Managed 5th Anniversary Newsletter EUR
Providing exposure to world-changing growth trends
Offering a straightforward equity investment vehicle to benefit from structural global growth was the mandate upon which the Dominion Global Trends Managed Fund was created half a decade ago. Five years later the Fund’s mission remains unchanged as strong performance demonstrates the benefit of a long term, structurally focused and diversified approach to growth investing. The Fund has returned 47.49%, which is an annualised increase of +8.06%.
In this anniversary newsletter, we look at the key benefits of structural growth investing and how the Dominion Global Trends Managed Fund is structured to take maximum advantage of the inexorable mega-trends that are changing the world.
Growth Investing - The Key to Capital Appreciation
“In investing, what is comfortable is rarely profitable.” - Robert Arnott
There are many schools of investing from value investing, income generation, index, clean to activist investing. All these schools of investment are, provided they generate their investors positive returns, valid methods of managing money. Which method an investor should choose depends on an individual investor’s specific circumstances, needs and ambitions. However, if an investor is seeking capital appreciation then one school of investing stands above all others: growth investing.
Growth investing in equities is defined as investing in companies that generate above average earnings or cashflow growth. They often have very low or no dividends as proceeds from growth are reinvested in growing the company further and generating additional profits leading to compound growth – additional growth generated on the invested proceeds of growth. Compound growth is perhaps the strongest force for capital appreciation, for instance should a company grow its profits at 10% per year and reinvest its profits for a ten-year period the total increase in profits would be +159%, with 59% of that gain coming from compounding. This turbo charges returns before we even consider the effect of operating leverage – the increase of margins as companies grow revenues on a stable fixed cost base – that is present in most growth companies and drives the acceleration of profit trends.
If we look back at the performance of growth over the last decade we can see that this investment style has outperformed both value investing and the broad equity market. In a ten-year period, that includes the financial crisis, we can see that the Russell 1000 Growth Index appreciated +110.97%, outperforming the Russell 1000 Value Index rise of +39.85% by 71.12%. Likewise, the NASDAQ Composite Index, which is considered a proxy for large growth companies listed in the US, outperformed the broad market S&P 500 Index by 79.35% having appreciated +149%.
How to Ensure Growth - Structural Investing
“Those who initiate change will have a better opportunity to manage the change that is inevitable.” - William Pollard
The road of history is littered with the defunct bodies of those giants of yesteryear who failed to secure a sustainable longterm growth path and were left obsolete. The champions of today, if ill managed, will share the same fate and soon become the laggards of tomorrow, as the world changes around them. It is in this environment of constant change investors must ask the question:
While the benefits of growth investing are clear, how does an investor ensure that the companies they invest in will continue to grow?
The Dominion family of Global Trends Funds ensures continued growth by investing in structural growth. Structural growth is a change in an economy, market or industry that alters the very way economies, industries and lives function. It can be driven by demographic, behavioural and technological change. Companies that adapt to, or even precipitate, structural change will come to dominate industries in years to come, potentially providing investors with exceptional returns.
The Dominion Global Trends Managed Fund invests in the strongest long term structural growth trends, termed megatrends, which act across multiple sectors and geographies. Key mega trends are the rise of the Millennials as the dominant global demographic generation (causing revolutionary change in consumer demand), the aging Baby Boomer generation (seeing record numbers retire in a World that is yet unready to cater to their demands), the Ecommerce revolution (that is seeing commerce and life move online), automation, an ever increasing human population and the rise of a newly educated middle class in the emerging world (creating billions of new workers and consumers, often with very different expectations and demands from more established Western economies). The Fund selects and invests in sectors that have the strongest exposure to these world-changing Mega Trends, as illustrated below.
For instance, the technology sector holdings within the Fund, which by the sector’s nature is subject to multiple growth drivers, invests in companies with exposure to Artificial Intelligence (AI), automation (also found within the Industrial sector), cloud computing, connectivity and security as well as holdings in two companies focused on the fast-growing Chinese internet space. This provides the basket with a broad range of holdings, both sectorially and geographically, while ensuring exposure to key underlying sector trends
From within these sectors a basket of top performing companies – champions – are selected to give a broad exposure throughout a specific sector. Champions are selected according to strict investment criteria, namely: proven business models, demonstrable growing cashflows and reasonable valuation, which form the core of the GARP – Growth at a Reasonable Price – investment philosophy. The result of this approach is a diverse portfolio geared towards growth, with an average 2017 forecast sales and earnings growth for the portfolio of 11.5% and 14.7% respectively (source Bloomberg Consensus), that is attractively valued, with an average forward price/earnings ratio of just 18.3x (source Bloomberg).
Diversification – Lowering Investment Risk
“Diversification is the only free lunch in economics”. Harry Markowitz
The strong growth inherent within the portfolio will, ceteris paribus, drive capital appreciation in accordance with the axioms of growth investing. However, as investors in growth and change, the Fund also aims to manage risk.
The composition of the portfolio, selecting multiple companies across a range of sectors, deliberately creates a highly diverse portfolio. The more diverse a portfolio the lower its idiosyncratic risk – the risk derived from a single company or specific sector. This means, should we see selling pressure on the holdings of one sector, the portfolio can still generate performance from another group of holdings that generates its growth from a very different set of structural and economic factors. This structural fund feature is further enhanced by a proprietary active risk management system (ARM) that cuts losers from the portfolio on a stop loss, allowing it to become biased in favour of outperforming shares, and thereby lowering exposure to underperforming sectors.
The result of growth investing, rigorous GARP selection criteria, and diverse risk management, has created, in the Dominion Global Trends Managed Fund, an investment opportunity that provides broad based exposure to structural global growth with a diverse, risk managed, approach: the risk profile is similar to that of the broad market – the 2-year volatility (risk) of the portfolio is 12.81% against the MSCI World volatility of 13.29% - whilst providing attractive capital appreciation for investors.
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The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Fund Management Limited. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.