By Jayson Forrest - Managing Editor  - IMAP Perspectives

Insync Funds Management’s approach to portfolio management is focused on investing in a portfolio of highly profitable companies that have a long trajectory of growth. This growth, according to Monik, is backed up by global megatrends.

“When it comes to investing in megatrends, advisers and managers need to have a disciplined framework that not only provides consistent strong returns over a full investment cycle, but also have powerful opportunities to blend investment styles that complement the traditional value/growth approach that most investors have in their portfolio,” says Monik.

However, as the world becomes increasingly volatile and unstable due to a range of issues, like geopolitics and supply chain demands, more businesses are becoming challenged operating in this highly disruptive environment.

Speaking at the 2022 IMAP Portfolio Management Conference, Monik questioned the traditional way of looking at building portfolios around the value and growth axis. He says this is because these changes are happening at such a rapid pace that it’s no longer just about company valuations but more about the actual business itself.

“The fact you have a company on a low P/E ratio does not necessarily protect investors from significant downside risks,” he says. “That’s because business models can become incredibly challenged.”

He points to a local example - AGL.

“When I was managing an Australian equites portfolio many years ago, we referred to AGL as being a utility, with stable, predictable earnings and a great P/E that should be in everyone’s portfolio,” he says. “It was priced at about $30 two years ago but today, it’s $5. That’s a startling example of what is happening across every industry, as businesses become increasingly challenged.”

According to Monik, there are three key factors driving these structural shifts that are impacting  almost every industry. These are: shifts in demographics; multiple technological advancements; and net zero sustainability.

1. Shifts in demographics

Monik believes the demographic shift we are seeing today is probably the most profound that has been seen. This demographic shift, including a rapidly ageing global population, is impacting many companies in the demand for their products and services. But it’s also a shift, he says, that is creating a “basket of opportunities” for investors.

“Another important generational shift we are seeing is what’s happening with Gen Z (born between 1997-2012, aged 10-25). They will make up 23 per cent of the world’s population by the end of this decade. So, the way they socialise, buy and consume things, their interests, and even how they buy equities, is distinctly different from the generations before them,” Monik says.

“You need to take the time to really understand Gen Z, because they are the future. It’s from this generation that tomorrow’s spending power will come.”

2. Multiple technological advancements

Advancements in technology are happening at a breathtaking speed, which can itself be a challenge just to keep up with. Traditional businesses have to contend with competition from cyber companies and the Cloud, as well as the rollout of 5G - the fifth generation mobile network, enabling a new kind of network that is designed to connect virtually everyone and all digital devices together.

“Semiconductors are getting faster, with greater storage capacity, which will enable greater machine learning and artificial intelligence into all businesses,” says Monik. “That is disrupting a lot of businesses. Add to this virtual and augmented reality with how we shop, which retailers need to adapt to. All these things are happening very quickly, which means companies need to be ahead of the game and investing now in their own technology. If they don’t, they will be left behind.”

3. Net zero sustainability

The move to net zero carbon emissions and a more sustainable future, will affect every industry and investment portfolio. “The whole world is changing so rapidly that both advisers and managers need to be more thoughtful when constructing portfolios, particularly when ensuring that the ESG and sustainability needs of investors are met.”

<sub>Megatrends and long-term sustainable growth

The world continues to change rapidly. In the 1960s, the largest companies included the likes of DuPont, Kodak, AT&T, and General Motors. Today, the largest companies are software-based businesses, like Amazon, Alphabet, and Nvidia. This shift from physical to online-businesses means advisers need to have a forward-looking approach to the next investment opportunity of the future. And this is where megatrends become important, says Monik.

“If you want to look at future value creating businesses, then you have to look at those companies investing heavily in R&D, innovation, intellectual property, and capability. That’s because they’re the companies that are going to drive value well into the future.”

Monik believes one of the attractive aspects of megatrends is that they blend well with different styles of investing. That’s because they span multiple regions, sectors, and business eco-systems. 

“Take for example, Apple,” he says. “The Apple iPhone has rapidly grown over the last 15 years. It began by giving users access to the Internet, and then it moved into apps. In fact, Facebook and Spotify were created because of smartphones, which were instrumental in allowing those companies to come to the market and become the behemoths that they are today. 

“Apple has since moved into content streaming, payments and now into health. So, there have been multiple megatrends that have been driving Apple’s business, which have been largely missed by the market.”

Monik continues: “Geographically, the third largest market for wearable earphones is India, with that country expected to have 600 million more people moving to the middle class over the next 10 years. So, that represents a significant opportunity for Apple, which it is well positioned to leverage this growth.”

Today, Insync Funds Management is taking advantage of these global megatrends in its portfolio construction, and is currently exposed to 16 megatarends in its global equities portfolio. These megatrends are:

• Contactless economy;
• Workplace automation;
• Silver economy;
• Emerging middle classes;
• Streaming;
• Data analytics;
• Video gaming;
• Internet of things;
• Enterprise digitalisation;
• Pet humanisation;
• Premiumisation;
• Food away from home;
• Household formation;
• Beautification and wellbeing;
• Experiences; and
• Low emission energy.

Monik emphasises that not all of these megatrends are technology-related. In fact, two of Insync’s largest exposures are ‘pet humanisation’ and ‘beautification and wellbeing’. He reveals the spend on pets continues to grow at about 6-8 per cent per annum, which is well ahead of GDP, while the ‘beautification and wellbeing’ sector is growing at 2-3x GDP.

“What makes stocks grow over time is earnings growth. Consistent earnings growth is what drives share prices up over the long-term,” says Monik. “So, by following megatrends and following these profit streams, we feel that the portfolio we have at Insync is well positioned to keep on growing consistently into the future.”

According to Monik, when investing in megatrends, advisers and portfolio managers need to be aware of fads and short-term trends. Instead, they need to look for sustainable growth. The key to this, he says, is to have a disciplined investment framework.

As part of this future-proofing of portfolios, Monik believes that before investing in a stock, advisers should ensure the stock complies with four key criteria: alignment to a megatrend; have a disruption advantage; have high R&D spend; and have a high return on invested capital. He says these four criteria are essential for sustainable growth of a portfolio.

He explains: “The stock has to be aligned to at least one megatrend, and a stock that is aligned to multiple megatrends makes it even more attractive. Innovative companies also tend to spend a huge amount on R&D to future-proof their own businesses and avoid any disruption risk, which makes those companies particularly attractive when building portfolios. And ultimately, a company needs to be profitable.”

Monik adds that another important aspect that advisers should consider in portfolio management is ESG. He believes the growing importance by investors to invest in sustainable businesses that are ESG compliant, along with rising consumer demand for ESG products and services, makes ESG and sustainability investing an important issue that cannot be overlooked.

Ultimately, Monik adamantly believes investing in global megatrends is not only a compelling investment strategy, it also offers investors an opportunity to future-proof their portfolio while delivering them long-term sustainable growth. By correctly identifying megatrends, advisers can ride the tailwinds of individual stocks and sectors, providing them with a long runway of predictable growth.

“There are many compelling reasons to invest in megatraends,” says Monik. “These include: outperformance through cycles; future-proofing of portfolios; longer runways of growth; style, industry and market agnostic; ESG; and uncorrelated outperformance.

“But if you want to future-proof your portfolios, making them sustainable over the long-term, while delivering an excellent return on investment, then you really need to consider global megatrends.”

Monik Kotecha is CIO at Insync Funds Management. He spoke on megatrend investing in global equities as part of the 2022 IMAP Portfolio Management conference.