Earnings Compounders with Structural Advantages
AllianzGI International Growth Fund
Author: Ticker Magazine
Last Update: Jul 31, 12:40 PM EDT
|To stay focused on the long-term view, a manager has to be able to cancel out the short-term market noises. Robert Hofmann, portfolio manager of AllianzGI International Growth Fund, focuses on companies with structural growth drivers, sustainable business models and high barriers to entry and ferrets out earnings compounders.
ďWe believe that the power of compounding is completely underestimated by the market. There is too much short-term noise, and Wall Street focuses just on the next quarterly earnings or if the numbers are missed by a cent.Ē
Q: What is the history of the fund?
The AllianzGI International Growth Fund was established in 2015, but the international growth strategy exists since 2013. We decided to launch an international strategy given the success of our European Growth Fund and the assets we gathered over time. We manage the European Growth Fund since 2003 and I joined the team in 2005 with a focus on structural growth.
The fund has assets under management of about $20 million and there are about $22 million under management in the international growth strategy.
Q: Is it global or purely international?
Itís an international fund that invests across all regions except the U.S., but we do invest in Canada. The biggest part of the International Growth Fund is Europe; our expertise is here, but we also look for the best ideas elsewhere. Approximately 50% of the fund is invested in Europe and 7% in Japan.
The rest of the portfolio is across Asia; we have some holdings in Mexico and Brazil, one position in South Africa and several holdings in China, especially in the Internet tech space. We have big underweights in other areas.
Q: What are the underlying principles of your investment philosophy?
We focus on long-term structural growth and try to avoid the cyclical growth component. We like the emerging middle class in Asia, for example, as well as other structural drivers. We avoid the cyclical GDP growth component, which is related to short-term growth.
We have a pure bottom-up stock-picking process; there are no macro calls and no technical allocation. We take a fundamental view on the companies we own. We donít play with derivatives and we are benchmark agnostic. Either we like a company and we invest in it, or we donít like it and donít invest in it. It is a truly stock picking, fundamental research focused fund.
We donít think of the companies as stocks. Instead, we assess if we want to be an owner in this business for the next 10 or 20 years. The fund is based on long-term thinking and high-conviction fundamental stock picking. The turnover is usually below 20%, even lower in new names. For example, this year we only sold three stocks and bought two.
Q: What are some of the important factors in the evaluation of companies?
We are a growth fund, so it is important to see long-term, structural growth drivers. However, the sustainability of the business model and the quality of the business are even more important, because we are long-term owners.
We look for high-quality businesses that can generate high returns and cash. Our focus is mainly on cash generation, not earnings. Obviously, a company that generates a lot of returns also attracts a lot of completion. In order to defend its return and its business model in the long term, it needs high barriers to entry.
A company with a sustainable business model and high barriers to entry may compound or grow its earnings over the next 10 years by 10% or 15%. Although these numbers may not be impressive, the power of compounding makes a huge difference. Earnings or cash flow growth of 15% a year means a company that doubles its earnings or cash in five years and quadruples them in 10 years.
We believe that the power of compounding is completely underestimated by the market. There is too much short-term noise, and Wall Street focuses just on the next quarterly earnings or if the numbers are missed by a cent. I think that the earnings per share number really distorts the importance of the business.
We have a very different approach, because there are great businesses out there, with great managements and culture, and these businesses are able to compound their earnings over long time periods. If the business can quadruple its earnings or cash flows in 10 years, valuation is not a huge driver. The most important factor is the combination between structural growth and sustainability. For a business to grow for a long time, it needs a sustainable business model, high barriers to entry and good pricing power.
Q: What differentiates you from your peers?
A main differentiator is the focus on the power of compounding and the long-term view. We actually donít care about quarterly results. Of course, the aggregates must be good in the long term, but we donít care about the next quarter EPS. While Wall Street and the market focus too much on the short term, we look for long-term factors and use of the power of compounding.
Another differentiator is our focus on the management quality, its culture, execution and capital allocation. We think that these factors are underappreciated because they are not tangible; you cannot touch or grade them easily. However, if you are holding the company for 10 years, they make a huge difference.
The key is not only to buy good companies, but also companies with great management teams and with people who are open, honest, and have intrinsic motivation. Such teams are not incentivized only by money, but also by creating something sustainable for the long term. We put a lot of emphasis on spotting companies that have good culture and execution.
We are focused on cash generation and on what the company does with free cash. A management team that isnít focused on value creation may do a stupid acquisition, while a great management team, which cares for the shareholders and has a long-term view, could make a wise capital allocation decision.
For this strategy to work, we need a really long-time horizon, while most funds have a holding period of less than a year. Our fund doesnít make much difference over the short term, because we focus on long-term drivers.
Q: Would you describe you investment process? How do you generate ideas?
Thereís no quantitative process or screening. Because we have strict quality measures, our investable universe is actually not that huge. There are thousands of listed companies, but since our goal is to invest in the best ones, we can cut off 80% to 90% of the market very quickly. The result is a watch list, where we concentrate our efforts.
The idea generation comes from the team and from the global buy-side analysts on our platform, who are also screening the markets. They are sector specialists, located across the globe in London, Frankfurt, North America, Hong Kong, Tokyo, and Taiwan. They are not part of the team, but they are part of the Allianz investment platform. The key element is that they understand our philosophy, our thinking, how we see the world, as well as our long-term view. They do provide us with many ideas. We have a Facebook like IT tool, called Chatter, which makes communication across the globe quite easy.