Learning from the best – ‘winner takes all’ here to stay

According to award-winning fund manager Hyperion Asset Management, the key to successful investing is to “maintain a portfolio of stocks that are robust and resilient, even in downturns and difficult economic environments.”

The team employs their resources in search of four key attributes when researching companies that will determine quality from rubbish. By investing in only the highest-quality businesses, can client capital be well protected and primed for growth over the long term.

What a year it has been. It will go down as a year; many would like to forget.

While it has been a struggle for companies trying to adapt to this new world, the team at Hyperion Asset Management took out Money Management’s Fund Manager of the Year 2021 award. Three of Hyperion’s funds were nominated in the Australian Large Cap Equities, Australian Small/Mid Cap Equities, and Global Equities. It was an almost a hattrick award with Hyperion winning the first two categories and given a highly commended for the latter.

Hyperion’s success boiled down to the ‘quality businesses’ the team handpicked and foreseeing economic and thematic trends well into the future. Back in 2018, the team saw a world that would experience low growth for decades, driven by an ageing population, higher debt levels, higher ESG thresholds, and smarter Artificial Intelligence.

Today, these factors “driving slower growth have only increased over the last 3 years – populations have aged further, debt has increased, ESG thresholds have risen, and AI & robotics have further advanced. In many cases, COVID has driven a step change in these factors,” says Hyperion.

And so, this has led Hyperion to maintain a portfolio of durable stocks that can endure sudden economic downturns or difficult conditions. Hyperion weeds “out average and low-quality businesses allowing the investment team to focus their research efforts on only high-quality businesses that are positioned to sustain and grow even in harsh economic climates.”

It’s these high-quality businesses that have what it takes to survive and thrive once the storm is over. What characteristics do these high-quality businesses have that give them an advantage even in economic downturns?

Hyperion breaks it down into four main factors investors should look for when identifying high-quality businesses:

1. Proven structural growth (tailwinds) – Businesses that can grow by utilising disruptive technologies that are the cause of fundamental change in industries. E.g., Amazon.
2. Innovative cultures – For a business to recognise and benefit from disruption, it needs to have an organisational culture that embraces innovation. E.g., Google’s campuses
3. Low debt levels – Low debt during uncertain times is key to surviving and making decisions without the threat of liquidation.
4. Sustainability – The long-term impact on the world which includes the company’s carbon footprint, are some of the core qualities of their investment philosophy.

Hyperion’s investment strategy solves for growth while limiting volatility and downside in their portfolios. What may be seen as a risky strategy, if done right, can transform the additional risk when it might be advantageous. This strategy embraces risk associated with growth whilst reducing volatility, essentially achieving the best of both worlds. The end result – A strong risk-adjusted-performance. Hyperion says the key to doing this, is selecting a ‘high quality’ business in a low growth world. And the team has made a clear-cut case against holding the average company.

Because, when it all turns south, average businesses lose market share while the winners take all. It’s these winners, the Amazons of the world, that have what it takes to survive.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.