Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Market storm won’t change winners and losers
A storm has hit global equity markets. But investors should ignore the blood on the floor and focus instead on the big structural changes that will underpin earnings for decades to come.
“The storm that’s hit Australian equity markets in the last couple of days is a storm we’ve been sitting in for the best part of three months,” says Nick Griffin, chief investment officer at global growth manager Munro Partners. “And this is that the Fed would remove accommodation and that would ultimately bring down high-multiple growth stocks.”
“That’s our bread and butter… and it’s driven very strong performance for us for a long period of time. Those chickens have been coming home to roost now for a couple of months.”
Griffin says that’s “perfectly normal”, and that the big structural changes that underpin the earnings of those companies are still taking place; e-commerce is still taking market share from brick and mortar commerce; digital payments are still taking market share from cash. And over the medium term, the earnings growth of those companies attuned to those structural changes will still outrun the multiple compression that will likely occur.
Munro believes – as other investors do – that semi-conductors still hold the key to a digital future, and that artificial intelligence will move into every single organisation on the planet. Nvidia is “the key AI enabler” and has dibs on “potentially being the largest company in the world one day”. The net-zero transition entails a 30-year s-curve in demand growth that equals a 30-year s-curve in earnings. Electric vehicles look “a lot like smartphones did in 2008” – and everybody’s next car will be one.
“That’s $30-$50 trillion of revenue for the energy transition companies. It’s a diverse set of opportunities that covers clean energy and energy efficiency; clean transport; and circular economy and packaging,” Griffin said. “We really like this area because there’s a lot of companies here that many people consider boring or low multiple that have a strong economic tailwind behind them.”
It should all be a balm for investors who have been savaged by months of market volatility, a route in tech stocks, and inflation that’s continually “higher than expected” (perhaps it’s time we adjust our expectations).
“The macro guys will have their fun, and ultimately the companies will go back to following their earnings,” Griffin says. “That’s what will happen. Multiple de-ratings and re-ratings don’t change who wins and loses in the long run – they just change the price you pay.”
There are, of course, other headwinds for companies that will benefit from those structural themes – particularly for big US tech companies, which face ongoing scrutiny in the form of antitrust investigations both domestically and abroad (Munro sold its remaining holding in Facebook in 2021 for that reason). But they’re still a better bet than their Chinese counterparts.
“The beauty of the US companies is that they can appeal, and they do appeal – to the Supreme Court, the DOJ – and they win, quite regularly. It’s a system of checks and balances,” Griffin says. “The problem we had in China last year, and it’s now quite well known, is they can’t appeal; they get investigated, they get fined within six weeks, and they thank the regulator for paying the fine.”
And semiconductors face short-term, possibly existential woes too – not just the well-understood supply chain crisis, but the possibility that China might annex one of the main centres of their production.
“What I find fascinating at the moment is that everybody’s trying to convince you to go buy oil stocks because there’s going to be a shortage of oil,” Griffin says. “There probably will be, and it’ll probably last about three years. But I don’t think anybody genuinely wants to own oil stocks on a five to ten year view.
“Semiconductors are the new oil. They effectively drive the entire digital economy. We’ve now realised that most of them are made in Taiwan and we’re panicking about Taiwan like we used to panic about the Middle East. This is a strategically important industry into which you’re going to see billions of dollars invested… Japan’s putting in their own plants, Europe’s putting in their own plants. Your semiconductor supply is your licence to operate as a country into the future, not your oil supply.”
