Think Thematic and Extend Your Duration
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Families can meaningfully improve returns in the public equity markets by thinking thematically and extending the duration of their ideas. While the public equity market provides advantages over other asset classes, including flexibility of company selection, investment entry point, and liquidity post-investment, many families are overwhelmed by the multitude of choices.
Families can combine elements of different investment styles to improve public equity returns through an approach we summarize as “think thematic and extend duration.” From private equity, we appreciate that business plans can take multiple years to execute. We are willing to back management teams with excellent products or value-added plans to improve company performance. Similarly, we borrow the patience and investment duration of the wealth industry, which often focuses on time horizons exceeding 10 years but with limited control over near-term outcomes. Finally, from our time covering tech, media, and telecom (TMT) at the hedge fund Point72 Asset Management, we recognize that a company’s fundamental growth and quarterly results are a major input to the feedback loop that determines a company’s investment performance in the public markets.
We add a layer of focus on companies with solid secular or “thematic” growth tailwinds. Per Bloomberg data, eight of the top 10 performing industry groups in the Russell 1000 over the last five years had above average five-year sales and EPS growth rates. So clearly, sales and profit growth are critical factors in strong investment performance. To the investor’s benefit, companies with secular tailwinds tend to see their valuations get more attractive as they produce more sales and profit over time. The same is not true for value-oriented ideas, where profits can shrink and valuations become less attractive over time.