DSM Capital Partners: Market Update

 

The DSM Global Growth and Global Twenty model portfolios are new additions to the Powerwrap Approved Products List. DSM Capital Partners LLC (DSM) is a fundamental manager of concentrated US, Global, International and Emerging growth equity strategies.  DSM focuses on earnings and earnings reliability coupled with a rigorous valuation discipline.  Our nine-person experienced investment team undertakes bottom-up research to identify and model the earnings of quality growth companies.  These are companies that historically have demonstrated strong revenue growth, superior profitability, a growing stable earnings stream and high-quality balance sheets.

Our investment philosophy is based on the belief that high-quality companies that consistently grow their earnings, as long as their shares are purchased at reasonable valuations, should produce attractive returns over time.  This means we don’t overpay for quality growth companies.

DSM Global Growth

In general, DSM’s Global Growth strategy will invest in equity securities of large capitalization issuers.  Equity securities, as determined by DSM in its discretion include, but are not limited to, common stocks, preferred stocks, securities convertible into common stocks, rights and warrants.  The Global Growth strategy can invest up to 98% of its assets in equity securities of US or Non-US issuers.  A large capitalization issuer is one that has a market capitalization of more than USD 10 billion at the time of purchase.  The Global Growth strategy may also invest up to 20% of its net assets in equity securities of issuers that have a market capitalization below USD 10 billion at the time of purchase.  The Global Growth strategy normally holds 25 to 50 equity securities.

DSM Global Growth Composite Returns

Periods ending 31 August, 2020
MTDQTDYTD1 Year3 Years5 YearsAnnualized SI*
Pre-Fee10.0%18.6%31.0%43.2%18.1%19.4%16.1%
Post-Fee10.0%18.4%30.2%42.1%17.1%18.4%15.0%
MSCI ACWI Net TR6.1%11.7%4.7%16.5%9.0%10.2%9.0%
*Inception 01/10/2010

The performance presented represents the composite of the prior performance of discretionary accounts managed by DSM in accordance with its Global Growth strategy. You should not consider this performance data to be an indication of future performance of DSM’s Global Growth strategy. Past performance is no guarantee of future results and individual accounts and results will vary. Composite performance is presented net of investment advisory fees (custody fees are not deducted). The performance figures presented do not reflect the deduction of investment advisory fees actually charged to the accounts in the composite. Rather the performance results presented reflect the deduction of a model advisory fee. From inception of the composite on October 2010 through December 2016, a model advisory fee of 1.0% per annum was used. As of January 1, 2017, the model advisory fee for the Global Growth strategy is 0.85% per annum. Performance is presented in US Dollars.

DSM Global Twenty

DSM’s Global Twenty strategy is a new strategy that selects 20 stocks from the Global Growth strategy.  In general, the Global Twenty strategy will invest in equity securities of large capitalization issuers.  Equity securities, as determined by DSM in its discretion include, but are not limited to, common stocks, preferred stocks, securities convertible into common stocks, rights and warrants.  The Global Twenty strategy can invest up to 98% in equity securities of US or Non-US issuers.  A large capitalization issuer is one that has a market capitalization of more than USD 10 billion at the time of purchase.  The Global Twenty strategy may also invest up to 20% of its net assets in equity securities of issuers that have a market capitalization below USD 10 billion at the time of purchase.  DSM may purchase non-US securities (otherwise known as local shares) for this strategy or may purchase American Depositary Receipts and/or similar securities.  The Global Twenty strategy will normally hold approximately 20 equity securities but may range between 18 and 22.

DSM’s Global Twenty Composite Returns are not yet available.

Portfolio Commentary

While DSM normally diversifies its strategies among five to seven sectors, we do not have sector or industry weight constraints.  At present, the DSM Global Growth strategy is heavily invested in digital companies and companies that thoroughly utilize the internet, given their diverse and predictably growing end markets. These companies have executed well during this severe recessionary period, and have done much better than the market as a whole.  Additionally, the trend towards work/shop-from-home caused by COVID-19 has accelerated the adoption of internet technologies which will benefit many of the companies in the portfolios.  It is anticipated that the DSM Global Twenty strategy will have similar GICS Sector weighting as those listed below.

DSM Global Growth

GICS Sector Weightings*
Information Technology40%
Consumer Discretionary32%
Communications Services17%
Health Care5%
Consumer Staples3%
Financials1%
Industrials1%
*As of 31/08/2020

“Tech stocks” are often accused of being the prime culprit triggering the purportedly overvalued equity market.  Since some tech, or digitally based businesses, exhibit P/E ratios of 100x or more it is hard to argue that these particular equities are not potentially in “bubble territory”.  As risk averse investors, we do not own these particularly highly valued companies.  However, it is essential to remember that digital transformation is a global revolution massively impacting the structure of the global economy.  Accordingly, pure-play digital businesses that are instrumental in creating the global digital transformation may, in an extremely low interest rate world, have bubble valuations.  Our task is to identify investment opportunities in new digital era equities that are much more rationally valued.  It is also anticipated that the DSM Global Twenty strategy will have similar top holdings as those listed below.

DSM Global Growth

Top 5 Holdings*
Microsoft Corp.US
JD.com Inc.China
Alibaba Group – ADRChina
Facebook Inc.US
Adobe Inc.US
*As of 31/08/2020, top 5 represents 40% of portfolio.

Earnings Results

DSM’s Global Growth portfolio earnings have grown largely as expected before the pandemic, and we believe our strong mid-to-high teens earnings growth will resume in the Global Growth portfolio beginning in 2021.  We anticipate similar earnings growth with respect to the DSM Global Twenty portfolio.

Earnings Win

Our investment approach is built on the simple concept that “Earnings Win.”  It is our view that as the world overcomes the coronavirus, which may require a few years, the ensuing expansion will be characterized by slow global economic growth.  Similar to the decade after the financial crisis in 2008/9, we expect the period after COVID-19 to be characterized by low inflation (perhaps fears of deflation), very low interest rates and slow/inconsistent economic growth that may, despite its slow start, develop into a longer growth cycle than the majority of previous economic growth periods.  As we have said for many years, “Bull markets climb a wall of worry” and we continue to expect that global equity markets will trend higher.

 

If you are an adviser and wish to access the DSM Global Growth and DSM Global Twenty model portfolios for investors, please raise a ticket through Hive Service Desk.