2020 will be remembered for many reasons. But we should also reflect that it has been another year where prudent investing in equities has grown people’s real wealth. This is particularly the case for shareholders in growth companies that have been beneficiaries of the pandemic. The growth in sales and earnings, and the improvement in cash flow these companies have enjoyed, has made them attractive assets for the savings industry.
ESG funds – those that take seriously concerns about the impact a company has on the environment, society and the quality and transparency of its governance – have mostly profited from this. This is because ESG management almost always adds an overlay of quality to stockscreening. The sectors that have been most affected by the pandemic are often old industries with too much debt and, now, less demand. ESG managers’ natural bias away from these sectors, and their sparse positions in banks, have been a major factor in generating relative outperformance.
However, I really wanted to leave the relative vs index performance debate behind and focus instead on the raw fact that Covid has acted as an accelerant of trends. As investors, we have always sought to integrate ESG considerations into investment decision-making. We believe that it is being invested in these trends that has been the key driver of success in growing real wealth in this most difficult of years.
In our experience, a company with a following wind behind it is, all things being equal, more likely to succeed. So our starting point as managers is to examine economic weather patterns to identify trends or themes enjoying a following wind and then find the best companies operating within those themes – which we call clusters of growth.
Of the nine themes running in the Artemis Global Select Fund, six have been beneficiaries of the changes resulting from Covid-19. That seems a hit rate a baseball player might be proud of. Looking for these clusters of growth has stood us in good stead. It is worth looking at these six themes in some detail.
It almost sounds farcical to state now that we need more testing – but we have long been believers in the need for this: more drug testing, more testing of humans to better target medicine, more testing for food safety and of the environment, water and air quality. All this is done using highly specialised machines that enjoy recurring income from reagent sales. It is many of these companies that have come to the aid of governments in the fight against Covid-19. They are providing and innovating tests that are likely to increase permanently their own marketplace.
The network effect has allowed companies within this theme to build impressive businesses that have become invaluable during lockdown. Whether or not one approves of its tax practices, it is noteworthy what Amazon has been able to provide, without any significant glitch, when we have all been locked in at home. Certain software has also, overnight, become critical to enterprises providing a solution to those working from home. Without these companies it would have been impossible for many in lockdown to function. No wonder it has been possible to make real money in these equities.
When looking for clusters of growth, you have to have a global perspective and this is especially the case with automation. While the trends are global – automation is happening everywhere and in all areas of our lives – almost all the quality companies are quoted in one country: Japan. Robotics has been more widely adopted as its costs have fallen and as the US/China trade war spluttered along. Lockdown has put an even greater emphasis on the need to reduce labour intensity. The rise of e-commerce, so accentuated by lockdown, has given further impetus to the automation of warehouses – another area where Japanese robotic firms have a seminal role to play.
Sadly, some might say, we have had less partying and more Netflix binging during lockdown. Perhaps that has the benefit of bringing the family unit closer together. Whatever, the value for money offered by streaming services is highlighted by the amount of time we all have spent in front of one screen or another since March. Using the words of renowned investor Nils Taube, these are the stocks that provide a cheap night-out, indoors.
In barely six months, public opinion towards cash has changed radically. Retailers do not want to touch our cash, we do not want their change and, anyway, we are stuck at home shopping online. The companies that enable cashless payments, such as PayPal or Mastercard, and even the less glamorous back office providers of supporting software, have just had the future arrive early.
Low carbon world
It is amazing that solar and wind remains cost competitive in the face of today’s low oil prices. That, combined with public opinion around climate change, has encouraged governments to act. Most have focused some part, or the major part, of their stimulus packages on encouraging the move to a lower carbon world. While the latest excitement over Nikola and its hydrogenfuelled trucks strikes us a little excessive, this is a key trend with governments now ever more behind the sector – a decent following wind.
So in 2020, investing around clusters of secular growth has once again shown its merits. Covid has acted as an accelerant but we believe that the stocks in the above themes would have done just as well over an extended period without it.
Finally, and critically, it is important to point out that there are two sides to absolute wealth creation. As well as identifying drivers of growth, you must also protect against wealth destruction. Sometimes the price of growth stocks runs beyond their true value. A correction can be painful. Sometimes value opportunities exist in quality companies where growth will return. Therefore, you need to search constantly for quality value and be unafraid to sell expensive stocks, for example in the low carbon world theme, during 2020.
We believe that this combination of identifying quality companies in areas of secular growth while monitoring valuations carefully allows us not only to grow but also aim to protect client’s wealth.
Alex Illingworth is a fund manager at Artemis
Charity Finance wishes to thank Artemis for its support with this article