STANLIB: We’re deliberately diversified across long-term growth drivers

‘We’re looking for that combination of value creative growth, but also the ability for the shares to roughly double over a five-year time horizon’ – portfolio manager Alex Stanic.

SIMON BROWN: I’m chatting with Alex Stanic. He is a portfolio manager within the JP Morgan Asset Management International Equity Group. Of course Stanlib and JP Morgan Asset Management have a strategic partnership [that was] announced last year. The first milestone is two new offshore funds. Stanlib Global Growth Funds, which is what we’ll be chatting [about] today.

Alex, I appreciate the time. This fund is investing, really looking for creative growth. Can you give us a sort of a top-line summary of what makes this an attractive investment for investors?

ALEX STANIC: Sure. First of all, Simon, thank you very much for having me on the show and giving me the time to talk to you through the Global Growth strategy. That’s a great question and it really goes straight to the point of what we’re trying to do here: investing in something called ‘value creative growth’. What that means is we’re looking for companies which have sustainable growth over many, many years because that’s the main driver of shareholder returns over the long term. The longer you hold an investment, the more the earnings power comes through, assuming it’s growing over [the] long term. That drives your returns.

But value creative growth is not just [about] that growth.

It’s also [about] adding a strong element of quality, and that really looks at the sustainability of the returns being generated and the conservative finance structure, so a strong balance sheet and net cash position.

If you think about that as lowering the risk and helping ensure that growth rate comes through to benefit us, that’s the key relationship introspection that we’re looking for over the long term to drive superior returns.

SIMON BROWN: Yeah, I got that. It’s like pulling on multiple levers. You’ve identified some growth themes, the digital revolution and going green. Tell us a little more about this. I suppose it’s conscious consumption, really?

ALEX STANIC: Yeah. The growth thing is important. I mentioned earlier that we focus on long-term growth. So what we’re looking for is to identify growth with thematic growth drivers, which will last way longer than that great economic cycle. That’s where the power of compounding becomes very important. It takes us outside of the macro cycle and extends our time horizon and our thought process. To slightly butcher a Bill Gates quote, people tend to overestimate what happens in the next two years and underestimate what happens in the next 10. So [we’re] deliberately pushing ourselves out by identifying these long-term themes. The key driver is that long-term growth. You mentioned a couple [themes] – digital revolution and going green.

Conscious consumption relates to this in some ways and it really looks at things like how informed consumers are able to be now, which is really created by the technology improvements we’ve had. I’ll give you a good example. If you ever use a service such as that provided by Uber, there’s a two-sided network effect here. There’s a network of drivers, who have information about the riders, and obviously as a rider there’s information about the driver. If you have high ratings you can come together and maybe take that ride. Prior to that platform’s existence we were in the dark; we didn’t know – it was a bit of a gamble. The cab could be good, could be bad, it could be dangerous.

So what we found is that the safety environment for both driver and rider has massively improved, and now it’s just a net good. That’s a good result. It gives a level of information to a consumer that we simply didn’t have before.

SIMON BROWN: That is a great example and, as you point out, in the old days both parties, the driver and the user, were totally in the dark as to what that experience was going to be. You don’t have constraints around country or even sector exposure – where is most of the portfolio investing? And, when you’re looking at stocks, is it a sort of company first, sort of bottom up, or do you start with perhaps a region or a sector and then look within?

ALEX STANIC: Again, great question. Our primary focus is on the stocks. So, as I said earlier, we’re looking for that combination of value creative growth, but also the ability for the shares to roughly double over a five-year time horizon, which is our investment-framework horizon. That really sounds aggressive, but actually if you break that down, that’s about a 14.5% annualised return for the investments we’re making. So that is the driver in terms of our thinking. It’s the ability to capture that and benefit at the fund level from that continued growth over the long term. It’s obviously in excess of the average growth rate of company earnings in the market for many, many years.

That’s our driver, but we are deliberately diversified across the long-term growth drivers, like the themes we’ve already mentioned, and they have very different drivers. We are diversified by sectors in terms of where you find those good ideas. We’re also diversified by the stage of the company’s life cycle: early-stage companies versus later-stage companies. They all demonstrate growth, but obviously the amount of risk you might be taking [in] an earlier stage versus a late-stage company is slightly different.

But all of them share a common characteristic of having returns way in excess of their cost of capital and a strong financial position.

That’s where as investors we have a bit of a concentration in some areas, like IT services. That comes to two sections. One would be the payments companies, companies like MasterCard for example, which is benefiting from continued lack of use of cash versus electronic means, and that’s providing very strong growth for many years to come.

The other side of that would be some of the companies which are helping the digitalisation of many corporates in terms of IT service providers, and they are key constituents of the change that companies are pushing hard to go through, which again is a multi-year process. It’s not just like a little Covid bump and it’s over. This is a very, very protracted process.

SIMON BROWN: Yeah. A trend that predates Covid. Covid accelerated it, but predated it.

A last question. The year 2022 has kicked off with global inflation, rising interest rates either happening or due to happen, and Ukraine more recently. What are you seeing as major risks in 2022, or are some of what I’ve mentioned here more bumps in the road rather than long-term risks in the investments you’ve got?

ALEX STANIC: Again, a great question. I don’t have a crystal ball. You have to be prepared for all weathers. I think we learned that lesson in early 2020 when Covid struck. Again, that just reinforces one aspect about having a conservatively financed company that can deal with whatever bumps in the road come. We can have some known unknowns, versus the unknown unknowns.

What we’re prepared for is we can talk about military invasion. We do think it’s peaking, it will come back down to the second half of the year. So it moderated the risk; it goes back to a more steady level.

But those risks we can see. There’s always that Black Swan event, which could happen …. So we approach this as a conservative investor with the ability to trade straight through those risks and make sure that they can self-fund that growth as opposed to being dependent on external finance.

If I had to put my risk antenna out there for one particular risk, I think there is some danger … we don’t expect the Fed to make a policy error, but there is a possibility of that. They are getting some heat in terms of seeming to be behind the curve of inflation. We think inflation’s peaking, but if they move a little too fast, and maybe panic, for example, that could cause some more dislocation in markets.

So I think that’s probably the out-there risk. No one expects it. Everyone expects them to be very careful and moderate in their increases, and that’s probably the most likely scenario. There’s risk in the background that there might be out of sync with what they need to do.

SIMON BROWN: I take your point. Base case, they’re probably going to do it perfectly well, but just in case keep an eye on it. We’ll leave it there. Alex Stanic, portfolio manager within the JP Morgan Asset Management International Equity Group. We talked about the Stanlib Global Growth Fund. Alex, appreciate the time today.

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