Peter Seilern-Aspang on the difference between growth and ‘quality growth’

David Stevenson, 23/03/2022

Growth stocks are selling off, the long-awaited rotation into value is finally here and managers who’ve been holding cyclical names are getting their time in the sun. However, the broad remit that ‘growth’ covers means the rotation shouldn’t impact the higher quality names, a point Peter Seilern-Aspang, chief investment officer and founder of Seilern Investment Management was keen to point out.

Mr Seilern-Aspang first outlines what makes a ‘quality’ stock, which have characteristics that can be captured by financial metrics allowing them to be included in smart beta products such as strong balance sheets and an attractive dividend yield.

“But does it [the stock] have growth? Does it have the kind of future long duration growth, which will enable the investor to enjoy the compounding effect of that growth?” Mr Seilern-Aspang asks. If the answer is no, then it doesn’t get into the firm’s pretty high conviction maximum of 50 companies across the world that can be dubbed ‘quality growth’.

Asked whether the fact that quality growth isn’t a factor that could allow its type to be included in an aforementioned smart beta product gets an interesting response. “I don't know whether it's a good thing or not a good thing.

“I thought that if it became an asset class in its own right that it might finally be throwing a lifeline to the pension funds and the pension fund industry, which is confronted with enormous problems. And if the pension funds invest in a little bit more in line with the quality growth philosophy, then they would have been bailed out of their problems years ago,” Mr Seilern-Aspang answers.

Finding these companies is tough task as although there are plenty of quality names in the healthcare sector, finding stocks that can double your money then ‘double it again in X years’ requires a thorough process.

The firm has 10 ‘golden rules’ which used to be called the ’10 commandments’ which have to be followed, to the letter.

“The 10 Golden Rules is only half the equation. The other half is that you have to have iron discipline, and stick with a goal. All of them always. It's not the majority rules are adhered to most of the time. It's all of them. Always,” says a resolute Mr Seilern-Aspang.

Changes to business models favour Seilern’s picks

While ‘old economy’ companies usually suffer from the law of diminishing returns due to their nature, for instance there’s only so much of a commodity than can be dug out of the ground, in today’s knowledge-based economy this isn’t so much of an issue. Moreover, it has led to what the firm call the ‘law of increasing returns’.

This is not just theoretical, Mr Seilern-Aspang recalls: “if we compare forecasts from 10 years ago where we made forecasts for the next five to 10 years for our companies, and now the five to 10 years have come to pass. We compare the actual results versus the then forecasts, you will find usually, the actual figures have beaten the forecasts as we underestimated the law of increasing returns.”

The firm tends to use a 10 year discounted cash flow model with a 7.5 percent weighted average cost of capital to build its forecasts and due to the lack of debt within the portfolios (which while having a maximum 2.5 times debt to EBITDA limit never get anywhere near this) should not be lumped together with the growth names discounting future cash flows due to inflation. There are exceptions and as most fund managers will say ‘asset management is not an exact science’ this firm seems to hold all these exceptions to the growth sell off ‘rule’.

But unfortunately, funds with the name ‘growth’ in the title such as the firm’s World Growth Fund seemed to be being tarred with the same brush as those products which hold companies that have sky high valuations but have yet to turn a profit.

This generalised view of growth companies all being impacted by rising bond yields (the 10-year US Treasury hit 2.3 percent in recent days) leading to large scale discounts of future earnings does have its upside. Mr Seilern-Aspang says its putting his preferred companies on a ‘silverplate’ as large scale sell-offs lead to share price declines which is an opportunity to top up a position although given the high conviction style of the firm it has to be careful not to breach UCITS rules on over-concentration in any one stock.

The search for growth

During Covid-19, the economy closed down and investors sought growth wherever they could find it and would often pay any price for it. Thus, when the economy reopened again and consumers were flush with cash accumulated during lockdown it drove a feeding frenzy for cyclical names while those who had piled into megatechs beat a hasty retreat.

The firm has a ‘search for growth process’ which includes a ten strong research team. However, the amount of work for a company to be considered of inclusion into the firm’s elite group of holdings is painstaking, with the document supporting the company’s addition being described as ‘almost like a thesis’.

Some managers may have changed their investment style to adjust to the new macro-economic conditions and achieve alpha, this style drift is considered almost a cardinal sin by the firm.   

“I can’t see anyone drawing up a base report on Barclays just because their shares are enjoying their time in the sun. It’s simply not possible to style drift,” adds Mr Seilern-Aspang.

For those not convinced that the rotation into value will hold this firm could well make hay. However, 2021 was considered a ‘value’ year with cyclical stocks outperforming and the firm’s World Growth Fund returned around 28 percent. It seems that there is a real difference between growth and quality growth.

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