Specialist in Asia Pacific, Japan, China, India and South East Asia and Global Emerging Market equities.
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Our philosophy is very simple. We are constantly searching for high quality businesses and when we acquire them, we will work relentlessly with them to create long-term sustainable value through innovation, ESG-led and proactive asset management.
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Stewart Investors manage investment portfolios on behalf of our clients over the long term and have held shares in some companies for over 20 years. They launched their first investment strategy in 1988.
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Our distinct blend of growth and quality has delivered outperformance through market cycles
Successfully uncovering Australian companies that are growing revenue and earnings strongly over time enables us to outperform during rising markets. Our added focus on quality companies that generate superior returns on capital and are improving their management of ESG risks also gives our portfolios additional ballast during falling markets.
Why invest with us?
Across all our Australian equities strategies, we adopt a consistent investment process that blends growth and quality stocks together through a well-established portfolio construction approach that incorporates a rigorously applied discounted cash flow valuation discipline.
These factors enable us to generate consistent outperformance across the cycle for our investors.
That process is driven by our investment philosophy and supported through in-depth industry analysis and rigorous stock research.
Growing companies that generate consistent returns and can reinvest above their cost of capital to provide the greatest shareholder value.
Change to company returns on invested capital has high explanatory power for stock outperformance.
Analysing industry drivers is critical to understanding what drives stock performance and informs our DCF valuation methodology.
Ten years ago carrier pigeons could transfer data faster than the internet*
It’s easy to overestimate what can be done in one year and underestimate what can be done in 10. In the past decade, technology has changed our lives and the investing landscape.
At First Sentier Investors, our Australian Equities Growth team has followed the rapid expansion of the Australian technology industry and invested wisely to capture the success of some of the industry’s best companies.
*A curious fact but nonetheless true – based on a tongue-in-cheek test carried out in rural UK.
Australia’s growing technology sector
With Australian companies competing successfully on the global stage, there are many opportunities for strong capital growth in the technology sector.
Our longest technology holding is a biotechnology giant, CSL. One of Australia’s most innovative companies, CSL spends more on research and development than any other ASX-listed company. We have held the stock continuously in our portfolios since December 2003 when it was the 43rd largest company by index weight. Today it is the largest and our investors have benefited from its impressive 26%pa growth throughout the last 17 years.
Weight of Technology Companies in the Australian Market
Source: Factset, S&P/ASX. Uses constituent data for the S&P/ASX 300 Index, which was established on 3 April 2000. Prior to 3 April 2000 the constituent data is sourced from FactSet based on data provided by the ASX before the index was bought by S&P. However, there is no precise mapping available from the ASX's security IDs to S&P's security IDs. It is provided purely for information and should not either be considered as fully replicating ASX 300 constituents, or relied on for the purpose of investment analysis outside of the context of this material.
We continue to uncover opportunities in the next generation of technology stocks as well – the Software as a Service (SaaS) companies like Altiium, Wisetech and Xero that are disrupting “on-premise” desktop software and rapidly growing sales overseas.
Through our investments in Australian SaaS stocks, we are now helping our investors gain exposure to these structural shifts to cloud-based solutions.
These shifts have been driven by dominant global players like Salesforce, Microsoft, Shopify and Adobe and are now enabling Australian companies to grow rapidly as they also compete successfully on the global stage.
Leading Global and Australian SaaS Stocks Aggregated Revenue versus Implied Costs
Source: FactSet, Aggregated Data from Salesforce.com, Veeva Systems, Adobe, Workday, Atlassian, Xero, Wisetech, Autodesk, ServiceNow, Zendesk and Shopify. Revenue and cost forecasts are based on FacetSet consensus estimates and are not guaranteed to occur.
Our best defence against the pandemic shock
With over 26 years’ experience of growth investing, we recognise the importance of earnings quality alongside revenue and profit growth in driving long-term share price returns. Stocks with quality earnings, as represented in our view by strong or rising returns on invested capital, also tend to ballast portfolio returns during periods of heightened volatility.
Many of our iron ore producers are of high earnings quality; Australian miners have ready access to high-grade iron ore in the Pilbara region of Western Australia and, as shown in the chart below, are among the world’s lowest cost iron ore seaborne exporters.
This enables them to generate extremely attractive margins and return on capital even if the iron ore price falls as low as US$50 per tonne.
