For the 4-week period to the end of January the Insync funds underperformed the benchmark. With a fresh focus on tightening interest rates in response to rising inflation, it is typical at this juncture for rapid investor shifts towards the current perceived short-term winning sectors like energy and financials. At the same time, an indiscriminate move away from growth stocks always occurs. And for some growth stocks, deservedly so as their financial position and prospects are less enthusiastically assessed. January’s moves follow a well-worn pattern of investor behaviour at these points in the investment cycle.
The cyclical stocks and sectors currently basking in the sunshine of rapid price-appreciation do not meet Insync’s disciplined financial requirements, primarily because of their low ROICs (profitability) through the cycle. Over an investment cycle, they do not align with delivering consistent and sustainable investment performance.
The senior team’s 90 years of investment experience has witnessed many sharp market corrections. Time and again investors try to anticipate markets, rotating between sectors, jockeying for a specific economic environment. Sadly, this results in inconsistent and lower returns and increased risk. As we frequently state, a quality defensive growth approach to investing can produce temporary underperformance at these junctures. This is the price paid for outperformance over a full investment cycle. Our results below support this statement.
Should interest rates rise too quickly (which the market is currently pricing into the interest rate futures market), it may induce a broader economic slowdown. This favours the type of profitable growth businesses we hold. If they do not overshoot, our ROIC + Megatrends approach also allows these same companies to thrive in a higher inflation/ interest rate setting. Our approach is not reliant on these factors’ settings to the extent of most other managers.
Short term, investors typically fret over interest rate rises and most growth stocks suffer, as indiscriminate machine-gun approach to selling occurs. Over time however, the more profitable businesses with strong revenue growth start to reassert their upward price trajectory. Investor’s value their consistent earnings power, which is why over time, stock prices are closely correlated to their earning’s. Insync’s portfolio has an expected earnings growth rate of 13%p.a. for the next two years (longer term expected growth significantly in excess of global GDP). Additionally, even after employing high discount rates in our valuation models, the current portfolio sits at a 50%+ discount to its long-term value. This sets the stage for outperformance consistent with the longer-term history of the funds. Patience rewards.
Pet Humanisation Megatrend update
This just keeps getting better: An American Pet Products Association Survey bodes well for the continued GDP plus growth in the year ahead. Below are some of the highlights that were particularly noteworthy.
Pet ownership is up. 14% brought home a new pet during the pandemic.
Spending increased. 35% spent more on their pets in the past year than previously.
Millennials are the largest ‘pet parents’. And will be the largest generation by 2030.
Spending is up post pandemic, as ‘pet parents’ are more than ever before willing to sacrifice more of their paycheques to provide premium care and services for their pets. The $100 Bn pet industry is poised to nearly triple to $275 billion by 2030 (Morgan Stanley). An annual compound rate in excess of 14% p.a. growth.
