INTRODUCTION As inflation continues to trend lower, most central banks appear to be done hiking interest rates. The European Central Bank...
The pace of change continues to accelerate across a range of sectors and industries. This makes it challenging for many companies to execute their existing long-term strategies.
This current dynamic is also presenting both risks and opportunities for investors.
The opportunity is to identify those companies that are successfully navigating through the changes occurring and invest in them.
Assessment of a company’s ability to adapt to and benefit from change is interwoven in the investment process for the Loomis Sayles Global Equity Fund.
In this video [10min | transcript below], Boston-based Lee Rosenbaum, Co-Portfolio Manager of the Fund, discusses how Loomis Sayles’ unconstrained, bottom-up approach, which is grounded in in-depth stock research, enables the firm to understand the implications of this change.
Lee provides examples of companies which Loomis Sayles believes have clear sustainable competitive advantages that enable these companies to adapt to the changing environment and to thrive over the longer term.
Video Transcript: The Accelerating Pace of Change – Investment Implications and Opportunities
This video and the content contained within is provided and maintained by Investors Mutual Limited (AFSL 229988). Investors Mutual Limited is the issuer and responsible entity for the Loomis Sayles Global Equity Fund. Loomis Sayles & Company, LP. is the investment manager. The information in this video is provided for general information purposes.
[Peter McPhee] The pace of change continues to increase across a range of stocks, sectors, and industries, presenting both opportunities and risks for investors.
In the following video, Lee Rosenbaum, Co-Portfolio Manager of the Loomis Sayles Global Equity Fund, discusses how Loomis Sayles’ unconstrained, bottom-up approach to investing, grounded in deep research, enables the investment team to understand the implications of this change and identify long-term opportunities which will add value to investors over time.
Q: What do you believe are the implications for investing in an environment with a rapid pace of change?
[Lee Rosenbaum] We believe the pace of change across industries has accelerated the last few years. Our team continues to witness disruption across a range of global businesses including retail, media, health care, and consumer products. This change has made it challenging for some companies to keep pace in terms of both execution and strategy. However we view this as an opportunity for our team to identify businesses and buy those companies that are successfully navigating technological change. In some instances, we have found opportunities in companies that are the disruptors themselves.
By focusing on our three alpha drivers of quality, intrinsic value growth, and valuation through our bottom-up, fundamental research, we seek to identify those businesses that we believe can be successful long term.
Q: Which sectors, industries, and types of companies do you believe are being most heavily affected?
[Lee Rosenbaum] Retail has certainly been affected. Both consumers and businesses can easily see prices across markets, pressuring companies to constantly demonstrate value for price. This pressure has intensified as on-line offerings continue to grow. The pandemic has certainly accelerated this trend; driving what we see as a significant increase in e-commerce penetration from both existing and new users.
Other online services are also seeing rapid adoption. Also accelerated by the pandemic are entertainment content and the move to telecommuting. This is driving additional demand for storage, networking and content delivery, as well as digital security.
We have also seen a disruption in healthcare. The pharmaceutical industry has seen an impact on pricing as a result of rising consumerization, led by the increasing prevalence of high deductible health plans. Here in the United States, rising pressure in commercial markets to lower healthcare cost is also having an impact on pharmaceutical markets. As a consequence the majority of our current healthcare holdings are in the services, equipment and other healthcare segments where we view business models to be more durable.
Which industries and types of companies do you believe are benefitting the most in this environment?
[Lee Rosenbaum] We have seen beneficiaries across several industries.
In e-commerce companies like Amazon and Alibaba have certainly benefitted from the increase in on-line offerings as well as from tail winds from the pandemic.
Consulting companies including Accenture and Nomura Research with strong technological expertise have also benefitted. We believe these firms are well positioned to help clients adapt their business models to an environment of continued disruption.
We’ve also seen industrial companies like Roper Technologies leveraging technology to go directly to their consumers, while at the same time, increasing their margins and strengthening their customer relationship.
And lastly, in healthcare – companies such as UnitedHealth Care, have been successfully navigating this environment. As the largest managed care operator in the United States, UnitedHealth Group offers back office technology to healthcare providers. For example, one of its digital tools provides doctors with real time costs specific to a patient’s benefit plan and preferred local pharmacy offers with lower-cost alternatives.
Q: What do you look for in a company to illustrate its ability to manage the pace of change effectively?
[Lee Rosenbaum] Our assessment of a company’s ability to manage change is interwoven throughout our investment process. We are looking for companies with sustainable competitive advantages.
