Mark Baribeau, head of global equity at Jennison Associates and portfolio manager of the PGIM Jennison Global Equity Opportunities fund, gives Expert Investor his views on compelling secular trends that he expects to get a supercharged boost in the post-coronavirus era.
Q After a volatile first quarter, what is your global outlook?
It is clear that we are in a recession—how long it will last and how the rebound will play out (“V” or “U” shape) is the big unknown.
The timeline around the eventual containment and mitigation of the virus, together with the depth and duration of the “shelter-in-place” mandate globally, is driving this uncertainty.
To backstop the fallout, we’ve seen unlimited quantitative easing and fiscal and monetary policy being applied globally.
Even as conditions stabilise, we are likely to see a prolonged period of the “lower for longer” environment in terms of interest rates, inflation, and economic growth—a backdrop that we believe will continue to benefit growth equities.
But what’s even more encouraging to us as growth managers is that the current crisis is driving a renewed appreciation for technology and innovation-driven businesses. Extreme volatility typically drives investors into more defensive sectors like consumer staples and utilities and the defensive parts of the health care sector, as has been the case this time.
But unlike previous periods of uncertainty, technology and the more innovative areas of health care have asserted their leadership in 2020, as they have over the last 10+ years.
Given the recent economic challenges, businesses and consumers have been changing their behaviours and actively seeking out innovative products and services that are more productive, cheaper, faster, and convenient.
Post-pandemic, the lasting impact on many shifts in consumer behaviour could accelerate the collapse of already struggling industries while fostering growth in companies with more innovative business models.
The epoch of this new disruption at a massive scale will affect some sectors more profoundly than others, widening the gap between the winners and losers.
Darwinian forces between the disruptors and the disrupted could spark a new wave of industry consolidation that makes more powerful, resourceful companies gain even more industry clout at the peril of struggling business models.
Q How have fundamentals been impacted by the continued uncertainty?
Corporate balance sheets—leverage, cash flows, dividends, and sales growth—have all been readjusted.
Understanding valuations and earnings estimates at this point is difficult as companies attempt to understand the impact to their businesses.
This level of uncertainty is historic, and many companies have or are expected to withdraw forward estimates and guidance for the remainder of 2020.
There are too many unknowns around the effect of a drastic decline in economic activity and the financial hit to both businesses and consumers.
But once the situation normalises, we expect conditions to reverse in a positive direction, although don’t expect it to be an even recovery.
Pent-up demand for goods and services could create a surge in corporate profits as companies see revenues rise much faster than costs and inflation.
Q How have your portfolios fared during the recent volatility?
Despite the very difficult backdrop, our global growth strategy delivered strong relative performance this year, significantly outpacing benchmark indices.
Driven by our long-term investment philosophy, we were well-positioned in market leaders driving structural change within their industries or creating new industries from the ground up.
These companies offer differentiated and disruptive business models and are even more compelling in the current period of economic turmoil and social distancing.
Compared to broader indices, the distinct value and utility of these types of companies has provided stronger upside growth in rising markets and more resilient performance, tempering the downside during the sharp downturn.
Q How are you positioning portfolios given this challenging backdrop?
In crisis periods such as these, the primary focus for companies is survival by adapting to the “new normal” while they build towards a thriving future.
Certain companies will do this remarkably well and see their stocks rewarded over time, while others will face structural damage and may take longer to come back (or vanish from existence).
We’re focused on the former, and after such a big correction, there are a lot of attractive companies selling at rare discounts now that we think will perform well over the next 12–18 months.
We have used the recent volatility as an opportunity to upgrade our portfolios into more of these high-quality stocks—companies with strong cash flows, asset-light business models, high demand/sales growth, and sustainable competitive advantages—which we are confident will continue to drive stronger earnings growth than the broader market over the long term.
On the risk side, we’ve minimised our allocation to obvious areas that are going to be hurt, with limited cyclical exposure in areas like energy, financials, the travel industry, and commercial aerospace, which have been the hardest hit due to weakening activity.
