Quality Growth Boutique

Separating Signals from Noise: Successful Investing During Uncertain Times

Viewpoint

We believe successful equity managers must invest with conviction. It’s a critical part of the foundation that helps ensure sustainable gains in any portfolio.

But how can a manager build this kind of confidence in a company, under current market conditions, when so much uncertainty poses a risk to potential returns?


It’s a minefield out there: central bank policymakers are struggling with slowing global growth, increased uncertainty is stemming from the UK’s withdrawal from the EU, the US-China trade dispute continues to send equity analysts scrambling to revise earnings forecasts and new leadership in Mexico and Brazil have triggered massive shifts in local business prospects.

The range of uncertainties today creates a much more challenging investment climate than in prior years. This, in turn, has fostered a “low-conviction” sentiment in the equity markets, even among experienced investors.

But at the Vontobel Quality Growth Boutique, we understand that long-term investment success is built upon strong convictions underpinned by skill, experience and discipline. We cut through the noise by separating companies that merely benefit from cyclical growth drivers from those that more clearly benefit from longer-term structural opportunities. This provides us with an avenue to build high-conviction positions in our portfolios during uncertain times. In our view, high conviction investing requires:

An independent view

While we are cognizant of how our portfolios compare to the broader universe, a benchmark does not influence where we invest. As a bottom-up manager, we only invest in companies that we think can provide attractive absolute returns. Our quality growth investment philosophy and process is rooted in deep, rigorous research.

The confidence to follow our discipline

We believe this is imperative to producing attractive returns over the long term, but is also critical in navigating shorter term volatility. Changes in investor sentiment often dictate share price movements in the short run.  However, over longer time periods, a company’s underlying fundamentals will ultimately be reflected in its stock price. So if our research tells us that a company’s fundamentals are intact – and by that we mean it has strong and consistent earnings growth, among other attributes – we must be patient in order for the company’s full potential to be realized. This means accepting relative underperformance at times. But, when share price performance dislocates from fundamentals during these periods, it creates opportunities for managers like us – with a clear long-term road map.

Constant re-assessment

Financial markets are continually evolving and can be impacted by events related to competitive dynamics, mergers and acquisitions, and capital allocation, among others. We take an active approach and constantly re-assess our positions in light of changing circumstances. But, if our core investment thesis continues to be intact, we retain our level of conviction.

Conviction Investors are Active Investors: Constructing a Quality Growth Portfolio

To us, conviction means investing in companies with stable franchises with solid fundamentals, durable earnings power, and long-term growth potential. These companies must meet our strict criteria of profitability, stability and predictability at an attractive price, but we must also foresee a solid outlook, with a very high degree of confidence, over the next five to ten years. Expressing conviction in portfolio construction results in:

High concentration, but that does not mean higher risk

Naturally, such confidence can only apply to a limited number of the roughly 50,000 companies in the global equity universe. Our universe of possibilities is therefore narrow, comprising a select group of approximately 500 stocks that we deem investible. Even narrower is our portfolio, typically around 50 to 70 companies, which are concentrated only in our best ideas.

Because we have such a high hurdle for inclusion into our portfolio, when we find good companies we invest with conviction.  In the Vontobel Fund – Global Equity, our top 10 holdings represent 38% of the portfolio whereas the top ten holdings of the MSCI All Country World Index represent 11% of the index. Yet our portfolios tend to take on less risk than the market. We effectively control portfolio risk by seeking to invest in stable businesses, and we further mitigate risk by evaluating the correlation that exists among the stocks in our portfolios. We seek to reduce overall portfolio risk by meaningfully diversifying the earnings streams of our holdings, as opposed to making nominal allocations across sector or regional buckets.

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Low turnover

Our focus on the long-term economics of a business, compared to an environment where the investable universe is larger and the turnover is higher, tends to result in long holding periods for our stocks. In other words, once we find companies that are worthy of our conviction, we invest for the long haul. The 5-year average turnover for the Vontobel Fund – Global Equity is 39%.

Style consistency

Since stable and relatively predictable earnings growth drive stock performance, our portfolio will typically participate in the upside of a rising market while offering downside protection during economic downturns – when the earnings of our holdings remain more stable than the broader and more cyclical market.

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Experience, Skill and Discipline Can Help Deliver Long-term Outperformance

As investors with conviction, we maintain a clear focus during difficult times. And, importantly, we aim to position our portfolios to weather them. Ultimately, we believe our conviction enables us to plot a steady course and help deliver outperformance – with lower risk – to our investors over the long-term.
 
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The Vontobel Fund – Global Equity Performance (%) as of March 31, 2019 (I-share class)

Net returns

Rolling 12-month net returns

USD

Fund

Index

USD

Fund

Index

QTD

10.34

12.18

01.04.2018-31.03.2019

5.73

2.68

YTD

10.34

12.18

01.04.2017-31.03.2018

15.90

14.76

2018

-5.02

-9.42

01.04.2016-31.03.2017

13.97

15.04

3 years p.a.

11.77

10.67

01.04.2015-31.03.2016

3.40

-4.34

5 years p.a.

9.13

6.45

01.04.2014-31.03.2015

7.19

5.42

10 years p.a.

13.51

11.66

01.04.2013-31.03.2014

9.94

16.55

Since launch p.a.

8.14

5.39

 

 

 

Launch date: 19.06.2008

ISIN: LU0278093595

 

 

 

 

Index: MSCI All Country World. Net of fees. Source: Vontobel Asset Management. Past performance is no indication of current of future performance. The return of the fund may go down as well as up due to changes in exchange rates. The performance data do not take account of the commissions and costs incurred on issue and redemption.