In many cases, they create completely new markets. These disruptors can be extremely profitable, and when stock performance follows earnings growth, they can result in great alpha-generating investments over the long term.
“Throughout Jennison’s 50-year history, much of our success has been driven by identification of secular shifts and the companies best positioned to benefit from them,” says Jennison chairman and chief executive, Jeff Becker.
Of course, the duration and magnitude of growth is crucial; plenty of companies have considerable potential but lack the business-model strength or addressable market opportunities that foster sustained growth.
“A key to successful growth investing is identifying companies at an early stage that are driving structural shifts in their industries, building sustainable competitive advantages, and emerging as leaders in global markets.”~ Mark Baribeau, head of Global Equity at Jennison and a portfolio manager.
We focus on disruptive growth companies we think will have a major impact on industries globally. These companies often have difficult-to-replicate business models that create significant competitive barriers. They can maintain their dominant position by exploiting the innovations of others or acquiring strategic competitors. They also typically benefit from long-duration, secular tailwinds.
In 2020, as in any year, fundamental research of individual companies drives our stock selection. The focus on company fundamentals sometimes results in investment themes. In technology, we continue to find strong growth in cloud-based infrastructure, digital/mobile payment processing companies, and companies benefitting from growth in e-commerce. In health care, advances in medical innovation have led to opportunities in biotech, pharma, and medical device companies. In consumer discretionary, we’re tilted toward internet-based retail and luxury spending, while in communication services, we’re invested in video streaming and social media companies.
Finding Sustainable Growers
Creating a portfolio of innovative companies with competitive edges requires a flexible, opportunistic, and high-conviction approach unconstrained by region, country, or sector. It involves observing consumer buying patterns, new addressable market opportunities, innovative problem solving, and scientific breakthroughs. But identifying securities that can generate long-term earnings growth is easier said than done. As the world has learned, disruption occurs quickly – think mobile innovation – and companies that have caused structural shifts in their industries have historically been rewarded with strong growth for many years. In the simplest of terms, successful disruptors address consumer convenience, raise business productivity, or create innovative solutions for societal or economic problems.
Along the way, the best companies evolve their models to incorporate new technologies or applications that enable them to layer on new revenue streams, expand their addressable markets, and strengthen their sustainable competitive advantages.
Of course, strong earnings growth doesn’t automatically translate into strong stock performance. But historically, companies with the highest earnings growth have significantly outperformed companies with lower earnings growth. High-earnings-growth businesses can emerge in any sector or region; historically, the U.S. has produced the majority of companies with these attributes, but investment opportunities can be found globally.
The Fastest Earnings Growers Have Outperformed
Data from 1/1/97 to 12/31/18.
Source: FactSet. Chart was created by Jennison using FactSet data for the MSCI ACWI. The chart above reflects the median avg. annualized (rolling 5-Year) returns from 1997-2018. These are based on the Historical 5-Year Earnings Growth Quintiles 1-5; Quintile 1 represents the highest growth quintile while Quintile 5 represents the lowest growth quintile. Past performance does not guarantee future results. See Notes for index definitions.
Growth and competitive advantages are rarely sustained by a single successful product. Durable growth stems from an ability to capture additional revenue streams from adjacent products or services as platforms or ecosystems expand. A blockbuster new product may lead to a first-mover advantage, but without a sustainable competitive advantage, a new pool of profits will soon face stiff competition. To benefit from the impact of transformative new business models and rapid innovation, investors will need to anticipate changing structures, dynamics, and behaviors of industries, businesses and consumers in 2020 and beyond.
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The financial indexes referenced herein are provided for informational purposes only. The MSCI All Country World Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI comprises 24 developed country market indexes and 21 emerging market country indexes.
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Source for index data: FactSet.
*The views expressed herein are those of Jennison Associates LLC (“Jennison”) investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change at any time without notice.
*Please remember that there are inherent risks involved with investing in the markets, and your investments may be worth more or less than your initial investment upon redemption. There is no guarantee that the investment managers’ objectives will be achieved. Further, there is no assurance that any strategies, methods, sectors, or any investment programs herein were or will prove to be profitable, or that any investment recommendations or decisions we make in the future will be profitable for any investor or client. Professional money management is not suitable for all investors.
*The information contained herein does not constitute investment advice, nor an offer or solicitation of financial products, financial instruments, and does not constitute an offer to enter into any contract or investment agreement, in respect of any product offered by Jennison Associates.