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
So, ideas can come from our team and the Allianz research platform. Another source is our meetings with managements and industry experts. We travel a lot; we attend over 1,000 company meetings per year; we go to conferences and visit companies. Sometimes we may look at one company, but in the research process, we may see that one of their competitors or suppliers or customers is in a stronger position in the value chain. Then we may switch gear and start working on the other company.
We have a list of opportunities, which we constantly research. Even if we find some short-term problems, we may still proceed with buying the company if we know it well and have high conviction. Sometimes we follow a company for years without buying it, but in this period we meet with the management several times and learn a lot about its business. Thatís how we build the conviction and the advantage of knowing the company well.
When we visit the companies, we meet not only the top managers, but also plant or sector managers. That allows us to understand the culture, to dig deeper, and to understand the DNA of the company. So these meetings are also a great source for ideas.
Q: How is your research process organized? How does an idea become a holding?
The research is done within the team. We discuss the ideas with our buy-side analysts, who are sector specialists. Then itís up to one team member to write an investment case if he wants to promote an idea to a ďbuyĒ. The investment case is then heavily discussed in the team. If we like the company and have known it for a long time, we may quickly agree to buy it.
If we have some issues or if we donít entirely understand the company, we would do more research and probably buy it later. We may monitor a company for several years before buying it. It is our principle that we cannot buy a company if we donít understand it. There are companies that are on our watch list but, unfortunately, are not offered a great price. In these cases we would wait for the valuation to come down.
There are thousands of opportunities and we certainly miss some of them, but it is more important to focus on the high-conviction ones that we really understand. If there are short-term issues and the share price goes down because of some noise in the market, then we are the first with the conviction to buy more and add to our position.
Q: How long does it usually take to build the conviction to invest in a name?
Thatís also related to how we differentiate from our peers. It can take years to build a conviction. If you invest for 10 or 5 years, you listen to the quarterly calls and meeting the management regularly; you know their words and their actions. Usually, these companies are rather conservative; they donít tell you any great story before they have executed. You get to know their thinking, their execution and their issues. Each business has some issues, but the question is how you handle these issues and if you can openly discuss, tackle and solve them. So they need to be open.
This type of knowledge you get only if you follow the company for years. The beauty is that the knowledge is compounded as well, but thatís also underappreciated by the market. If you are buying 200 companies every year, there isnít a lot of time to compound your knowledge about each company.
The problem in the financial industry is that many people earn money in the short term and focus on trading volumes, but sometimes they miss the big picture and the long-term development of the company. Everybody admires Warren Buffet and many managers say they use his strategy, but their turnover shows a different reality.
Of course, we have learnt and developed over time. We started with bigger focus on the barriers to entry and then we saw that structure makes a huge difference. I believe that a good manager has to learn over time, has to read a lot, to have patience and the right investment temperament. I donít think that daily action for the sake of action is the best approach.
Q: What drives your portfolio construction process in terms of allocation?
We are benchmark agnostic, so the allocation is driven by conviction only. Obviously, we need to be measured against the benchmark and we need to beat it over the long term, but we would never own a company in a country just because that country is in the benchmark. If we like the company for the long term we buy it, but if we donít like it we donít buy it. It is that simple.
Typically, we have 60 to 80 holdings. The size of the individual positions is determined by the market cap of the company and by our conviction in the management. Small-cap companies usually have lower weightings than large caps. Our bigger focus on Europe and the developed markets is largely due to the better and more developed corporate governance there. Thatís important to us.
As we donít do any tactical cash allocation, we never hold cash. Overall, the allocation is a relative game. If we want to buy something new, we have to sell something else because we donít own cash. That also strengthens the portfolio over time.
We are not allowed to own more than 10% of an individual name and we are not allowed to have an overweight or underweight of more than 15% compared to the sector, but we can differ more on an industry level. Usually, our positions donít go up to 10% but are in the 4% to 5% range.
Q: How do you define and manage risk?
We think about risk in two dimensions. On the one hand, we have the risk management of Allianz Global Investors, which is monitoring everything. We get all the reports and we also have regular monthly and quarterly meetings to make sure that risk is aggregated and managed. Thatís the industry norm.
At the individual stock level, risk is coming from the companies we own. When we buy higher-quality companies, we have less risk. I believe that we reduce risk through buying high-quality, cash generative companies with strong management teams and balance sheets. The market underestimates the company level risk compared to relative, benchmark related risk.
We donít focus too much on macro factors, because we donít think that we can correctly predict all the different macro drivers. By focusing on what we know best, namely, picking great companies and knowing them well, we are better prepared for difficult times.
Actually, we perform better in poor markets because of the balance sheet strength of the underlying companies. Crises usually come quickly and the companies with weak balance sheets are not prepared to survive them. In fact, our companies have higher value creation in weak times than in great times, when credit is cheaper. So, we usually outperform in good times, but the outperformance is greater in weak macroeconomic conditions.
1 2 More: Mutual Funds Archive