One company we believe will thrive in this period of disruption is Dassault Systemes, a design and simulation software company. Dassault’s products help its clients by creating ‘digital twins’ of complex, real-life products and systems that place Dassault at the center of the digital transformation taking place in global manufacturing. For instance, Dassault can help with building an airplane or modeling traffic patterns as a part of urban planning. Dassault has a sustainable, intangible asset portfolio of over 500 protected inventions, and patents on more than half of these. Its commitment to maintaining its technological advantage is evidenced by significant Research & Development expense.
Another example is Nomura Research Institute, a Japanese IT services provider. Nomura Research provides strategy consulting, system integration, business process outsourcing, as well as software.
The company’s resilience stems from its asset-lite business model and entrenched position with long term clients. For example, it is involved in critical business functions such as supply chain systems for all 7-Eleven convenience stores in Japan. The company also has a high degree of recurring revenue, stemming from its cloud computing capability where offerings, such as back-office solutions for retail brokerage firms, are very sticky in our view.
We believe the company’s long-term potential has improved in this current environment. The digital transformation in enterprises driving Nomura Research’s long-term potential, has accelerated. Enterprises without digital technologies will find it increasingly hard to compete, as peers leverage technology to improve existing business processes and create more relevant products.
The COVID-19 pandemic required many companies to adapt very quickly to new ways of operating (working remotely, breaking down silos, adapting slow-moving hierarchies and bureaucracies, etc). How have you seen this play out in the companies in which you are invested?
[Lee Rosenbaum] Many of our companies have leveraged this period of disruption to reduce costs. Some, have increased use of augmented and virtual reality technologies to perform virtual sales and service visits.
We’re seeing many companies reducing or assessing their real estate footprints. And we anticipate increased percentage of work forces will be working from home for an extended period of time. One company that is making progress in this area is Dropbox. The company participated in a study which found that over 25% of working hours in knowledge work are lost due to distractions from interruptions from colleagues. In conjunction with the study, Dropbox announced that remote work will become the primary experience for all Dropbox employees. Dropbox employees will have access to smaller Dropbox Studios that are going to be hubs to spark creativity and maintain that company culture. We view Dropbox’s approach as an interesting alternative to either a fully remote approach or an ad-hoc approach.
We believe our portfolio of companies have sustainable competitive advantages and balance sheets that will give them the flexibility to weather challenging environments, and thrive over the longer-term. This is evidenced by the portfolio’s return on equity, which is meaningfully higher than the MSCI All Country World benchmark, and with financial leverage that is significantly less than the benchmark on a net/debt to ebitda basis.
Q: Is the pace of change making it more difficult to forecast sustainable competitive advantage and intrinsic value growth, and if so, how is your investment process taking account of this?
[Lee Rosenbaum] We do not believe this increased pace of change is making it more difficult per se, rather we see this as an opportunity. For all our investments, we need a high degree of conviction in our three alpha drivers of quality, intrinsic value growth, and valuation. We embrace forecast uncertainty by constructing three scenarios for every security that’s being considered for the portfolio. We start with a base case, which is our view of the most probable trajectory of a business, a downside scenario, which reflects the possible risks to that base case, and lastly a best case scenario if events were to exceed our base case assumptions.
This video is provided for informational purposes only and should not be construed as investment advice. Any opinions or forecasts contained herein, reflect the subjective judgements and assumptions of the authors only, and do not necessarily reflect the views of Loomis, Sayles & Company LP. Investment recommendations may be inconsistent with these opinions. There is no assurance that developments will transpire as forecast and actual results will be different. Data and analysis does not represent the actual, or expected future performance of any investment product. Data and analysis does not represent the actual or future performance of any investment product. Information, including that obtained from outside sources, is believed to be correct, but Loomis cannot guarantee its accuracy. This information is subject to change without any notice.
While the information contained in this article has been prepared with all reasonable care, Investors Mutual Limited (AFSL 229988) accepts no responsibility or liability for any errors, omissions or misstatements however caused. This information is not personal advice. This advice is general in nature and has been prepared without taking account of your objectives, financial situation or needs. The fact that shares in a particular company may have been mentioned should not be interpreted as a recommendation to buy, sell or hold that stock.
Examples above are provided to illustrate the investment process for the strategy used by Loomis Sayles and should not be considered recommendations for action by investors. They may not be representative of the strategy’s current or future investments and they have not been selected based on performance. Loomis Sayles makes no representation that they have had a positive or negative return during the holding period.
Past performance is no guarantee of future results.
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