Equity investors have always had a strong affinity for dazzling innovations and are drawn to them like moths to a flame.
History is littered with examples of high expectations leading to steep valuations and dashed hopes, from the Railway Mania of the 1840s to the RKO radio boom of 1928, the Dotcom bubble and, more recently, the beginnings of genomics. .
Once the stock market carnival is over, the less glamorous, laborious and tedious work of implementing disruptive innovations begins.
The real long-term benefits of an innovation often accrue to “silent disruptors,” companies that go out of their way to apply the innovation in practical ways that make a real difference. The second mouse gets the cheese.
“Innovative” and “disruptive” are two adjectives that rarely appear in the context of equity investing.
Higher-dividend stocks are often assumed to be twilight companies in declining industries.
Those who see their last days quietly over or risk finding themselves on the wrong side of history as the world moves towards a low-carbon economy.
This is partly due to the bifurcation of corporate stock markets (and media) into opposing camps of predator and prey, old and new economy, disruptor and disrupter, resulting in a dramatic but is generally an oversimplification.
By applying our thematic investing process, we have identified a class of companies that are behind the scenes, silent disruptors with established and growing businesses, where investors can be on the right side of history and benefit today. healthy cash flow, earnings and dividends.
When investors think of innovative disruptors, it is usually stocks with longer duration, higher volatility and higher returns that come to mind.
They are the “extroverted” disruptors favored by high-conviction growth investors.
Some of these companies have produced incredible risk-adjusted returns and become household names in the process, and many more will in the future. However, this is not what we seek to include in our clients’ equity income portfolios.
Silent disruptors, on the other hand, have a very different risk profile that sits at the opposite end of the equity risk spectrum.
Their lower risk and reward profile is more typical of mature, cyclical or defensive franchise companies. For many investors, they don’t look like disruptors and the full implications of the innovations they apply in their businesses are often overlooked.
The strength of diversity
The silent disruptors we identify all tend to provide sustainable revenue streams for companies that can expect long-term organic growth but, due to our thematic approach to idea generation, they come from very different industries.
This is clearly desirable to ensure that we are able to deliver well-diversified and resilient portfolios.
An example is Air Liquide, the world’s second largest supplier of industrial gases and part of our climate change investment theme.
The company doesn’t get the high valuations of a fuel cell start-up, but it is instrumental in expanding the world’s capacity to generate clean hydrogen, which will be increasingly in demand as alternative energy source in industry and transport.
In addition to being a central player in a key industry for the future, Air Liquide’s business has proven to be solidly defensive in the face of economic and market downturns.
Regarding our aging investment theme, Medtronic is an American company specializing in minimally invasive surgery, miniaturization of medical devices and medical robotics.
Medtronic’s development of its Hugo device brings welcome competition to robotic surgery.
This is accelerating the pace of innovation and, we believe, will give patients around the world unprecedented access to surgical skills at relatively low cost.
A third silent disruptor is DS Smith, the second largest producer/supplier of corrugated packaging in Europe and a portfolio of Sarasin under our Evolving Consumption theme.
DS Smith’s innovative approach to packaging for circular use is experiencing strong organic growth driven by e-commerce and demand for recyclable/reusable packaging.
DS Smith is committed to making packaging 100% recyclable or reusable by 2023 and aims to have all of its packaging recycled or reused by 2030.
Income investors have a choice
Most investors want to do the right thing.
Anyone in doubt need look no further than the colossal sums that have been invested in ESG-focused funds in recent years.
However, when it comes to investing in income stocks, many fund managers are curiously content to retain exposure to high dividend payers in detrimental sectors such as traditional energy and tobacco.
Some may believe they can leave these companies before the music stops – or maybe they hope the music never stops.
In our view, neither of these positions is defensible for an asset manager engaged as a long-term manager of his clients’ capital.
Alex Hunter is Global Equity Portfolio Manager at Sarasin & Partners