We’ve also reduced exposure to areas where we believe there will be a temporary but significant drop in demand, such as medical technologies as elective treatments, hospital procedures, and doctor visits, etc, are being deferred for quite a while.
Q Which areas do you find most attractive post-crisis?
The current disruption is giving investors a heightened appreciation of transformative businesses.
We believe many of the winners of the last few years offer differentiated and disruptive business models that are even more compelling in the current environment.
This crisis has illustrated the power of the mobile internet and its ubiquity in our lives.
In a few short months, Amazon has been deemed an essential business, Netflix a cure to stay-at-home boredom, and cloud-based platforms a lifeline to businesses and employees during the world’s largest work-from-home experiment.
Coming out of this, we expect to see a digital migration acceleration and escalating acceptance of technologies that will continue to drive tremendous growth and permanent migration into areas like e-commerce, streaming video and gaming, digital payments, and cloud computing.
While these companies have been around for several years, their unique ability to deliver at the right time and place and under the right conditions will meaningfully accelerate demand for and adoption of their services and products, leading to greater penetration and market share gains.
We’ve seen evidence of this already, with retailers trying to meet massive online demand for groceries, household items, and medicines while restaurants offer new, contactless deliveries/takeout options—services that require digital payment platforms for execution.
Shopify is good example of a cloud-based platform with easy-to-use infrastructure tools and an omni-channel e-commerce capability that has helped small and medium-sized businesses during these times of restricted personal mobility.
Meanwhile, video streaming upended the cable networks in terms of subscribers, with Netflix adding nearly 16 million new subscribers in the first quarter.
Annual revenue growth for the top-four cloud-computing service firms ranged from 33–71% in 2019 but have seen demand climb recently as companies everywhere incorporate technological mobility into business continuity plans and upgrade technology infrastructure to modernise and protect their businesses.
This will foster an enormous upgrade cycle where software-as-a-service (SaaS) companies will be big beneficiaries. RingCentral, a provider of cloud-based communications software that allows for business communications across multiple devices, locations, and modes, is an example of a company benefitting from the acceleration to unified communications in the decentralised work environment.
Longer term, social distancing is likely to lead us into a new frontier of innovations and advancements in robotics and autonomy, virtual education, telemedicine, and customised drug therapies.
We believe innovative companies in these areas will inspire and establish the “next normal” for society as we will know it in the future.
Q What do you think is the best approach for investing today?
In general, we think successful growth investing requires a selective and active approach focused on carefully weighing the long-term opportunities against the risks.
We believe there will be more market volatility in the months ahead, and stock picking will become paramount, creating challenges for passive investors.
Active managers can look through the short-term noise and focus on the bigger long-term opportunities by spotting secular growth trends early.
In uncertain times like these, there are still companies that can manage to remain cutting edge in making our daily lives more efficient with new products or in helping us to work together more productively with new services.
These companies will continue to see healthy customer demand and sales growth and are the kinds of companies we are on the lookout for.
Q What differentiates your strategy from peers?
We think our ability to consistently create portfolios of disruptive companies with unique business models that are poised to become future market leaders is a true differentiator for us.
We believe creating a portfolio of innovative companies with competitive edges requires a flexible, opportunistic high-conviction approach, unconstrained by region, country, or sector.
We believe our investment success stems from our ability to identify and invest early in companies with long-duration growth potential.
Fundamental research points us to companies that are driving structural shifts in their industries, building sustainable competitive advantages, and emerging as leaders in global markets.
By leveraging Jennison’s 50-year history of growth investing, our deeply experienced analysts focus on gauging both the duration and magnitude of growth for companies within their respective area of expertise.
With volatility having returned to markets, we also believe our long-term track record of managing portfolios through the volatility of many different market environments, understanding the risks that are inherent in portfolios, and having the ability to adjust as market conditions dictate will be valuable to long-term investors.