Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Ian Warmerdam, fund manager, Henderson Global Growth.
We’re six years into a stockmarket recovery fuelled by coordinated and repeated bouts of quantitative easing, which have driven bond yields to historic lows. This has forced traditional yield-hungry fixed-income investors to venture into stockmarkets. Equity valuations are now somewhat stretched relative to history.
Yet when compared to the meagre returns on offer from fixed income, this premium looks easier to justify. As a result, in recent years high-yielding equities -– typically low-growth, mature businesses – have attracted a lot of investment. This has driven their valuations higher compared to the rest of the market. This has left some higher-growth areas looking rather neglected, resulting in attractive entry points for the longer-term investor.
We scour the globe for these pockets of under-appreciated long-term growth. We try to identify sectors that may provide stock ideas that fulfil our long-term, fundamental investment criteria. We focus on a small number of themes, each underpinned by a disruptive innovation, or a demographic trend that is expected to drive growth over the long term.
Current themes include energy efficiency, paperless payment, healthcare innovation, internet transformation and emerging-markets growth. We’ll look at three of them here.
Firstly, energy efficiency. This theme has served us well recently. The quest for greater energy efficiency is driven by several factors – environmental concerns, rationalisation of finite reserves of carbon-based fuels, and governments’ pursuit of energy independence.
For example, governments in countries covering 80% of global passenger vehicle sales have now set stringent targets for fuel economy or emissions. In America the National Highway Traffic Safety Administration has said that the average passenger car’s fuel economy must rise from around 35 miles per gallon (mpg) to 56mpg by 2025.
Continental (Dax: CON), the German-listed manufacturer of car parts and tyres, benefits from these trends. It has strong market positions across its powertrain division, which integrates efficient vehicle system solutions with a broad portfolio of engine parts (from turbochargers to start-stop technology), all geared towards increasing fuel efficiency and reducing emissions.
Healthcare innovation is another fruitful hunting ground. The ageing global population is struggling to contain ever-rising healthcare costs. Rising life expectancy and falling fertility mean that the number of over-60s in the world is set to double by 2050 to two billion.
That’s good for the likes of American pharmacy chain CVS Health (NYSE: CVS), which provides an integrated healthcare service for its customers. CVS now has around 1,000 walk-in “Minute Clinics” across its 7,800 stores, where patients can get a variety of everyday illnesses and injuries treated at a fraction of the time and cost of going to a GP.
Finally, within our internet transformation theme, we still like leading online UK property listings company Rightmove (LSE: RMV). It’s had a turbulent 18 months following a period of uncertainty surrounding the impact of a third entrant into its market. But we believe the founder-led management team has done an impressive job, and the company has rightfully emerged as a more dominant leader in a market that should continue to benefit from the long-term shift in advertising spending from traditional media to online.