One such company is Europe-based Ashtead. It is a construction equipment rental company that has the majority of its business in the US. It is experiencing increased demand from its customers, who are seeing the benefits of a flexible, capital-light model in an uncertain world. On top of that, Ashtead is taking significant market share as its smaller competitors seem to struggle to compete given a lack of financing, and older equipment.
Both of these drivers of the company are significant changes relative to previous economic cycles. This means that Ashtead continues to grow steadily, despite US construction only growing at a low single-digit rate, and we believe it will continue to strongly outperform the underlying market.
However, it appears that market participants still view and value Ashtead as they have always done – as a relatively low quality, cyclical business, dependent on the strength of the US construction cycle for its growth.
As a result, the slowdown in industrial activity in the US during the summer months, in particular in the oil & gas sectors, may provide an investment opportunity in this company.
Finding potential winners in volatile markets
The above example demonstrates the benefits of our Focus on Change stock-picking strategy. Through this, we seek to find positive changes at the company level that the rest of the market has not fully priced in. This philosophy is particularly well-suited to the current market, given the greater pace of change and larger opportunities for finding non-consensus stock insights.
Currently, investors are concerned about China’s economic growth. In the US, the much anticipated rate rise was delayed until December, signalling that the US recovery had shown some signs of faltering. On a more positive note, European economic growth has held up relatively well, led by the UK – although all the major Eurozone economies are showing improving trends.
Nevertheless, a number of European stocks and sectors with exposure to global markets have been struggling, with industrial businesses and luxury goods companies among those seeing earnings pressure and falling share prices.
When the market reacts this way to macroeconomic data, near-term volatility can provide an opportunity for investors with a long-term time horizon and a bottom-up, stock-picking focus. Such a market backdrop has reinforced the need for a robust and repeatable investment philosophy and process, which is style agnostic in order to take advantage of these prospects.
Unconstrained investing – our definition
While the market offers diverse opportunities, investors tend to hunt for the best possible risk-adjusted returns. This has consequently given unconstrained investing greater prominence within the financial world.
However, ‘unconstrained’ means different things to different people. To us, it means we have the freedom to express deep, stock-level insights to the fullest possible extent without consideration for potentially inhibiting benchmark constraints, risks or biases.
This ability to invest in only our highest-conviction ideas means that our portfolios are the purest expression of stock picking, reflecting our best investment ideas and representing truly active investing. It also means we seek to avoid those areas of the market that we think are less attractive and where the risk/return profile is poor.
Putting our process to work
How does this look it practice? First, we construct a portfolio that focuses on our stock-specific insights (Ashtead’s market share gain opportunity being a perfect example). We then diversify our thematic risks so that changes to the macroeconomic outlook won’t blow the portfolio off course.
Market volatility can be stressful for market participants. But for the genuinely long-term fundamental investor, taking an unconstrained, stock-picking approach, such bouts of upheaval can prove extremely profitable.
Stan Pearson is head of European equity at Standard Life Investments
Past performance is not a guide to future returns. Investment involves risk and you may get back less than your original investment. Standard Life Investments (Hong Kong) Limited is licensed with and regulated by the Securities and Futures Commission in Hong Kong and is a wholly-owned subsidiary of Standard Life Investments Limited. Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments Limited is authorised and regulated in the UK by the Financial Conduct Authority. Calls may be monitored and/or recorded to protect both you and us and help with our training. www.standardlifeinvestments.com © 2016 Standard Life, images reproduced under licence
This material is for informational purposes only and does not constitute an offer to sell, or solicitation of an offer to purchase any security or company, nor does not constitute investment advice or an endorsement with respect to any security or company.
All information, opinions and estimates are those of Standard Life Investments, and constitute best judgement as of the date indicated and may be superseded by subsequent market events or other reasons.