OFFSHORE SUPPLEMENT
30 November 2020
FINDING GROWTH OPPORTUNITIES IN AN UNCERTAIN WORLD JANICE ROBERTS Editor: MoneyMarketing
T
he world is now facing a long period of structurally lower growth, meaning that more and more companies will simply not grow, says Erik Mermet, Senior Associate Partner and South Africa Market Head at London-based Sarasin and Partners. “We actually expect to see a scenario where an average of 28% of companies will see shrinking profits, compared to just 17% before,” he told last month’s BCI Global Investment Conference. The firm is well-known for its global, multi-thematic approach, running one core fundamental process that integrates Environmental, Social, and Corporate Governance (ESG) factors and climate analysis with a very strong focus on stewardship and active engagement with companies. “This process underpins all of our offerings, including the equity allocation within our GlobalSar multi-asset funds.” Mermet adds that equity investing remains the core of what the firm does – and is the core performance engine within the GlobalSar fund range. “We need a strong framework to help us find compelling and longterm growth opportunities.” The firm’s investment philosophy entails following a multi-thematic approach, “which is really to help us understand where the world is going over the long run, but most importantly, what companies can actually benefit in the future. He believes that growth rates are going to be a lot lower going forward, even more so now with COVID-19. “This may seem obvious – and you’ll
hear it from everyone – but the truth is that if you add demographics, the debt, the potential for deflation that we’re facing, the reality is that nominal growth is actually never going to be as high as it used to be.” The amount of companies that have sought-after return dynamics is becoming smaller. “It’s an environment of fewer winners than in the past, but one in which the winners are substantially more valuable… and the current volatility actually provides incredible opportunities for stock pickers like us.” As weak companies will inevitably fail, and great companies will adapt, Mermet believes that it’s essential to understand the long-term themes that are driving broad systemic change. “We look for sources of growth that reach across sectors and are more permanent, such as the move to electronic payments or the use of cloud computing, for example. And we try to move away from shrinking industries that rely more on the exploitation of natural capital, which are not only unsustainable but will also be subject to higher regulation, taxation and consumer backlash risks.” The firm’s multi-thematic framework helps to narrow the global equity universe down to about six hundred businesses. Its team of analysts then carries out a rigorous, bottom-up stock-picking process to find not only those companies that are interesting from a thematic point of view, but those that are also genuinely good investments, to form the firm’s global buy list of about 100 stocks. “We narrow it down to five megathemes that are designed to be very broad and consistent over time, lasting over the next 10 to 30 years.”
MULTI-THEMATIC IDEA GENERATION
Source: Sarasin
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The first mega theme – aging – is country accounts for a third of observed across all major economies global emissions. “We expect to see as it has huge consequences for health a wave of investment in climateand pharmaceuticals, “particularly related industries on the back of now, given the statistics related to this, providing us with even further COVID-19”, says Mermet. opportunities.” The second is evolving Each of the five mega-themes has consumption, where the focus is a series of more specific trends or on how patterns of consumption subfields, Mermet explains. “For are changing, for example, how example, under digitalisation we look millennials consume differently to at cloud computing or digital media, baby boomers. but we also look at much more niche The third mega-theme – industries that maybe less people automation – concerns how the drop have heard of, such as food-chain in the cost of robotics is allowing technology under the automation what used to be done by people to theme. These subthemes evolve move to machines constantly, depending at an ever-greater on where our analysts’ WEAK COMPANIES research takes us, and rate. “We’ve actually heard they often overlap.” WILL INEVITABLY from industry As growth is scarce, FAIL, BUT GREAT contacts that gaining an in-depth fully autonomous understanding of ESG COMPANIES WILL factories are factors allows for, at the ADAPT being increasingly very least, a significant considered as a response to current reduction of tail risk. “Our themes are social distancing rules, but also as founded on environmental and societal a way to prepare for potential new change, and the weaker global GDP pandemics in future,” Mermet says. is, the more relevant it becomes to The fourth mega-theme, integrate ESG considerations into one’s digitalisation, concerns the shift from fundamental analysis, allowing us to analogue to digital. “We think that’s far avoid companies that are structurally from done yet, and this creates a huge challenged in terms of how they plan amount of opportunities – which are to deploy capital. We are also believers only exacerbated as the world shifts to in active ownership – once we own a more permanent patterns of working company, we engage with it on issues from home and online shopping.” where we want to see positive change.” The final mega-theme is climate Potential threats to shareholder change, which is seen as an enormous capital or the materiality of ESG and increasing force affecting factors are assessed using a traffic companies as the world moves to a light system across 15 ESG criteria. greener economy, and Sarasin analysts “The key point of how we integrate fully integrate climate considerations ESG in our process and our thinking into their fundamental analysis of is that we don’t just focus on the stocks across all of the five themes. highest rated companies. We actually In endeavouring to meet the try to capture the upside from challenges that climate change potential ESG upgrades, as we truly presents us with, Mermet believes believe there’s a great deal of value to that a broad range of investment be found in the transition to a more opportunities will emerge, from sustainable economy.” renewable energy and electric vehicles to smart buildings and agriculture. Sarasin’s GlobalSar multi-asset fund range has Climate change and the move to a posted consistent strong performance, with, as an greener economy provides many example, the flagship GlobalSar Dynamic fund – opportunities. the one with the highest equity component – up “We have no doubt that any 8.4% annualised over five years in USD (as of the end of September, P shares, net of fees). upcoming stimulus will be heavily biased towards the green economy, like the European Commission Next Generation EU recovery plan. “At his recent speech at the UN general assembly, Chinese president Xi Erik Mermet, Senior announced the country’s intention Associate Partner & to achieve carbon neutrality by South Africa Market 2060, which was a big surprise Head, Sarasin and and is significant given that the Partners
