Why "buy and manage" is the better way to invest in stocks
Note: This episode was taped on Monday 28 October 2024.
We've all heard time and time again about the importance of buying and holding stocks for the long term. If you sell too soon or you have too short an investment horizon, you'll lose out on the eighth wonder of the world (as Albert Einstein so beautifully put it): compounding.
But perhaps a better way to approach this mantra is to "buy and manage" your investments. That doesn't mean you need to lose your long-term horizon - far from it. It also doesn't mean that you need to be turning over your portfolio a lot either. In fact, as Ryan Quinn, Client Portfolio Manager at WCM Investment Management says, the WCM Global Growth Equity strategy turns over just 30% of its portfolio in a year with half of that activity being additions or trims to existing companies in the portfolio.
In this edition of The Pitch, Quinn shares with us the benefits of this approach as well as his views of the global equity market opportunity set today. With valuations, by some measures, in their 95th percentile relative to history, there is no doubt that any extra gains being made at all-time highs by the largest and most well-known stocks will likely be muted at best.
We'll also talk about two secular tailwinds the team has eyed and invested in, which you may not expect to hear from a growth manager - healthcare and aerospace.
EDITED TRANSCRIPT
How do you view the opportunity set today just given equity markets are at all-time highs and that it's been propelled mostly by growth stocks?
Quinn: I think the risks for the average investor out there are buying the broader market. Because you're correct. The valuations are at very high levels, and not all businesses are created equal. Where we differ at WCM is we manage a concentrated portfolio of 35 to 40 growth stocks, and so we're selecting only our favourite ideas in the world that we can make the case that is going to grow. And when things are valued highly, as long as you grow your earnings, that valuation takes care of itself. So, for us, the answer is stock selection and active management.
Why is "buy and manage" the better approach to stocks and not "buy and hold"?
Quinn: I think the business cycle changes and different environments are going to be better or worse for different stocks. If you are lucky enough to buy a business or the shares of a company that rapidly increase, it's our view that you should be diligent about managing the size of that position. Usually, when something rapidly increases, it does create an air pocket below it, and any sort of hiccup or bump in the road for the world can lead that stock right back down to where it started.
We don't want to have two or three positions be 20-25% of the portfolio. That's a way to make money when everything's going up, but when everything's going down, it's a very fast way to destroy capital, and we're in the business of protecting capital.
Does this approach mean your holding periods are shorter?
If you look at our turnover statistics, the portfolio turns over about 30% per year, but half of that is adding and trimming to existing positions. And what we've learned over time through backtesting things is that trading and that buy-in managing exercise has led to alpha over time.
AI is the flavour of the month but what are some of the other secular tailwinds the team has identified?
Quinn: Were not for AI in 2023, the biggest trend in that year would've been GLP-1s, which are the glucose-gene-like peptides that had been previously only helpful for managing diabetes and insulin levels in patients. The side effect of these GLP-1s is weight loss. Now, there are obesity drugs, and so being able to impact the global problems of diabetes as well as obesity, is an incredible runway of opportunity for businesses like Novo Nordisk (CPH: NOVO-B) and Eli Lilly (NYSE: LLY), but it's also going to have a wave of impacts throughout industries.
Think of everything from general healthcare - people are going to be living longer. Think about it in regards to retail - maybe casual athletic wear is more approachable for a broader audience. Or the hospital system where there are going to be positive impacts on cardiovascular disease and kidney disease, which will put less of a strain on the hospital system. Or even maybe healthcare prices will come down.
So that's a very large trend that we are taking advantage of in our portfolio. And then also some trends maybe hadn't been appreciated post-COVID, with one of them being aerospace. We're getting exposure to the engine industry as it relates to commercial as well as military aircraft.
What is one stock in each of those thematics that you are backing?
Quinn: We don't own Eli Lilly. We've owned Novo Nordisk when it was just a diabetes drug that was the original thesis, and we like Novo because it's very laser-focused on that one space. Now, their Ozempic, which is the diabetes drug, has been re-labelled as Wegovy, and is now their obesity drug.
It's had a fantastic run for us because of the efficacy of the drugs and because they are showing these benefits in other areas like cardiovascular and kidney diseases.
There are also several different tests going on in areas like addressing Alzheimer's through GLP-1s. So we're at the forefront of some pretty exciting medicines in that space. And the impact of a healthier world can be extrapolated to a wide number of industries.
And rather than owning either of the aeroplane manufacturers, we prefer to be in the jet propulsion business. So General Electric has an aerospace business [GE Aerospace (NYSE: GE)]. They recently spun off their electric nuclear business called GE Renova to become a pure-play aerospace. So they make the middle part of an engine on a middle-body aeroplane in three parts, the front, the back, and the middle. GE makes the middle bit.
What we love about this industry at the moment, not only is the dominance that GE has in that space in terms of having huge market share with Boeing and Airbus for every single one of their planes, but the commercial airlines are requiring their planes to fly for longer, which means that in addition to the initial sale of the engine, they're going to have much longer maintenance contracts that are very profitable for GE Aerospace.
As you can imagine, keeping those engines running and working flawlessly (hopefully) is in everyone's best interest. Having flown over the Pacific to get here, I'm hopeful that they continue to keep those maintenance contracts rock solid. But it's an area that had gone into a dip post-COVID, and so we are expecting to see that area of the market pick back up.
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WCM Global Growth Limited (ASX: WQG)
WCM Global Growth Limited (ASX: WQG) is a listed investment company investing in global equities. The Company provides investors with access to an actively managed portfolio of quality global companies found primarily in the high growth consumer, technology and healthcare sectors.
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