The accelerating pace of change – investment implications and opportunities

The pace of change continues to increase across a range of industries, presenting both opportunities and risks for investors. I recently discussed the implications of this environment with Lee Rosenbaum, Co-Portfolio Manager of the Loomis Sayles Global Equity Fund.

What do you believe are the implications for investing in an environment with a rapid pace of change?

Lee Rosenbaum: “We believe the pace of change across industries has accelerated over the last few years, and we continue to witness disruption across a range of global businesses including retail, media, healthcare, and consumer products.

This change has made it challenging for some companies to keep pace in terms of both execution and strategy. However, we view this as an opportunity to identify businesses and buy those companies that are successfully navigating technological change. In some instances, we have found opportunities in companies that are the disruptors themselves. By focusing on our three alpha drivers of quality, intrinsic value growth, and valuation through our bottom-up fundamental research, we seek to identify those businesses that we believe can be successful long term.”

Which sectors, industries, and types of companies do you believe are being most heavily affected?

Lee Rosenbaum: “Retail has certainly been affected. Both consumers and businesses can easily see prices across markets, pressuring companies to consistently demonstrate value for price. This pressure has intensified as online offerings continue to grow. The COVID-19 pandemic has accelerated this trend, driving what we see as a significant increase in e-commerce penetration from both existing and new users.

Other online services are also seeing rapid adoption. Also accelerated by the pandemic are entertainment content and the move to telecommuting. This is driving additional demand for storage, networking and content delivery, as well as digital security.

We have also seen a disruption in healthcare. The pharmaceuticals industry has seen an impact on pricing as a result of rising consumerisation, led by the increasing prevalence of high deductible health plans. In the United States, rising pressure in commercial markets to lower healthcare costs is also having an impact on pharmaceutical markets. As a consequence the majority of our current healthcare holdings are in the services, equipment and other healthcare segments, where we view business models as being more durable.”

Which industries and types of companies do you believe are benefitting the most in this environment?

Lee Rosenbaum: “We have seen beneficiaries across several industries. In e-commerce, a number of companies have benefitted from the increase in online offerings as well as from tailwinds from the pandemic. Consulting companies with strong technological expertise have also benefitted. We believe these firms are well-positioned to help clients adapt their business models to an environment of continued disruption.

We have also seen industrial companies leveraging technology to go directly to their consumers, while at the same time increasing their margins and strengthening their customer relationships. And lastly, a number of healthcare companies have been successfully navigating this environment. These include one of the largest managed care operators in the US, which offers back office technology to healthcare providers.”

What do you look for in a company to illustrate its ability to manage the pace of change effectively?

Lee Rosenbaum: “Our assessment of a company’s ability to manage change is interwoven throughout our investment process. We are looking for companies with sustainable competitive advantages. Many of our companies have leveraged this period of disruption to reduce costs. Some have increased use of augmented and virtual reality technologies to perform virtual sales and service visits.

The COVID-19 pandemic required many companies to adapt very quickly to new ways of operating (working remotely, breaking down silos, adapting slow-moving hierarchies, and bureaucracies, etc.) How have you seen this play out in the companies in which you are invested?

Lee Rosenbaum: “We’re also seeing many companies reducing or assessing their real estate footprints. And we anticipate increased percentages of workforces will be working from home for an extended period of time. One of the companies in our portfolio participated in a study which found that over 25% of working hours in knowledge work are lost due to distractions from interruptions from colleagues. In conjunction with the study, the company announced that remote work will become the primary experience for all its employees, who will have access to smaller working hubs to spark creativity and maintain that company culture. We view this as an interesting alternative to either a fully remote approach or an ad hoc approach.

We believe our portfolio of companies have sustainable competitive advantages and balance sheets that will give them the flexibility to weather challenging environments and thrive over the longer term. This is evidenced by the portfolio’s return on equity, which is meaningfully higher than the MSCI All Country World benchmark, and with financial leverage that is significantly less than the benchmark on a net/debt to earnings before interest, taxes, depreciation and amortisation basis.”

Is the pace of change making it more difficult to forecast sustainable competitive advantage and intrinsic value growth, and if so, how is your investment process taking account of this?

Lee Rosenbaum: “We do not believe that this increased pace of change is making it more difficult for investing per se. Rather, we see this as an opportunity. For all our investments, we need a high degree of conviction in our three alpha drivers of quality, intrinsic value growth, and valuation. We embrace forecast uncertainty by constructing three scenarios for every security that’s being considered for the portfolio. We start with a base case, which is our view of the most probable trajectory of a business; a downside scenario, which reflects the possible risks to that base case; and lastly a best case scenario if events were to exceed our base case assumptions.”

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The Loomis Sayles Global Equity Fund is distributed in Australia by Investors Mutual. To find out more, hit the contact button to get in touch or visit our website for more information.