DSM Capital Partners – Model Manager Updates
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 and DSM Global Twenty
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 while the Global Twenty strategy will typically hold approximately 20 equity securities but may range between 18 and 22.
|DSM Global Growth Composite Returns|
|Periods ending 30 September, 2020|
|MTD||QTD||YTD||1 Year||3 Years||5 Years||Annualized SI*|
|MSCI ACWI Net TR||(3.2)%||8.1%||1.4%||10.4%||7.1%||10.3%||8.6%|
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’s Global Twenty Composite Returns are not yet available.
DSM Global Market and Economic Outlook
We continue to believe that a global economic recovery has begun in the second half of 2020, but given its rise from a very low base, the robust third quarter growth rate will not be sustainable. In our view, a complete recovery from the global recession caused by COVID-19 will require the worldwide distribution of vaccines and treatments. Given that vaccines are several months away from approval and distribution, we suspect an end to the pandemic in the developed world is unlikely before year end 2021. Unfortunately, an end to the pandemic in emerging market nations will probably extend well into 2022. Similar to the decade after the Global Financial Crisis (GFC) in 2008/9, we expect the period after COVID-19 to be characterized by low inflation (and 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.
Over the past twelve years since the Global Financial Crisis (GFC) in 2008, the influence of unprecedently low interest rates on equity market performance has, in our opinion, been underestimated. Today a purchase of the S&P 500 provides a dividend yield of approximately 175 basis points. With just modest global economic growth over the next ten years, the S&P 500 can likely provide an average dividend yield in excess of 200 basis points. The S&P 500 yield is quite attractive when compared to the current yield of the 10-year US Treasury note, which is often considered the “risk-free rate”, as well as being the benchmark against which equities are valued. The yield of the S&P 500 also compares quite favorably to the negative yields on the 10-year bonds of France, Germany and Switzerland, and the fractionally positive yields provided by those of Japan and the United Kingdom.
The chart below illustrates that from 1980 until the GFC in 2008 the 10-year US Treasury yielded 300 to 900 basis points more than the S&P 500. In the years following the GFC, on average, US treasuries yielded just 50 to 100 basis points more than the S&P 500. Today, the 10-year US Treasury yields roughly 100 basis points less than the S&P 500. This historically unprecedented outcome is driving global markets higher, possibly leading to higher price-earnings ratios than investors are accustomed to. The dynamic of higher price-earnings ratios will likely lead to commentary that global equities are overvalued, while the chart below indicates that equities may actually be undervalued relative to interest rates.
We are reminded of the age-old investor adage, ‘Don’t fight the Fed’, meaning that inevitably the Federal Reserve’s low interest rates will drive stock prices higher no matter what the skeptics claim. If perhaps today’s low interest rates are in-fact ‘manufactured’ by the Federal Reserve and other central banks around the world, rates may well rise at some point over the next two to five years. Even if true, interest rates will likely remain historically low in a deflationary world.
Source: Evercore; Credit: ISI, Ed Hyman
We continue to believe that sequential earnings growth is likely to resume in the second half of 2020. By 2021 we assume that the global economy will be growing once again, although the emerging market economies may remain depressed at that time, and importantly, the portfolios’ mid-to-high teens earnings growth will likely resume. We believe there remains significant appreciation potential, given the portfolios’ reasonable valuation, substantial revenue and earnings growth, low interest rates, and the potential for improving global economic activity.
DSM Global Growth
Portfolio Valuation and Portfolio Characteristics
|As of 30 September, 2020|
|Calendar 2021 P/E||29.5x||Weighted Avg Market Cap||$487B|
|Calendar 2022 P/E||23.9x||Long Term Debt to Equity||40%|
|“Most Likely” EPS Growth||17-19%||Number of Holdings||26|
|Active Share||88%||Beta (trailing 24 months)||1.0|
|Dividend Yield||0.4%||Trailing 12 Month Turnover||34%|
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.