Our global hunt for fundamentally strong companies continues, focusing on companies with steady profitability, looking for signs for growth and studying industries with high barriers to entry.
The software and technology industries are great examples – it is Asia and the US that are really spearheading innovation in these fields.
But that’s not enough in the current competitive and low-return investment climate. How can we ensure that these businesses will perform as expected?
What is the starting multiple or starting valuation? We need to find good businesses that will perform over the long term and give investors the expectations that they are chasing – and the timing is critical.
We have built up a global equity portfolio with a specific focus on capital preservation and below-market levels of risk. So how do we find good businesses across the globe which will give investors the outcomes that they are after?
Look for disruption
There is usually a catalyst which allows a gap to open up between the two valuations (market value versus intrinsic value) – for instance, changes in the regulatory environment or a board’s decision to undertake capital management initiatives like share buybacks.
In the case of some cyclical businesses, it might be a change in competitive dynamics or the launch of a disruptive new business or product.
Quantitative tools can help identify anomalies across a wide universe of securities before our analysts go into a deep-dive on an individual opportunity.
Don’t get caught up in generalisation
A lot of time has been wasted in analysing and brooding over the unfavourable macro-economic factors.
Being on the hunt for yield and buying predictability in the absence of growth have been large drivers for sectors and investors around the world.
Investors can get caught up in the macro environments and it can deter them from investing globally. While macro matters, the valuation of the business is much more important.
We believe identifying the underlying micro opportunities at a company level is value investing in the true sense.
Three levers for success
Our strategy is based upon three levers for success.
Firstly, we take long positions in businesses at compelling prices. Essentially, looking for bargains but without compromising on the calibre of the companies.
Secondly, we also take the reverse approach, by taking short positions on companies that seem overpriced and show signs of an imminent correction. Typically, investors have been doing the exact opposite. They buy high and sell low, riding on the wave of excitement or panic they see around them.
And thirdly, we actively manage currency positions. This might sound complicated, but it’s common sense to use currency positions whenever significant dislocations arise to help manage portfolio risks and generate alpha.
Having this three-pronged approach removes exposure to single points of failure and offers multiple ways of winning. We ought to look at the intrinsic value along with a clear understanding of how the company is looking to close this valuation gap.
Jacob Mitchell is the chief investment officer and lead portfolio manager at Antipodes Partners.
