Simon Steele has put disruption in its place.
According to the AMP Capital head of global equities, disruption is “simply a modern-day term for the change to a longstanding phenomenon that has underpinned economic development for a period of time”.
In a recent paper, Steele says while technology-enabled disruption remains a “key investment theme in the 21st century”, old-fashioned financial concepts – like making a profit – still hold sway.
“Ultimately, long-term share price performance is almost entirely explained by the trajectory of cash flows,” he says, “thus successful companies (and successful investments) are those that can be relied upon to generate a persistently high and sustainable cashflow from their assets over many years and expand those cashflows well into the future.”
Steele says new-age investors do have to identify the “structural shifts” channeling profit pools from dying business models to disruptor successors – and position their portfolios accordingly.
“Nevertheless, being positively exposed to structural shifts (or disruption) does not in itself define a sound investment,” he says. “Far from it, it is perfectly possible to be an unprofitable disruptor with disastrous outcomes for shareholders. The graveyard of would-be disruptors is very large indeed.”
The trick, of course, is to separate the fake disruptors from the genuine long-term businesses, which Steele says feature three fundamental qualities:
- a substantial and enduring competitive advantage;
- strong capital allocation decision making; and,
- certainty of demand.
“Only when all these components are aligned is an investment genuinely great, while failure of any of those fronts can have significant and costly consequences,” he says.
The London-based Steele heads the team of portfolio managers running the AMP Capital Global Companies Fund, which launched a NZ portfolio investment entity (PIE) version last November.
And the fund does boast an eclectic mix of stocks in its top 10 holdings, the latest disclosure documents show, ranging from a couple of well-known western brands – Visa and Ferrari (almost equal-largest in the portfolio) – to less-familiar names to NZ households, Chinese liquor giant, Kweichow Moutai, and Swedish lock-maker, Assa Abloy.
Over the six months to June 30, the AMP Capital Fund, which has accrued $33 million in the retail PIE, returned 24.5 per cent against 16.1 per cent for the benchmark MSCI (ex-tobacco) index in NZ dollar terms.
However, it was an old-name brand that was a stand-out for the June quarter with Ferrari reporting “strong earnings upgrades reflecting increasing confidence in the product line-up out to 2022”, AMP Capital says.
And it was another ancient corporate name, the almost 150 year-old Danish Chr Hansen – which, admittedly, is focused on disruptive food biotechnology – that dragged on performance over the period.
“The company negatively revised its profit outlook based on short-term weakness in certain markets, including China,” AMP Capital says. “We continue to engage with the company however remain confident of the longer-term opportunity.”
Disruptive innovation is one thing; disruption to cashflows is another.