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Long-term 'signal' versus short-term 'noise'

The rapid change in long-term bond yields, particularly over the past 12 months, has been the primary cause of the decline in the market value of our portfolios, and has represented the worst macro environment for long-duration assets, in a very long time.

Despite recent declines in our portfolios, the underlying fundamentals have not deteriorated, with our companies' competitive positions and long-term earnings growth profiles remaining strong. Short-term fears about recession, temporary increases in bond yields and inflation are 'noise' and should not be our focus. Instead, focus should be on long-term valuations representing 'signal'.

  • The businesses in Hyperion’s portfolios can take market share because of the relative strength of their value propositions. These companies are leaders in their respective industries and are well-positioned to take advantage of weaker competitors that suffer during an economic downturn. Moreover, these companies tend to have strong pricing power that gives them economic flexibility during economic downturns or periods of high inflation.
  • Our top holdings’ market penetration percentage rates are typically in the single digits indicating that they have significant growth opportunities with the potential to capture meaningful market share.
  • Our key portfolio holdings are dominating niches, in some cases creating new categories, to transform old industries into something more modern. We refer to this concept as “dominate and transform.”
  • During economic downturns, consumers and businesses focus more on the relative strength of the value proposition of the goods and services they buy. As a result, hard times tend to accelerate market share shifts, favouring the stocks Hyperion has in its portfolios. We expect our key portfolio holdings to accrue significant market share gains over the next 10 years.
  • Our portfolio companies have attractive financial metrics relative to their benchmarks such as no net debt or low levels of debt and robust business models that are generally less sensitive to economic conditions than most listed businesses. Furthermore, this year’s weighted average return on equity for the Global fund is estimated to be approximately 33% and 21% for the Australian growth fund, indicating high profitability of our portfolios.

A cyclical recession over the next year is unlikely to impact our portfolios' long-term forecast EPS and valuations due to our high levels of innovation and low penetration rates. In a world where growth will again become scarce, businesses that grow by taking market share will be in a strong position to produce attractive returns over the long term. The current selloff is providing an opportunity for long-term investors to get exposure to some of the best businesses in the world at attractive prices.

Short-term factors are mere 'noise' rather than fundamental long-term 'signals'.

You can find further thought pieces from Hyperion on our website here.

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  •   1 December 2022
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