The five stages of a company’s lifecycle

Fund managers need a distinct and reliable process to maintain their edge and keep them ahead of the index. When we sat down with Peter Rutter, Head of Global Equities at Royal London Asset Management, we asked about his strategy, which begins by sorting companies into one of five stages in a lifecycle.

He told us that: “What we're looking for in any one particular investment basically depends on where it is in the life cycle. How we analyse and value companies also varies by lifecycle”. In this short video with transcript, Peter runs through each of the five stages, using the returns on capital generated by the major tech companies to illustrate each one of these stages.

Edited transcript 

“We allocate every single company in the investment universe into one of five corporate lifecycle categories:

1. Early stage innovation and growth
2. Compounding
3. Fading
4. Maturity
5. Potentially turn around/distress 

The point of allocating companies to different lifecycle categories is that what we're looking for in any one particular investment basically depends on where it is in the life cycle. How we analyse and value companies also varies by lifecycle. 

The insights from seeing the world through this lifecycle lens that is something that we believe gives an investment competitive advantage. 

What we notice is that returns on productive capital for companies tend to progress along a lifecycle over time. 

Early stage innovative, disruptive companies, like Amazon, often have quite low returns on productive capital, but they're improving as they invest in growth. If they're successful, like Alphabet or Google, they're returns on capital can be very high. 

So, innovation drives returns on capital up at the start of the lifecycle, for what we call accelerators and compounders. But once a company is successful, competition and fade in excess profitability is a very powerful force. So, a company like IBM is slowing and maturing in our framework. It's a decent business, good returns on capital, but they are slowing and maturing over time. 

Numerically, most companies are mature in our framework. They make returns at or around the cost of capital but even from there, competition continues to pressure returns potentially. 

So we also have turnarounds where returns on capital have sunk below the cost of capital. And a company like Sony would be an example for a company in this part of the lifecycle. 

Now, the key for us is that we allocate every single company in our investment universe into one of these five lifecycle categories. And how we analyse and value businesses and what we're looking to see in them for them to be good investments varies by lifecycle category”. 

Enjoy that?

For further analysis from Peter and the team at Ironbark Royal London Concentrated Global Share Fund, please visit their website