Finding opportunities in global investment ‘megatrends’, with InSync portfolio manager John Lobb
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Funds management group InSync is Australian-based, but its investment portfolio doesn’t include local stocks.
And the firm’s rationale is based around listed exposure to investment megatrends; changes in technology, demographics and consumer preferences and the companies positioned to capitalise.
Within that mandate, InSync’s core performance metric in stock selection is ROIC (return on invested capital), says portfolio manager John Lobb.
Speaking with Stockhead recently, Lobb discussed the current markets outlook in the contexts of InSync’s key investment philosophies.
InSync’s Global Quality Equity Portfolio is currently comprises 29 international stocks, with an overweight position in US markets.
Those companies have exposure to 10-15 different investment megatrends, which InSync expects to play out over the course of the next decade.
And in turn, it means the fund is less concerned with broader economic metrics such as GDP growth.
“Those megatrends tend to continue regardless of economic growth levels, because they’re based on entrenched shifts like consumer behaviour or demographic changes,” Lobb said.
One such example is workplace automation.
“The priority for companies globally is to streamline a lot of their front and back-end internal business processes,” Lobb said, and companies that assist that transition will benefit.
Within that trend, InSync has positions ranging from tech giant Microsoft to UK company Rightmove, which operates a similar model to local online real estate marketplaces.
Lobb also cited the example of US tech company Nvidia, which is best known as the maker of graphics processing units for the global gaming industry.
But part of its business model also addresses the workplace automation megatrend, he said.
“Within the field of medical imaging, they provide the AI (artificial intelligence) that helps clarify those images,” he said.
“Where an image shows a a broken bone or a blood clot break, AI helps analyse those images which in turn allows medical specialists to make decisions a lot quicker than they could in the past,” he said.
“So that’s a good example of the diverse range of companies we hold within that megatrend of workplace automation.”
While InSync currently has holdings in less than 30 stocks, it scans an investible universe of around 3,000 companies for stocks that fit its investment criteria.
And Lobb said that as an investment thesis, InSync puts a priority on ROIC.
It’s defined broadly as the amount of money a company makes each year, above the cost of its debt and equity.
The metric reflects how efficiently the company is allocating its capital to generate profits.
Relative to other fund managers, Lobb said InSync is fairly “extreme” in terms of the strict ROIC criteria it employs.
“The reason I say that is because it gives you a good idea of the sectors we’re unlikely to invest in,” he said.
That often rules out banks and REITs (real estate investment trusts), along with resources stocks.
“Some resources stocks may exhibit acceptable ROICs for a year or two but over long term they don’t, and that’s really because of the cyclical nature of the sector,” he said.
“The volatility of that that ROIC is often too high as well for us. We’re looking for stability so posting a high ROIC on 2 or 3 years out of 10 doesn’t cut it.”
Utilities such as energy providers are also generally too low, as are defence stocks, Lobb said.
But for with outperformance in ROIC, he returned to the example of Nvidia.
“Over the next 12 months, we expect them to generate a return on invested capital of around 90%,” he said.
“And historically, they’ve typically posted a ROIC in excess of 70% over the last 10 years.”
Overall, the expected ROIC of companies across InSync’s stable is around 60%.
“To put that in comparison, the ROIC on the global benchmark we look at — the MSCI all-country world index — is about 15%. So ROIC of our portfolio is around about 4x that and that’s probably the best way to illustrate our portfolio composition vs the index,” Lobb said.
Other companies in the InSync portfolio include famous US tech stocks such as PayPal and Amazon.
“We definitely have a larger exposure to the US, but that doesn’t mean it’ll be that way next year,” Lobss aid.
“But right now I’d say a lot of the companies that fit our criteria in terms of their ROICs and global growth opportunities are based there.”
In terms of InSync’s investment criteria, he added that a high ROIC doesn’t necessarily mean a business has to operate a ‘capital-light’ business model.
“It’s not necessarily capital-light, but it’s businesses that don’t require a lot of external funding to grow profits,” he said.
“A lot of the companies we own still spend a lot on R&D. Whether that’s in product development, or increasing the barriers to entry for their business.”
“For example, Amazon still spends about US$40bn annually on R&D. And if you adjusted for that spend, their underlying profits would be around US$60bn,” Lobb said.
“So you’d be surprised how much earnings growth these big companies can deliver. Their size doesn’t stop them from delivering 10-15% in EPS (earnings per share) growth year in and year out.”
“If you look at our fund, it’s consistently returned 18% p.a. over the last 10 years,” Lobb said.
“It’s been a pretty good decade for markets but we think (that return) reflects a good way to get exposure to these investment megatrends and the companies operating within them.”