RISING IN THE MIDST OF DISRUPTION

The current catchphrase is, “DISRUPTION”.

Even though certain primary forces at work that are causing the disruptions – technology, globalisation, demographics and environment – are not new1,  it was the environment, especially with COVID-19, that pushed the world over the edge. We might not have witnessed or experienced disruptions on so many levels at one go.

Ray Dalio, founder of Bridgewater Associates, the world’s largest hedge fund, in an interview last month mentioned a few drivers when he was thinking of the current economy:

Drivers2 Characteristics
1 Longterdebt cycle •High debt
•Zero or near zero interest rates
2 Monetary Policy •Printing of money
•Market led by liquidity instead of fundamentals
•With high liquidity, asset prices continue to rise
3 Rising global power •High tension
•Trade wars
•Disruption in supply chains

And as COVID-19 has changed how we live, work and play, it will also be partly responsible for probably another decade or more of slow growth. Thus, in the selection of equities to be exposed to in your portfolio, they must be sectors and businesses that have continued to innovate and delivered results over time despite the headwinds.

Unfortunately, the word “disruption” usually has a negative connotation.

However, it could also spell ”opportunity” for businesses with products and services that bring new relevance to what people are looking for, and these businesses would thrive instead.

So the keyword should be “relevance”.

How do we look for relevance among so many companies?

In our previous write-ups, we discussed the various types of companies: the cyclicals, the mature and stable, the structural losers, and the structural winners.

And some types of companies tend to perform poorly in certain environments:

We have also identified structural winners as the companies which are relevant to their customers and will continue to be so despite the environment of slow growth, and other disruptions.

Thus, it is with great joy to feature the investment methodology, H.E.R.O., that has been selecting structural winners for our stocks portfolio as well as a new fund that embodies this methodology, the Phillip Global Rising Yield Innovators fund (Bloomberg Ticker: RISINGA).

It has been a dream long coming to bring even more value to our clients who have trusted us over the years with a fund that is made up of structural winners. These companies selected by the methodology are characterised by H.E.R.O. which stands for “Honourable. Exponential. Resilient. Organisation.” It is operationalised into a unique, systematic 4-step investment process to identify the structural winners, AND it is also the only fund in the market that focuses on both dividend yield and innovation-driven capital gain to enhance total shareholders’ returns with zero exposure to cyclical businesses while avoiding yield traps.

What is this fund about?

The Fund defines “innovators” as companies which provide solutions with technologically enabled new products and services that potentially transform the way the world works. It seeks to identify companies that offer faster, cheaper, more productive, and more cost-effective products and services that people would want.

These companies are also exceptional innovators and focused market leaders in their respective fields with unique, scalable, recurring-revenue business models with high profitability which deliver innovative products and services indispensable for our daily well-being. These companies are generating high profitability at the inflection point of their exponential growth trajectory – thus winners with structural growth.

So, instead of simply investing into an index, which would include all sectors and businesses that are cyclical, mature ones that could get disrupted, or worse, structural losers, this methodology would suss out only the structural growth winners. And as these winners are innovators, their businesses continue to be relevant and resilient despite disruptions, delivering results.

What is the H.E.R.O. Investment Methodology?

© 2018-2020, HERO Investment Management Pte Ltd, KB Kee

1) H: Honourable, High-Integrity, Solves High-Value Problems

Companies in this fund are run by entrepreneurs who have a higher purpose and are also honourable and far-sighted.

This is backed up by the investment framework which eliminates downside risks from accounting tunnelling fraud and misgovernance. The proprietary forward-looking fact-based accounting fraud detection system within the framework developed by Kee Koon Boon, thought leader of the H.E.R.O. investment methodology, ensures that there aren’t malpractices such as unusual related-party transactions, consolidation accounting craftiness (opportunistic shifting of expenses and debt into unconsolidated entities), and hidden balance sheet liabilities.

These entrepreneurs are homed in on solving high-value problems for their customers and the society. An example would be Sectra, a Swedish company that’s active within the medical technology and encrypted communication systems. It is a global leader in medical imaging software systems (PACS) with a particular focus on cancer diagnostics, serving over 2,000 healthcare providers around the world. The company is also Europe’s public defence cybersecurity leader in the area of encryption and secure mobile communications, serving governments, defence organisations, EU and NATO organisations that handle classified information.

This fund is also weighted more heavily in developed countries as the quality of information flow to investors is higher, and thus conducive for due diligence.

