Insync’s strategy of investing in 30 super profitable businesses, across 16 global megatrends with little sensitivity to global GDP, continues to deliver consistent outperformance.
Value facing demographic headwinds. A notable feature of the current investment cycle from the lows of the GFC has been the severe underperformance of the ‘Value’ factor. The world economy just cannot escape its low-growth, low-inflation rut. This remains as a significant headwind for Value driven stocks. The emergence of Millennials and Gen-Zers is playing a greater role in shaping the future but is also counterbalanced by an ageing population. This tends to produce a deflationary impact. There is a strong relationship between a rising old age dependency ratio and low inflation.
Technology creates significant deflationary headwinds. Whilst there is growing optimism on a reflation trade, the 5-year inflation expectations continue to remain low.
Inflation’s damp fuse. This is not surprising as aggressive central bank policies to drive up growth and inflation over the past 10 years, have largely failed. Whilst a more aggressive fiscal policy may well increase growth in Goods and Services inflation in the short term, the secular deflationary drivers of an ageing population and technology are likely to remain dominant.
Is Factor & Style based investing still valid?
Recently I had an interesting conversation with my daughter. She felt that most of the school curriculum was suitable for jobs in the old world but has not prepared her for the world we are moving into. Studying computer design at university was something she had not considered doing previously. It is enabling her to find a path forward in terms of developing a skill-set better suited for a fast changing and volatile world. Her generation understands better than my generation, that the old rules and processes no longer apply.
Historically, different parts of the investment cycle typically favour different investment styles and therefore advisors typically blend different management styles. In this highly disruptive world, the investment industry is not immune. Style blending needs careful examination and an open mind moving forward.
Blaming bubbles? Many asset consultants, researchers and some of our well-known peers cite bubble-like conditions as the reason why some style-based investing and factor tilts are not working.
We agree that there is a group of stocks which seem to have bubble-like valuations based on ridiculously high sales multiples (they do not trade on multiples of profit as they are still loss-making or only making a tiny profit). However, although popular, these are in the minority. There are many stocks that have strongly risen in price for sound reasons but are lazily lumped with the bubble stocks. Our process uncovers who is in which.
Fundamental structural changes have occurred in the economy and across business models. We believe many investment decision-makers do not fully appreciate this. In turn this is negatively impacting many investment styles and factor-based approaches, leading to poor blending and manager selections.
A lot of old-world analysis has been absorbed into conventional wisdom through various studies and back-testing, with no regard for the real-world changes that are occurring in front of our noses and when looking ahead. Insync looks forward, rather than to the past.
Whilst the Value style has severely underperformed on several occasions over the past 200 years, the last 10 years has been one of the worst.
The major sectors that are well represented within the value style include banks and energy companies. It seems clear that these businesses have been severely disrupted, and it is hard to construct a great positive long-term future for these industries based on their current business models.
Is a dividend bias still worthy? Another strategy indoctrinated into mainstream thinking is generating outperformance by investing in businesses with stable and growing dividends (e.g. S&P Global Dividends Aristocrat index). One would have expected this strategy to be highly successful in a very low interest rate environment. Yet, the chart below shows this strategy has not performed for a long period of time. Worse, the magnitude of underperformance is accelerating.
S&P Global Dividend Aristocrats Index versus S&P 500 Index
The reason is that stable and steady growth businesses that were the foundations of a so called ‘blue chip’ dividend portfolio are being increasingly disrupted and have suddenly become unstable. Thus, they struggle to maintain their dividend streams; local banks are a good example.
“Insanity is doing the same thing over and over again and expecting different results.”
Our new normal is a highly disruptive environment as it is forcing the next generation of workers to acquire new skills to be relevant (like my daughter’s choice). Investors also need to spend more time reviewing how they pick and blend managers and which styles and factors are going to be more successful in a fast-changing world. Hoping for some sort of elastic rebound back to the way things were, is a dangerous wish.
We see these tailwind drivers of strategic change, such as the acceleration of disruption, as both permanent and profound. They are not a cyclical part of a ‘phase’.
It requires significantly more work, more than just using some simple blending tools. By doing so, strong investment performance can be generated. Some people scream at the river to change its course and others simply swim with its flow.
Equity Trustees Limited (“EQT”) (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) (“Insync”), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.