Our focus on quality earnings has prompted a longer term overweight to stocks such as Rio Tinto, BHP and, more recently, Fortescue Metals.
Low cost iron ore production support higher quality earnings
At the onset of the 2020 pandemic, our preference for companies with strong (or rising) returns on invested capital lead us to further increase our iron ore exposure, at the expense of energy stocks. We anticipated that iron ore prices would recover quickly as China would be the first country to emerge from the coronavirus crisis.
At the same time, we expected oil prices to fall as global demand for energy fell with the spread of the coronavirus to other parts of the world. This proved a defensive move; stocks with higher earnings quality and strong cash flows tended to retain their value while the wider market suffered a severe price downturn.
Orienting our portfolios towards quality has not only helped during the recent coronavirus crisis. Historically, when the market falls, our strategies typically fall by less - consistently generating excess returns in down markets and helping insulate our investors from market corrections over time – even during the severe falls of the WorldCom, GFC and Euro Debt crises.
Downside market protection: our portfolios typically outperform over down months
Source: eVestment, First Sentier Investors and S&P/ASX. eVestment downside market returns used for years to February 2009 and May 2020. Consistent methodology used by First Sentier Investors to calculate downside market returns over year to February 2003 and downside market return since the inception of the Wholesale Australian Share Fund in January 1994. Past performance is not a reliable indicator of future performance. The S&P/ASX 300 Index was launched on 3 April 2000. Index performance data before 3 April 2000 is a synthetic benchmark sourced from a variety of providers maintained in the First Sentier Investors performance database. It is provided purely for information and should not either be considered as fully replicating ASX 300 constituents, or relied on for the purpose of investment analysis outside of the context of this material.
Why we blend growth and quality
Through our investment process, we blend the characteristics of companies with strong sales/cash flow/profit growth and earnings quality. Along with our preference for quality management running companies with lower environmental, social and governance risks, our Australian equities portfolios tend to generate outperformance through the cycle for our investors.
Our exposure to growing companies in strong industries, such as Australia’s technology sector, tend to result in attractive growth attributes that see our portfolios typically grow faster when the broader market is rising. Looking across the months that the market has risen in any three-year period since its inception in January 1994, our Australian Shares Fund has risen faster than the market in over 55% of those three-year periods (rolling monthly).
Combined with the defensive characteristics of our quality focus discussed in the prior section, the Australian Share Fund has:
• risen 1.7%pa faster (net of fees) than the market during all the up months of the S&P/ASX 300 since January 1994: and
• fallen more slowly than the market by a similar 1.7%pa (net of fees) during all the down months over the same period.
Our blend of growth and quality consistently generates value across market cycles
Source: Upside and downside market returns since the inception of the Wholesale Australian Share Fund in January 1994 calculated by First Sentier Investors using consistent methodology adopted by eVestment. Value added is relative to the S&P/ASX 300, which is the benchmark for the Wholesale Australian Share Fund strategy. The S&P/ASX 300 Index was launched on 3 April 2000. Index performance data before 3 April 2000 is a synthetic benchmark sourced from a variety of providers maintained in the First Sentier Investors performance database. It is provided purely for information and should not either be considered as fully replicating ASX 300 constituents, or relied on for the purpose of investment analysis outside of the context of this material.
Our risk management and strong valuation discipline also ensure that we retain a balanced exposure to growth and quality attributes over time. Our investors then continue to benefit over the longer term from this balanced approach that adds value evenly across up and down markets.
The advantage of blending growth and quality
Source: Upside and downside market returns since the inception of the Wholesale Australian Share Fund in January 1994 calculated by First Sentier Investors using consistent methodology adopted by eVestment. Value added is relative to the S&P/ASX 300, which is the benchmark for the Wholesale Australian Share Fund strategy. The S&P/ASX 300 Index was launched on 3 April 2000. Index performance data before 3 April 2000 is a synthetic benchmark sourced from a variety of providers maintained in the First Sentier Investors performance database. It is provided purely for information and should not either be considered as fully replicating ASX 300 constituents, or relied on for the purpose of investment analysis outside of the context of this material.
Disclaimer: Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of the holdings of First Sentier Investors’ portfolios at a certain point in time, and the holdings may change over time.
Meet the Australian equities team
Dushko Bajic
David Wilson
Christian Guerra
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