2) E: Exponential

The companies are also focused on and expected to benefit from an exponential non-linear structural growth with disruptive innovation and a large addressable market. Beyond economic moats, these companies have an edge in the 4Cs:
i) Curiosity: Creates curiosity and discovery, gives recommendations that are customised to user, resulting in deep engagements
▪ Examples: Amazon Prime, Netflix, Spotify

ii) Compellingness-Craftsmenship: Uses process intellectual property, intangible know-how and mastery to give comfort, convenience, as well as “customised” pain-killing mission-critical solutions
▪ Examples: Novo Nordisk, Givaudan

iii) Circumspection: Delivers or enables circumspection with insights, intelligence, tools and analytics that help the customers make better decisions
▪ Examples: Microsoft, Sectra, Wolters Kluwer

iv) Community: Builds a community where members can connect and interact repeatedly, uses user-generated content in reviews and ratings to foster trust; feedback loop to improve; and social capital to expand into complementary products and services
▪ Examples: Apple iOS, Spotify

3) R: Resilient

The framework also eliminates businesses that are not resilient in recessions. Not only do these companies have financial resiliency with healthy operating cashflows, strong balance sheets and pricing power, they also enjoy business model resiliency.

In other words, the companies have:
i) Resilient recurring revenue streams
ii) Proprietary/Unique offerings and solutions
iii) Capabilities in design knowhow, manufacture of mission-critical and innovative products in multiple applications
iv) Attractive position in the value chain/ecosystem without being dependent on certain suppliers or customers only

For example, Microsoft’s shift to the cloud has left it well-placed for a world where large numbers of people are working remotely. The Teams communication app has become a way for workers to stay in touch. Instead of 20 million people using the app in late 2019, 75 million people used it in a single day in April. The Azure cloud computing platform has also become a more critical part of the digital backbone for many companies.

As the leaders of these companies are guided by an inner compass and governed by a greater purpose in their pursuit to contribute to people’s welfare, their businesses are therefore also resilient as they are quietly fulfilling their inner innovation work and delivering value, day in and out.

These companies are therefore more independent of economic cycles and less sensitive to changes in interest rates compared to banks, property or energy.

4) O: Organisation

These companies understand deeply that the organisation needs to be larger than any single leader for the firm to last the distance and find enduring success to grow stronger with each passing day.

A company that is properly managed and has a corporate culture of decentralisation, trust and cooperation fosters innovative experimentations. This signifies investing in a system so that decision rights are cascaded, with relevant and timely knowledge disseminated throughout the organisation.

One such Swiss company, Givaudan, has created perfumes and flavours (for food and beverages) of the highest quality over 125 years, innovating and inspiring trends in scent and taste. Simply for strawberry flavours alone, they have a portfolio of about 2,200 different notes3! Dior, Saint Laurent, and Prada turned to Givaudan to create the iconic J’adore, Opium, Infusion d’iris, and more.

The company has since trained over a third of the world’s creative perfumers when it opened a perfumery school in 1946. Givaudan’s perfumery team is also the largest in the industry.

Who makes up the Investment Team?

It is Unicorn’s honour and privilege to be appointed by Phillip Capital Management (PCM) as General Adviser to PCM. PCM is a well-known local brand and an independent fund management company since 1995, which is a part of the Phillip Capital Group established 40 years ago.

While PCM gives the final nod to the companies in the fund, they have adopted the H.E.R.O. investment methodology as the core methodology for this fund.

We are proud to be associated with Kee Koon Boon, founder of HERO Investment Management (HERO), as our Equity Research Partner. He is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst. He had also taught accounting at the Singapore Management University (SMU) as a full-time faculty member and pioneered the 15-week course on Detecting Accounting Fraud in Asia as an official module at SMU.

We have introduced HERO to PCM, and as General Adviser to PCM, we are remunerated for recommending this fund.

We are excited to propose this fund to you that’s backed by an investment philosophy we believe in wholeheartedly. Do speak to your Unicorn consultant if you would like to know more or have further queries.

Note: We will increase the frequency of our communication with you during the current turbulent times. We will continue to communicate monthly with you during usual times.

References:

  1. Ernst & Young Megatrends Framework 2020 EYQ 3rd Edition
  2. Adapted from video interviews with Ray Dalio on Bridgewater Associates
  3. Givaudan’s website

 

 

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