Lauren Ryan from Thinktank speaks to Laurence Parker-Brown for our IN60 series. The Inside Adviser
That consumers are influenced heavily by well known, trusted brands comes as no great surprise. What does, though, is that they rate life insurance as the least most important tool in ensuring financial security.
Flipping the script in pursuit of alpha
Speaking at the Inside Network’s Equities and Growth Assets Symposium, the only conference dedicated to this important asset class, co-portfolio manager of the Franklin Global Growth Fund, Francyne Mu said the time was right for investors to start “flipping the script and look beyond the usual suspects” in resetting their equity allocations.
No surprise who the “usual suspects” are.
Mu is referring to Facebook (Meta), Apple, Amazon, Netflix, Google (Alphabet), Microsoft, and all the other household tech names that we all recognise and are familiar with. “It’s fair to say, however, that the FAANGs have had a great run. They were the early disruptors, with good secular tailwinds and have done well for investors,” says Mu.
But the FAANGs have had their day in the sun and their days are numbered, she says. These mature businesses will soon go from being disruptors to the ones being disrupted. Facebook’s Meta is a good example. Facebook, the great disrupter, is in the process of being disrupted, by TikTok.
Take the NASDAQ as a proxy for innovation and success stories. Mu uses eBay as an example. The company was a top 10 company in 2005 with a NASDAQ index weighting of 1.5 percent and $60bn market cap. In 2010, its market cap dropped to $36bn market cap and revenue slowed. Its margins were still OK, and underlying growth drivers were present, but eBay was losing its competitive advantage to a significant disrupter, Amazon, which was hot on its heels.
“We need to question at what point are we seeing these disruptors? Do they become more cyclical names and not disruptors?” says Mu.
And it’s a great question.
At what point do you lock-in profits and sell a disrupter before it becomes disrupted? The opportunity cost of not doing so is huge. Not investing in a huge opportunity to capture massive upside potential from some of these global small caps, is where the ‘sweet spot’ is.
Mu says, “All the usual suspects are there in the top 10 MSCI World Index. Underneath $500bn in market cap, there are basically 1,530 stocks. This massive pool of companies often fades into the distance. The sweet spot is the $50bn market cap. This means these aren’t speculative risky companies. These names are established names, with a good track record. A good example in an Australian context is – CSL and Cochlear have gone through innovation and are around the $100 market cap. But on a global level, not many know about them.”
It’s finding these ideas that aren’t well-known on a global scale; that is where the alpha is.
“Sustainable growth is key. That is consistent growth with a long term competitive advantage, supported by long term secular drivers. Relative valuation support is driven by internal models. Generates strong free cash flow, not much debt and from a valuation cash flow (DCF) – strong fundamentals. These are the characteristics of a great company,” says Mu.
Mu also prefers pure-play companies to conglomerates. A pure-play is able to better focus on its niche product or service and build scale better than a conglomerate. As an example she picks, Intuitive Surgical, Inc. (NASDAQ: ISRG), which is a market leader focused on robotics surgery. A pure-play stock, flying under the radar. Another example is Zebra Technologies (NASDAQ:ZBRA) – which has a first-mover advantage in bringing Android OS-based products to the marketplace. Scanners at Woolworths; FedEx scanning barcodes; that’s all Zebra’s tech. With a 45% market share, it has great pricing power that can offset any negative pressures. A company flying under the radar, but which has great exposure to good markets and is a supply-chain efficiency winner.
Mu says there is a huge pool of global small caps with a great story that fits in that ‘sweet spot’. It’s time to flip the script with the large-cap FAANGs before they become another Kodak moment.
