the first leg of the race have suddenly hit a wall and run out of fuel. Investors are starting to question the sustainability of AI spend, the ability of companies to turn spending into tangible revenue, and the largely speculative nature of generative AI. Investors have also lost excitement about the predicted September rate cut, fearing the fuel will be too late to revive their favorite sprinters, when just a few weeks ago the near-term rate predictions were viewed as the fuel needed to enable these names to run faster and further.
Throughout this period, we have remained the disciplined quality growth marathon runners we have been since our start 40 years ago. We did not get distracted by the record-breaking sprinters such as Nvidia but aimed to remain focused on investing in resilient companies with durable business models generating predictable streams of growing earnings. We believe these are the names that will have the ability to finish the race, or the ability to generate earnings growth over the full market cycle, including that more challenging recessionary environment. This has meant that we have been slower out of the gate, but our consistent and disciplined approach is like the consistent training and proper fueling required for successful marathon running.
Over the last month we have seen the merits of our discipline deliver strong relative performance across our US, International and Global Equity strategies. We are seeing the first signs that the sprinters are running out of fuel, with the largest year-to-date winner Nvidia selling off the most over the last four weeks. We continue to invest with our disciplined approach, rather than speculate on the latest fad. Just as we do not know when a sprinter will hit a wall, we do not know when a downturn will hit. We expect we will be in a prolonged period of volatility, and the tougher environment is not behind us. The current correction serves as a good reminder: it is not important who is first out of the gate, it is who finishes the race that matters.
That said, we remain committed marathon runners, not distracted by the latest fitness fad… Have you ever heard of a short cut to running a marathon? We believe our consistent approach focused on resilient companies with a high degree of predictability in earnings growth is what will enable us to keep pace and successfully complete the marathon that is long-term investing. Like marathon runners compounding their fitness levels, we seek to compound our clients’ capital.
Important Information: Past performance is not indicative of future results. Any companies described herein for informational purposes only to elaborate on the subject matter under discussion and may or may not currently represent a position in our strategies. Note: The company highlighted is held in a Quality Growth strategy. Information provided should not be viewed as a certainty or indication of similar or future outcomes in connection with our investment management approach and processes. The reader should not assume that an investment in any securities identified was or will be profitable or that investment recommendations or decisions we make in the future will be profitable. The selection criteria for companies discussed was not based on performance. References to strategy holdings and/or other companies for illustrative purposes only. Information provided should not be considered a recommendation to purchase, hold, or sell any security nor should any assumption be made as to the profitability or performance of any company identified or security associated with them. There is no assurance that any securities discussed herein will remain in the portfolio at the time you receive this communication or that securities sold have not been repurchased. Securities discussed do not represent the entire portfolio and, in the aggregate, may represent only a certain percentage of the portfolio’s holdings. Any projections or forward-looking statements regarding future events or the financial performance of countries, markets and/or investments are based on a variety of estimates and assumptions. There can be no assurance that the assumptions made in connection with such projections will prove accurate, and actual results may differ materially. The inclusion of forecasts should not be regarded as an indication that Vontobel considers the projections to be a reliable prediction of future events and should not be relied upon as such. The views and information provided herein may change at any time and without notice.
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