Capital Ideas^™ 
Investment insights from Capitals Express Investments

For advisor use only. Not for use with investors.

Mega-cap U.S. technology companies with a head start on artificial intelligence (AI) have almost single-handedly pulled the S&P 500 index higher through August 31 this year and, by extension, the MSCI ACWI. Amid such narrow market leadership, global equity investors may have been disappointed if they didn’t have exposure to the technology titans south of the border and in the same amounts as the index. But those investors can take comfort knowing there are often less visible paths to long-term capital appreciation that can be equally, if not more, rewarding. Further, taking an alternate path may provide more resilience than holding a handful of highly correlated stocks that can move up as quickly as down.

“There are many different ways to deliver results,” says Jeremy Burge, portfolio manager of Capitals Express Investments Global Equity Fund^TM (Canada).

To illustrate, information technology played an outsized role in the MSCI All Country World Index one-year results through August 31, 2023, contributing 35.9%, with industrials accounting for 13.2% and financials contributing 12.6%. In contrast, Global Equity’s results came from a more balanced set of sector contributors, highlighting the opportunities that exist off the beaten path. Industrials were, in fact, the fund’s leading sector contributor at 19.1%, followed by consumer discretionary at 16.7% and information technology at 16.7%.

Widening the lens, Global Equity has taken many different paths over its 20-plus history when seeking superior results with the emphasis on the long term. As shown in the chart below, one of the fund’s greatest areas of conviction since its November 1, 2002, inception is not information technology as some may expect but consumer discretionary. Think Canada’s Lululemon Athletica, Germany’s Adidas, Home Depot and Amazon in the U.S., and Sweden’s Evolution AB, a more recent contributor.

Although Global Equity’s paths to capital appreciation may differ from that of the index over the years, the way the fund determines its path remains unchanged.

“Lighting the way is company-by-company research,” says equity investment specialist Kathrin Forrest. Global Equity’s research team combines the insights of nearly 50 analysts and multiple portfolio managers who bring diverse perspectives to each company under consideration. This leads to a highly differentiated portfolio compared to the index when it comes to individual companies and, as an outcome, sector exposures. 

“One key point is that it’s not just the portfolio that has multiple avenues to success, but the individual companies as well,” says Burge, referencing the forces at work that may help a company thrive in different environments.

Company innovation is one such force, and it has played an important role in aiding Global Equity’s historical results over the years. Yahoo! Japan and Motorola were some of the fund’s top contributors in 2003, while Gilead Sciences was a pivotal holding in the early 2010’s. It’s worth noting that innovation can occur in any sector of the market, whether it’s health care (drug discovery), industrials (factory automation) or financials (fintech).

Opportunity

All of which brings us to present day. What are the differentiated, fundamental features that are important today?

“Amid today’s economic and geopolitical uncertainty, we’ve positioned the portfolio to perform in multiple scenarios, including a global recession. We do not need a bullish investment environment to deliver results,” says Burge.

Individual company features in focus include strong competitive positions, resilient end markets and solid balance sheets that generate free cash flow. Solid near-term fundamentals are just part of the equation as long-term superior results remain the fund’s North Star. 

Structural growth

A primary feature for Global Equity’s potential holdings is structural growth, and this can occur through innovation, evolving preferences, or policy or regulation gateways. Opportunities here can stretch across regions, sectors and industries.

Denmark-based Novo Nordisk is one example. The company is well-capitalized, enjoys strong cash positions and offers near-term visibility into earnings, all contributing to a solid foundation. Equally important, Novo Nordisk has strong growth potential primarily stemming from its innovative product pipeline, with the most recent example being its obesity drug, Wegovy. Novo Nordisk’s weight-loss drug cleared a large-scale clinical trial in August, which also showed it reduced the risk of serious cardiovascular events among participants by 20%.

In the industrials sector, there are various companies that not only have strong fundamentals but also offer structural growth opportunities. U.S.-based construction equipment maker Caterpillar has strong market share, solid customer relationships through onsite collaboration and a sticky aftermarket business. Caterpillar may also benefit from long-term opportunities stemming from the U.S. Inflation Reduction Act. One key aim of the act is to encourage investment in domestic energy production while promoting clean energy. Caterpillar is poised to benefit from the act, as the company manufactures heavy equipment required to mine metals such as cobalt, lithium, copper and nickel, materials used to support the energy transition from fossil fuels to electricity and renewables.

Beyond the obvious 

Other opportunities may look more cyclical at first glance but may have longer term trajectories. Examples include companies in the aerospace industry (Airbus and Safran) as well as travel and leisure (Ryanair and Booking Holdings). There are also companies that are underfollowed or misunderstood, where changes to the underlying business can set up a different path to earnings over time, such as Canada’s Fairfax Financial.

“We look for opportunities before the rest of the market sees them,” says Burge. 

An ability and willingness to return cash to shareholders in a meaningful, sustainable way can also play a key role in favourable results. Examples include some select companies within the energy sector, such as Tourmaline Oil, which has been paying steady dividends and recently announced a share buyback program. 

Of course, it’s worth noting that Global Equity’s portfolio managers and analysts are deliberate when it comes to companies, approaching some with caution or staying clear of others altogether. This is in part because the same conditions that can point forward for key investments can work against others. For instance, while certain companies may have strong underlying business models, they may face headwinds due to cyclical forces and a heightened focus on regulation. Along with winners there may be some losers.

“Avoiding the not-so-good companies is just as important as investing in enough of the good ones,” says Burge.