Amid frothy and fast-moving markets, IMCO’s Fundamental Equities strategy takes a long-term and in-depth approach in its hunt for investment opportunities. We caught up with Angus Botterell, Managing Director, Fundamental Equities, to discuss what goes into finding and partnering with leading businesses poised for long-term outperformance.
Let’s start with an overview of the Fundamental Equities program at IMCO. How do you define this strategy?
Sure – at a high level, our objective is to identify high-quality companies that can outperform through a business cycle. We’re looking for organizations that have a competitive advantage or moat around their business that enables them to earn returns higher than their cost of capital and the rest of their sector on a sustainable basis.
Before we invest, we seek to learn as much as we possibly can about a company through a combination of proprietary research, extensive engagement with management and comprehensive analysis of all the data we gather. We aren’t looking to build a trading portfolio – these really are long-term investments where we build deep, lasting relationships with the businesses in which we invest.
Our strategy also includes what we call Fundamental+, where in addition to investing in a company, we can provide transformative capital to help it accelerate growth, change business mix, shore up its balance sheet or facilitate shareholder transitions, for example.
If I had to sum it up in a sentence, we want to truly partner with companies that earn sector-leading returns while creating value for our clients.
How large of a portfolio are you building? And how has the pandemic impacted this process?
We are planning on assembling a select group of 20 to 40 names that will look very different from the market in terms of sectors, geographies, market cap and factors. It’s an in-depth process – our initial due diligence process alone takes six to eight weeks—and we are always gathering new information and shaping new insights about these companies. On average, we expect to hold them for at least three to five years, but preferably much longer.
We’re generally sector-agnostic, and we have global expertise across both emerging and developed markets. It’s worth noting that our group is still new inside IMCO, which itself is a relatively young organization. This gives us a lot of flexibility because we don’t have to manage inherited positions and we have a blank slate as we build this portfolio.
As for COVID-19—on the one hand, the pandemic has made us more efficient. We can engage with many more management teams than we could pre-pandemic, primarily because we don’t have to travel to see them. On the other hand, as we evaluate potential investments, we often have to work a little harder to figure out which factors showing up in business performance are pandemic driven and which are not. That has made our due diligence process a little more intensive.
Market valuations are currently running high, almost across the board. How do you view this challenge when searching for outperformers?
It’s certainly true that the market has gone a little haywire in terms of valuations and there have been some unusual sector rotations. With that said, a company’s market valuation is only one of the inputs into our decision making.
First and foremost, we’re trying to beat the market. So that means we are looking for companies that present better value relative to their peers. We also take a holistic view when analyzing a business. We look at the share price, certainly, but we also look at cashflow, relative multiples, we conduct a sum-of-parts analysis, and so on. And we, of course, want to develop a clear point of view of a company’s prospects in terms of its growth trajectory or changes to its business model.
What are you thinking about as we wrap up the year and prepare for 2022?
I would expect that at some point in the next year or so, we will emerge from the pandemic, although what that looks like and how it impacts the markets is very much an open question. At the same time, the companies we engage with are seeing broad-based inflation in their businesses. This might not be a temporary phenomenon.
Inflation influences our view on market valuations and where we want to place our capital. If it turns out to be stronger and longer lasting than expected, we believe interest rate regimes around the world will also change, which could lead to disruptions in the market. We believe this could represent some really compelling opportunities, especially if asset prices change suddenly and significantly.