Key takeaways

• In a decade that has seen a number of market moving events, our Global Equity team outline the key factors that have enabled them to deliver long-term outperformance.
• Their differentiated Future Quality investment approach has seen alpha sourced from unexpected places.
• With several long-term growth drivers being evident the team are confident in their ability to find plenty of Future Quality opportunites for the future.

A decade of transformation

In the ten years since our Global Equity team joined Nikko Asset Management and launched our Global Equity strategy, the world has changed considerably. In 2014, the Paris Agreement on climate change hadn’t yet been signed, globalisation was ascending, and Donald Trump was primarily a TV star.

The intervening decade has certainly been busy in terms of global events. We have witnessed the organisational powers of social media, sparking the #Metoo movement and anti-government protests in Hong Kong and the Middle East; conversely, we’ve also experienced its downsides amid the proliferation of disinformation and amplification of political divisions. Meanwhile, increased economic inequality has given rise to populism, and we’ve endured a pandemic.

From a corporate perspective, we’ve seen the technology sector intensify its dominance. In 2014, only half of the world’s ten largest companies were categorised as technology (including online retailer Amazon), but in the summer of 2024, eight of the top ten largest companies were from this sector.

Navigating an evolving landscape

As global equity investors, we are often asked how we have successfully navigated such an evolving market landscape since the strategy’s inception in 2014. And the truth can ultimately be attributed to three key factors.

Firstly, we remain humble. It’s just as important to stay grounded during times of good performance as it is to avoid falling into the doom and gloom loop during challenging times. And we’ve certainly experienced both during the last ten years. Humility helps us question our assumptions and make more objective decisions. When mistakes are made, acknowledge them early to limit losses. These mistakes provide valuable insights for future decisions. Additionally, learning from the experiences of others, both their successes and failures, is equally important.

Secondly, it’s essential to surround yourself with people who share the same core team values. A wise Australian CEO once told us you should never appoint anyone you wouldn’t want to have a second cup of coffee with. This idea of building a well-functioning team and maintaining strong social bonds has proven to be a very useful asset. Most of the time, we all sit together around a huge 20ft desk – which encourages healthy debate and the occasional dispute, usually centred around our differing soccer allegiances!

Like many businesses, our setup was disrupted by the pandemic. Nearly three years of predominantly working from home, with minimal face-to-face communication, created strains that could have been far more damaging if we were not already such a tightly knit group.

Thirdly, having a robust investment philosophy and adhering to it through both good times and bad is crucial. Joining a larger organisation that has faith in your culture and philosophy, in our case Nikko AM, has given us the stability and opportunity to build a team structure centred around our core values, and has empowered us to develop and reinforce our Future Quality investment philosophy.

Thinking differently to outperform: the Future Quality approach

When we first started, it was clear to us that to outperform as stock pickers we needed to think differently. Rather than focusing on the starting point of a company’s journey, we felt that it was the direction of future travel that really mattered. Essentially, we find Future Quality. Those companies beating the fade or on a path to leadership. Companies that are efficient with capital not only today but more importantly for tomorrow, that will seek to attain and sustain rewarding returns. Our goal of investing in quality companies that can attain and sustain high returns on investment has not materially shifted since our start although we’ve worked with our Nikko AM colleagues to refine our Future Quality articulation, and we find that it helps our clients better understand our approach. It can also help explain why our portfolio is quite differentiated from other traditional quality growth portfolios while still delivering long-term outperformance – in the ten years to 2024 our portfolio has delivered a net annualised return of 13.48% versus 12.10% for the benchmark MSCI All Countries World Index.

For us to categorise a company as a Future Quality investment, it must meet our four pillars of Future Quality: Franchise – it has a lasting and sustainable competitive advantage; Management – who demonstrates the ability to make sound strategic and capital allocation decisions; Balance Sheet – growth prospects must be properly financed and not reliant on the issuance of new debt or share offerings; and Valuation – in our view paying too much for a high-quality company can turn into a low-return investment, so maintaining a disciplined approach to valuation is essential. While zeroing in on these pillars helps us construct a quality portfolio, it can also lead us down a road far less travelled.

Differentiated alpha

In the last decade, we have sourced alpha from some unexpected places. While the technology sector may have gathered the most headlines due to its sometimes extraordinary growth, the strategy’s largest sectoral contributors in the last ten years were actually consumer discretionary and financials. This differentiation stems from our prioritisation of individual stocks over sectors. Essentially, by not subscribing to a narrow definition of growth, we have been able to find genuine alpha from the less obvious places – US insurance technology leaders, Australian medtech innovators, US agricultural equipment manufacturers, and Chinese automakers, to name a few.

Moreover, while we regularly analyse long-term macro drivers and structural themes in order to identify potential sources of growth, we won’t invest in a theme if we are unable to find companies that meet our Future Quality criteria. In fact, many of our outsized past performers have been driven by idiosyncratic stories. For example, a new management team may operate in a radically different way from the previous incumbents or stocks in a relatively unloved part of the market can benefit from their relatively low valuations.

The portfolio’s longest-held position is an example of a change in business operations that had a real impact on future growth. Sony, the Japanese entertainment conglomerate, was a notably diversified and somewhat undisciplined business ten years ago that was spread too thinly across too many areas. By prioritising three or four of its most promising business strands, Sony has been able to establish market leadership in those areas and return to sustainable growth.

