In a recent presentation held in Madrid, the manager of the Invesco Pan European Equity Fund explained to his clients the types of companies that, according to his analysis, generate better returns over the long term.
In the equity market, there are three ways to make money, according to John Surplis, Head of European Equities at Invesco at Henley. The first is to invest in compounders, which are leading companies that are in very good standing and with return on capital (ROIC) in the first quartile of their sector. The second is to invest according to the economic cycle, that is, keeping in mind the macroeconomic trends and managing the market timing well. But, for the manager, with Martin Walker of Invesco Pan European Equities, with a fund Rating Fund People In 2002, there is a third method, which is probably the most effective: Bet on what he calls a quality transition.
As told at a recent breakfast hosted by the manager in Madrid, Success lies in exploiting valuation discrepancies where potential exists and the company’s willingness to change for the better. “In the long run, the profitability potential of companies included within this concept of quality transition is higher than that of compounders, i.e. those companies already established in the first quartile by ROIC, which is precisely the type of securities on which Investors tend to focus. However, betting on businesses in the second and third quartiles that may prosper in the first is more profitable,” he says. But… identifying these companies and those in them from a longer-term perspective How profitable can investing be?
results of your analysis
According to their analysis, the results of which are shown in the following graph, companies with ROIC in the first quartile, which are able to maintain this position, provide an average annual return of 5%. rather than, Quality transition companies that are in the third quartile by ROIC, quality companies with an attractive valuation and who have harnessed their strengths to improve their business and jump into the top quartile, generate average annual returns that just double ( 10%) is. “It’s an outperformance potential that’s hard to capture. On many occasions this means investing in businesses that aren’t on the market’s side at the time. That’s what we try to do and what every active manager wants to achieve.” ”
Case Study: Carlsberg
A practical case of a company that would be included within this concept of quality transition that Surplus defends is the Danish brewery Carlsberg. “It’s the classic example. It was a very low-margin, virtually no-growth company that didn’t exist in some of the sexiest emerging markets. Furthermore, after the outbreak of the war in Ukraine, the company lost its business, with the consequent impact on its business.” Announced departure from Russia. This was a company that was blowing wind in its face and, however, has managed to build their brand very well. They already have a 7% market share in China And the company has been able to jump from that third quartile of ROIC to the first”, Surplis says.
How to identify quality transitions
Therefore, the next question is what factors are needed to successfully identify these companies. And here it is very clear to the manager: “It’s a combination of rigorous analysis, discipline, patience and engagement, which is key to knowing what changes your managers are making to move the business forward.” In his opinion, success in an investment does not lie in trying to build a portfolio with a certain sector or factorial exposure. “It is a question of conducting a detailed analysis of the companies and their position in the market, with the aim of finding quality companies that have competitive strengths that will allow them to take advantage, and that also do business at attractive prices.” , he emphasizes.
For Surplus, Price, the philosophy he has defended since starting his career, is not buying cheap junk companies, but good businesses that are trading at attractive multiples. “Since the outbreak of the financial crisis, a series of extraordinary events have been chained that changed the normal behavior of the markets (debt crisis, Brexit, COVID…) in particular. But value investing is what has always worked for me. The current crisis has uncovered very interesting investment opportunities. Today you can buy good businesses by paying practically nothing for them. The environment is very complex, but it is important not to surrender. In a recovery scenario, some companies are going to take off”, he concluded.