Despite the uncertainties that dominate the headlines, powerful secular growth trends continue to underpin a diverse range of opportunities for long-term growth equity investors.
One of the most significant secular growth trends today is the rise of innovative technologies, supported by the demands for digital transformation and automation in many commercial sectors.
We are in the early stages of a technological revolution that is set to transform entire industries. While companies in the semiconductor space, have already reaped the rewards of this trend, the impact stretches far beyond semiconductors.
Sectors like digital media, industrials, and enterprise software are all poised for substantial growth as transformational technologies are integrated into their business models, enhancing their capabilities and creating new avenues for expansion.
In the consumer sector, we believe that companies with strong brand equity and loyal customer bases, particularly those in the luxury goods space, are well-positioned for continued growth.
In the healthcare space, our focus is on companies developing breakthrough treatments with large addressable markets. The demand for innovative drugs targeting conditions like diabetes and obesity – both of which affect millions of people worldwide – is a prime example of a growing opportunity.
In emerging markets, we are particularly excited about innovative fintech and e-commerce platforms that are disrupting traditional industries and democratising access to financial services, capturing market share from legacy financial institutions and expanding their reach into new regions.
The critical moment: when to sell
While identifying and investing in high-growth companies is essential, it is equally important to recognise when to exit positions.
There is no such thing as a growth company that grows indefinitely. Markets mature, competition intensifies, and product cycles evolve.
Once-dominant players can lose their competitive edge quickly, and holding onto those stocks for too long can erode the returns previously generated.
This is where active management plays a critical role. Successful growth investing emphasises the need for continuous monitoring of the companies to ensure they remain on their growth trajectory.
If a portfolio company’s growth slows or its competitive advantages begin to erode, our sell discipline comes into play, and we reallocate capital to other companies with more compelling growth prospects.
This dynamic approach helps us protect the alpha generated by previous investments and ensures our high-conviction strategy of 35 to 45 growth stocks is always well-placed for future growth.
Finding the next big growth idea
Investing with conviction makes sense for growth equity investing: a small number of companies drive the majority of equity market returns over time.
Markets tend to be poor at predicting these outliers. Our experience has shown that market expectations often fail to fully capture the growth potential of companies during the early stages of secular trends.
As active managers, we aim to bridge this gap by identifying opportunities ahead of the broader market and seizing those that will lead to long-term value creation for our investors.
Our goal is to uncover companies with unique business models, innovative products, large addressable markets, and strong competitive advantages.
While stock valuations are important, underlying business fundamentals matter more. Through in-depth fundamental research, we evaluate valuations within the context of expected earnings growth over the next three to five years.
As the market consensus expectation catches up with our own expectation and the gap closes, or if it fails to narrow as much or as quickly as we had hoped, we move on to the next big growth idea.
Successful growth equity investing requires a deep commitment to fundamental research, stock selectivity and a strong sell discipline.
These principles have consistently delivered alpha for our investors for more than 50 years and will continue to guide us as we seek to capitalise on the most promising growth opportunities in the years and decades to come.
References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.
The views expressed herein are those of PGIM investment professionals at the time the comments were made, may not be reflective of their current opinions, and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy.
Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
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