The other feature of our alpha track record has been the ability to source it widely across regions, sectors and market capitalisation. Whilst some commentators have questioned the success rate for active investors in the United States, this large market has been a notable source for the winning future quality companies we seek. Whilst technology is a notable feature of that market, particularly in more recent times with the emergence of AI, our success has just as much been about other areas of that market.

The US insurance sector is a case and point, with the competitive dynamics back in 2015 being quite rightly a turnoff for the industry overall. However, within many industries, growth in market share can be a more important dynamic than the market overall, and Progressive Corp was testament to this. Unusually led by a female CEO, this company has been able to differentiate itself through better use of data analytics and a differentiated direct delivery to customers. The result has been superior growth, high ROE and the ability to sustain this over the whole period until today.

Discipline investment

The ability to be able to step back and re-evaluate our investment decisions has been another contributor to our long-term outperformance. This pragmatism doesn’t just apply to buying decisions, but is also a key part of our selling discipline.

An important part of our team structure is that we don’t just rely on individual sector experts to make investment decisions concerning specific stocks. Our culture encourages all team members to express their views as it is only together that we can best find and challenge ideas – in our view, there is no monopoly on truth. In practice, we find a team-based approach makes us less emotionally invested in individual stocks, enabling a more critical assessment of when to buy and sell.

And while there have certainly been times when we have held on to a stock for too long or didn’t invest quickly enough, our process has been designed to recognise these mistakes rapidly.

The discipline of strictly sticking to our Future Quality investment philosophy has also resulted in a relatively low portfolio turnover. We believe it’s important not to overtrade and, over the last decade, our average stock holding period has been around three years. Rather than tracking the prevailing macro conditions, the drivers supporting our four pillars of Future Quality tend to be of a longer duration, with valuation variability (of which there have been some extremes in the last five years) being an appropriate catalyst for appropriate portfolio changes

What’s more, the durability of our Future Quality pillars provides an element of shock absorbency that can dampen stocks’ reactions to past and future periods of volatility.

An eye on the future

The ‘Future’ element of our Future Quality approach is just as fundamental as our focus on ‘Quality’. Even though stock selection remains our number one priority, it would be remiss to ignore important macro and structural drivers of future growth. After all, stocks rarely operate in a vacuum.

Looking ahead, we see three long-term thematic opportunities.

• Enablers of the energy transition

The need to reduce humankind’s reliance on fossil fuels and create cleaner alternatives through renewable energy sources and greater electrification is irrefutable, but the transition is not straightforward. Existing energy supplies will need to be maintained and supported, cleaner and more sustainable energy sources introduced, and investment accelerated into electrical infrastructure to cater for artificial intelligence (AI) driven datacentre build outs. We have identified investment opportunities in all of these areas, although limited fiscal spending and fickle political support mean that the pathway will likely remain bumpy.

• Providers and enablers of healthcare efficiency

With an ageing global population, providing sufficient and efficient healthcare, and reducing the cost of these services, will be one of the most important challenges going forward. This sector is proving to be a great hunting ground for investment ideas, as healthcare companies rapidly innovate to deliver much-needed solutions.

• AI adoption

The emergence of AI has become impossible to ignore. Our research shows that while AI contains an element of hype, it likely to be the transformative technology for the next generation. It is too early to define the long-term winners, but there are market leaders already benefitting from the capex rollout underway that fit our Future Quality criteria.

Yet, no matter how enticing the theme, it is important to reiterate that we will only harness these opportunities if the representative companies align with our Future Quality philosophy. We have been unwavering on that standard for ten years and we will remain steadfast well into the future.

Adherence to values as team evolves

It is also important to us that the culture we have established over the last decade is maintained as we move forward. Founded on the principles of Diligence – we only invest in companies we fully understand and trust; Respectfulness – we treat clients, colleagues and peers with mutual respect; Mindfulness – we always aim to do what’s best for our clients; and Transparency – we are open about everything we do; this culture is the foundation of our process, and is integral to maintaining the trust and goodwill of our clients.

Where we do anticipate change is within the team. Over the last ten years, our team has already expanded, with the purpose of building out the team to ensure continuity for when some of our older members look to retire (which is unlikely to happen for some time). In our view, by selecting the right team members now, and instilling in them the foundations of our Future Quality ethos we will have established the right building blocks to ensure our portfolio will continue to outperform.

And future growth doesn’t daunt us. Since we joined Nikko AM in 2014, the size of our team’s assets under management has grown from US$250m to US$5bn, and we are hopeful that it will continue to be trusted with more client assets. From day one, we factored in liquidity considerations as well as how we could best avoid concentration risk and are confident that we still have plenty of capacity.

Ultimately, our ten-year story adheres to the adage: that if you plan for success, you are more likely to deliver it. We look forward to continuing our investment journey along the road less travelled for the next decade and beyond.

The Yarra Global Share Fund is invested in the Nikko AM Global Equity Fund managed by the Global Equity Team of Nikko Asset Management Europe.

The Global Equity team is a proud partner of Future Generation, an Australian-based social impact investment organisation that supports children and youth mental health.