Disruption is wiping out entire sectors and companies. While winners are hard to predict, using megatrends such as digitalisation and ageing to identify the losers in advance is the best approach, says Henk Grootveld, head of trend investing at Lombard Odier IM.
Together with two other fund managers, Grootveld joined the Swiss asset manager early last year from Robeco, where he was also responsible for trend investing. He started two funds there: a fintech fund and manages the Golden Age fund. ‘The performance so far has been good. We have beaten the MSCI World since the beginning. This is in line with our target for all trend funds to outperform the world index by 4 percentage points a year over a three to five year period.’
Avoid the losers
What contributes especially to the anticipated outperformance is avoiding the losers, says Grootveld. He points out that only a small number of shares are responsible for the rise in the stock market. ‘95% of US stocks have not been able to outperform the return on American government bonds in the past ninety years.’
This, he says, also explains the failure of most mutual funds to beat the market over the long term. ‘Stock pickers try to predict winners, but that is very difficult in practice. Trend investors, on the other hand, try to identify the losers in advance’, says Grootveld. ‘Trend investors think about the changes that have taken place in the economy and society and that await us in the coming decades. You then map out which companies will suffer as a result. I have been doing this for 15 years and my experience is that two thirds of the outperformance is due to avoiding the losers. By avoiding the losers, you win.’
Two megatrends
Grootveld sees two megatrends that companies must embrace to survive. The first is the wave of digitisation, which is having a major impact on the consumer, financial and industrial sectors. ‘We are at the end of this wave in most industries. The exception is healthcare, which is still in the early stages of digitisation.’
Demographic developments such as an ageing and shrinking population are the second important megatrend, Grootveld anticipates. ‘After World War II, the world experienced enormous population growth and a great deal of prosperity was created. This is now peaking. In large countries, the working population is shrinking. Take France, Italy, Germany and Japan, but also South Korea and China. This will have repercussions on society and the economy.’
Increasing inequality
Grootveld is also responding to two mega challenges: climate change and increasing inequality in the world. ‘We think that inequality has reached its peak, partly because of the pandemic. You see calls for higher wages rising everywhere.’
In his trend funds, he looks for companies that offer a solution to these major challenges and deal well with the two aforementioned megatrends too. According to Grootveld, one of the strongest growth opportunities this decade is in healthcare. ‘We think that digitalisation in healthcare will bring about enormous changes’.
The objective of the new healthtech fund is ‘better care at lower cost’. ‘For example, it involves technology companies developing digital tools that enable patients to keep track of their own data. This improves efficiency but also diagnostics,’ says Grootveld. ‘This is a nice bonus, because good health for everyone is one of the UN’s SDGs.’
‘Another example is that increasing digitalisation in the financial sector has greatly reduced costs, so that virtually all people in India now have a bank account for example. Companies in our fintech fund therefore also contribute to reducing inequality in the world.’
The companies in which Grootveld invests tend to be fast growers. They achieve a high return on invested capital and do not depend on external financing for their growth thanks to their solid cash flows.
Though these shares tend not to be among the cheapest, Grootveld continues to see enough value. ‘As long as you stay away from the FAANGs and hypes such as Tesla, there are still enough attractively valued growth companies to find.’