Investors have been filled with caution this year and rightly so, but this has led to short-term thinking in the market, according to PineBridge’s Rob Hinchliffe.
Despite a narrow market performance led by the ‘Magnificent Seven’, Hinchliffe’s PineBridge Global Focus Equity fund has beaten most of its peers year-to-date and over a longer time frame.
By focusing on buying companies with undervalued long-run growth potential, this GARP (growth at a reasonable price) focused fund has managed to stay on top of its sector despite a tumultuous period for growth equities.
The $644m strategy has top-quartile performance over a one-, three- and five-year period versus other global equity funds in the Hong Kong and Singapore mutual fund market.
“I think being bottom up, this is a great market for being an active investor,” Hinchliffe (pictured left) told FSA.
Describing the fund’s approach, he said he is simply “looking for companies where we think the view of the company is better than what the market thinks, over the medium to long term”.
Thermo Fisher Scientific case-study
Thermo Fisher Scientific is one example of a company which he thinks the market is underestimating its future growth potential due to a narrow focus on the short term.
The fund bought a position in the biotech and life sciences equipment supplier during the third quarter of 2023.
“I think the market is taking a short-term focus and taking company guidance for the current year and then extrapolating that into the future,” Hinchliffe said.
Indeed, as interest rates have risen, public company executives are exercising caution when sharing their outlooks and providing conservative earnings guidance.
Coming out of Covid-19, many companies struggled to manage their supply chains, but healthcare companies at the centre of the pandemic were impacted a lot more than other industries.
“Many healthcare companies, particularly companies in the same area as Thermo Fisher, are dealing with results right now where demand for their products isn’t as good as it typically is,” Hinchliffe said.
He thinks the market seems to be interpreting the inventory issues at Thermo Fisher and concluding that the company is now a slower growing company than it used to be several years ago.
“But we don’t think that’s the case,” he added. “We think it’s this Covid supply-chain issue, the world is just normalising and once we get through that, Thermo Fisher’s growth rates will return”.
“The valuation of the stock is trading more like that their growth rates are going to be slower than it used to be.”
Performance of Thermo Fisher Scientific over five years
In fact, Hinchliffe argued that the company has actually transformed itself into a business where it has a faster growth rate than it used to.
“They’ve acquired businesses more in the services area that are growing faster with higher margins, and Thermo Fisher is now a one-stop shop full service from drug discovery all the way to making manufacturing drugs,” he explained.
“You can go from step one to the end of the process faster than your competitors because they don’t need a bunch of different companies to do it.”
“So, we bought a company that we think has a faster growth rate in the future than the past, while the market thinks it might have a slower growth rate, at a valuation that reflects that.”
Positive trends in the industrials sector
Hinchliffe said that the wider industrials sector is another example of where the market is extrapolating the same issue.
This is one reason why the fund has a notable overweight to the industrials sector, where it has 25.6% invested, versus the benchmark 10.3%.
When supply chain issues were prevalent, many industrial companies saw their orderbooks and backlogs soar.
However, now that supply chains are normalising, these backlogs are getting worked off as companies order less than they used to at the height of the supply chain chaos.
Despite the apparent near-term headwinds, Hinchliffe thinks that industrial companies have several trends playing in their favour, including increased investments into new factories to de-risk supply chains as well as the drive to net zero.
“I think the market doesn’t yet appreciate the ability of some companies to help their customers get cleaner and their ability to gain market share,” he said. Companies that use less energy for manufacturing their products are gaining market share and growing their revenue faster, he said.