Key points
Matthias Born
Co-manager of the Allianz Continental Europe Fund
The end of 2015 and start of 2016 has been dominated by bad news and accompanying market volatility. We live in a world where economic headlines are perpetually dominated by issues such as the price of oil, Asian growth numbers, or forecast currency moves. But are these really the most important drivers of investor returns, and are they even possible to forecast reliably?
Within my team, we would argue that the vast majority of investors do not place sufficient emphasis on the long-term drivers of share prices; business models. The last year has painfully demonstrated both the difficulty and flaws of reliably forecasting many macro factors, for which often the only guarantee, is that there are no guarantees, as short-term prices are influenced by unknown future policy decisions, geopolitical factors and event risks. Even for those, wiser than us, who can reliably forecast these factors, we remain unconvinced that they materially drive asset prices over the long term. For example, much is made of regional GDP growth rates, or PMI data, but the correlation of these factors with share price performance has historically been low.
There are however, certain factors, that are both much more durable and visible through investment cycles than macro issues and these are business models themselves. In most instances, it takes companies years, if not decades, to create clear competitive advantages, but for those companies that are able to establish the famous ‘moat' or barriers to entry around their business, these competitive advantages will likely last far longer than any one business cycle. In Europe, where we invest, we see many opportunities for long-term investors. With deep analysis you can find examples of such long-term competitive advantages in almost any industry, whether it is through a brand, as in fashion retailing (e.g. LVMH), the business model (e.g. Inditex, which benefit from far shorter product cycles than competitors), product superiority (e.g. Novo Nordisk) or simply best execution (e.g. DSV)¹.
The competitive positioning of high quality businesses is usually far more relevant to a company's long term development than any current regional growth rate, or any short term currency move. For example Novo Nordisk1, the global leader in diabetes care, have consistently grown earnings independently of the state of the wider economy, as shown by their ability to grow their EPS every consecutive year since 1998, even during recessionary periods. This structural growth has been achieved through best in class execution, product innovation, barriers to entry and market share gains, which will always be more important for the long- term investor than any of the supposed macro storms that regularly appear on the horizon. Within our investment team we seek to apply these beliefs in practice. We take time to find the strongest companies with the best business models, and we hold them for the long term, ignoring short-term noise. We believe that, given the current economic backdrop we see now, this is advice many investors should heed.
To find out more about Matthias Born and the Allianz Continental European Fund please visit www.allianzcontinentaleuropean.co.uk.
¹This is no recommendation to buy or sell any particular security
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