2 portfolio managers at a $24 billion firm share 8 stocks that are pursuing innovation even in a slo

July 2024 · 5 minute read
2023-02-15T10:30:00Z

As equity markets face off against a brewing recession in the first half of 2023, many investors are taking cover by flocking to high-quality stocks with robust fundamentals and stable cash flows.

David Souccar and Daniel Kranson, portfolio managers focused on global equities at Vontobel Quality Growth — which manages $24 billion in assets — are following the same philosophy. But they believe that investors can still find innovative and growth-oriented companies when they go looking for high-quality stocks.

"Quality growth means that we are investing in companies that we believe have a competitive advantage, which translates itself in higher margins, higher returns, and higher degrees of predictability of earnings," Souccar explained to Insider in a recent interview. "The way to outperform the market and create value for our investors is to invest in companies that can grow much faster than the market."

Boring businesses can be the most recession-proof

Although Souccar and Kranson's investing strategy is mainly focused on bottoms-up analysis, they still take macroeconomic trends into account. They believe that the ongoing correction back towards a low-growth and low-rate environment will provide quality growth companies an opportunity to outshine the disruptive tech stocks that have dominated markets over the past few years.

That may seem counterintuitive, since growth stocks have recently struggled against their value peers as investors have reemphasized fundamentals. But Kranson made the distinction between the high-flying growth stocks that sell investors on overinflated future growth prospects, versus the quality growth companies that are oftentimes less flashy but already have a demonstrated history of solid earnings to back up their promises.

"We don't invest in hope — which means that by the time we invest, probably the stock is going to be a little bit more expensive, but that's fine," Souccar said. "We're not creating a portfolio as a quick way to become rich. This is about slowly compounding, but doing better than the market."

Souccar and Kranson are generally sector-neutral, although they do tend to avoid the energy sector since it depends on forecasting oil prices, which Souccar said was an impossible task for investors. Most regional opportunities are currently in developed markets, although the pair have also been increasing their emerging markets exposure recently, especially to China due to its reopening.

Because they focus on companies that are less cyclical, Souccar and Kranson believe their portfolio will be better shielded from a global earnings recession, and will help them to outperform in recessionary years. On the other hand, this also means that their fund doesn't perform as well compared to more aggressive growth portfolios during "bubble markets" such as 2021.

Boring stocks can be the most innovative

Sometimes, quality growth stocks like the ones Souccar and Kranson invest in can be more boring than companies with high speculation and flashy CEOs. But that doesn't mean the boring companies aren't also doing interesting things, Souccar explained.

For instance, one stock the portfolio currently holds is Ashtead (ASHTY), a UK-based industrial equipment rental company. By itself, that might not sound like a super exciting business model, but Ashtead has revolutionized technology to understand supply, demand, and inventory for equipment in different markets to better price rentals from local construction companies accordingly.

"It's about innovation above and beyond your competitors and in that market, and they are definitely the best," Kranson said.

As another example, Souccar pointed to Walmart (WMT), which he said innovated supply chain technology to provide better product mixes in its supermarkets.

Souccar and Kranson also own Sartorius Stedim Biotech (SDMHF), which provides equipment for the biotechnology sector. "Demand for new drugs is not going to fall in a recession, which means their clients still need to buy their products and they're going to continue to grow," Souccar explained.

Although investments in certain countries can come with their own set of risks, Souccar and Kranson try to mitigate that by investing in multinationals such as L'Oreal (LRLCY) and Diageo (DEO). But in China they're bullish on fast food conglomerate Yum China (YUMC), which owns brands like KFC and Pizza Hut. "It's a great business and a great brand, but the earnings are depressed right now because people couldn't go out to eat. So as life goes back to normal, there is going to be an acceleration of earnings growth," Souccar said.

Japan-domiciled Keyence (KYCCF) has also stood out for being a global leader in the rapidly expanding vision automation industry, which helps manufacturers improve both productivity and quality control during the production and e-commerce delivery process. And both Souccar and Kranson pointed to Epiroc (EPOKY), a global leader in underground mining equipment, as a standout holding.

"The problem with underground mining is that when you go with a diesel truck inside to take out the ore, there's a lot of diesel and pollution and CO2 emissions … Epiroc is transforming the underground mining operation from diesel to electrification," Souccar explained, pointing out potential benefits, including meeting ESG targets, as well as providing safer and healthier environments for workers.

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