In the UK the economic outlook is mixed. Data released at the end of August painted a picture of resilience from the UK consumer, and the dreary talk of stalled business investment in the post-Brexit aftermath has been somewhat silenced by recently released services and manufacturing PMI’s – surveys of confidence in respective sectors – showing a sharp rebound from July’s shocks.
On one hand it may be too early to rule out a recession, but on the other if Britain’s economy shrugs off the Brexit result and starts performing more strongly, rising interest rates may serve to zap the currency, at the exporter’s dismay. Either way, GDP growth seems likely to remain lacklustre at best.
In our portfolios we utilise a blend of growth and value styles. Known as growth-at-the-right-price (GARP), we seek-out companies we believe demonstrate high-than-average levels of growth, be it in revenues, earnings, and so forth, but aim to not overpay for that growth i.e. finding companies where the market appears to be undervaluing their fundamental worth.
Importantly, we look for companies with ‘structural’ growth drivers, where long-term underlying trends - for example changing demographics, over-arching governmental policies, or technological innovations – drive revenues and enable businesses to grow regardless of what’s going on in the wider economy. It’s an investment strategy that seems particularly logical in an environment of persistently low growth.
Small and mid-size companies - where we focus our attention – serve to further enhance exposure to the underlying structural growth trends. Their inherently small, nimble, ambitious management teams, unencumbered by red tape or giant operations, are able to seek-out new markets, launch new products or services, or look at new ventures overseas; and ultimately build sales rapidly and tap into the trends that underpin the business’ success.
A number of positions in our portfolios exemplify the structural growth approach:
NMC is primarily an operator of speciality hospitals, general hospitals, medical centres, and day surgeries in the United Arab Emirates (UAE). Floated on the Alternative Investment Market (AIM) – London’s junior market - in 2012, it has been the darling of investors, with this summer seeing it reach seven times its original valuation (please remember future performance bears no relation to past performance).
It plays a number of structural trends. Mandatory healthcare is being rolled-out across the UAE and the governments could feasibly spend much more per capita: currently 3.2% of GDP versus 9.4% in the UK and 17.2% in the US. Demand for these services is also strong as the burden of disease – health issues that affect a population most – is in areas that are both treatable and chronic such as diabetes and obesity. And the weight of demand will only increase with population growth rates predicted to run at an annual clip of between 3-5% until 2030, according to local authorities.
John Laing Group (JLG) is dedicated active investor and manager of infrastructure assets, boasting over 160 years of history in the infrastructure sector. Since 2001 it been gradually divesting itself of construction, house building and facilities management businesses, to focus on major transport, social and environmental infrastructure projects awarded under governmental public-private partnership (PPP) programmes and renewable energy projects. PPPs have proved popular with government, utilising private sector efficiencies to drive key infrastructure build. JLG is now seen as highly experienced in this regard: over the past 25 years it has completed well over 100 of these types of projects.
Structural growth comes from the length of the commitments – usually between 25 and 30 years – as well as the growing population demographics and increasing urbanisation. It means the project pipeline is stuffed, and the size of the projects is ever-increasing.
Gym Group a low-cost no-frills operator in a UK health and fitness market worth around £4.5bn. Its structural growth comes from the recent emergence of these true no-frills players, which have jettisoned swimming pools and cafes to reduce costs. Rather than just trying to steal market share of the mid-market players and the circa 9m current gym-goers, they have been trying to tap the potential of the 57% of UK adults who would go but for the cost. The strategy seems to be working. To put it into context the market grew by c.1.4m people between 2011 and 2015.
Technology is also a key part of Gym Group’s business model, from PIN entry systems to bring-down manned reception staffing costs, to database analysis to reduce the risks associated with building greenfield sites. Scrapping 12-month contracts in favour of fully flexible membership has also been a boon for new business.
The twists and turns
Growth investing is inherently risky; a delicate and volatile balance exists between top-line growth and share price performance. Increasing the reliability of revenues by gaining exposure to long-term structural trends strategically aims to mitigate some of these risks, and by looking at smaller companies to seek out opportunities exposure to these trends is only further concentrated.
The above example is intended for illustrative purposes only and is not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. Henderson Global Investors, one of its affiliated advisors, or its employees, may have a position mentioned in the securities mentioned in the report. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.
Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.