With key equity markets volatile, bond yields racing to zero, central banks out of dry powder and governments consumed by politics, 2020 promises to be a year of uncertainty for investors. The one thing investors can’t ignore is the investment process.
There is a Zen proverb, which says:
“Before enlightenment; chop wood, carry water.
… After enlightenment; chop wood, carry water.”
For investors confronted by market noise and volatility, there is no more important time to do the basics well.
This means consistently executing the investment process.
Focus on companies with pricing power, an industry or regulatory structure that allows price increases at or above inflation, and structural growth, where growth reflects long-term change rather than the ebb and flow of the economic cycle. Infrastructure companies like toll roads and mobile towers offer these characteristics and can be particularly valuable to a portfolio during periods of uncertainty.
Spend time with management to understand what motivates them, where they are going and what contingencies they have in place if things don’t go to plan. Our team conducts over 500 management, site visit and regulator meetings each year – we will do 500 if markets are up and 500 if markets are down.
Assess the quality of companies, from barriers to entry and financial leverage to management incentives and board independence. Infrastructure companies with positive environmental and social impacts should minimise political and regulatory risks and preserve their licence to operate.
Identify companies with value, relative to history or a considered range of risk scenarios. When stocks trade above these scenarios, have the discipline to sell. When stocks trade below, have the conviction to buy.
Be aware of changing macro conditions when constructing portfolios, to ensure these conviction stock calls remain the primary driver of returns.
In times of stress, it pays to do the basics well.
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