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Disruptive Growth – Mark Hawtin

In this video Mark Hawtin updates us on the opportunities the shift to the ‘higher-for-longer’ interest rate environment presents, and why investors re-focusing on fundamentals should work to the advantage of disruptive growth companies.

What were the major recent events and what were the impacts on your asset class?

So, looking back over the last quarter, the markets continued to be concerned with the pace of improvement in inflation and what that is going to mean for the rise in interest rates and for the sustainability and period of those rises. So we got a clear message that we're going to see interest rates being at an elevated level for longer than had perhaps been anticipated. That really led then to equity markets being much more difficult over the third quarter. But what was interesting from a disruptive growth point of view was that whereas in most cases when that happens, higher growth equities or duration equities tend to fall faster or further than the market.

In Q3 that didn't happen. In fact, we saw some areas of disruptive growth outperform that falling market. And so that was extremely encouraging and suggestive of the fact that investors are now really focusing on the fundamentals, which have not deteriorated at all throughout the last 18 months, and therefore the significant falls that we saw in disruptive growth shares over 2022 and early 2023 has perhaps seen most of the difficulty taken care of from a price perspective.

And so now these companies are perhaps more freely able to reflect their fundamentals and perform in line with them. And we really saw that in the third quarter, with higher growth names in many cases outperforming the index.

What can your asset class offer in the current environment?

So I think in any environment the disruptive growth approach is really targeted at getting hold of growth opportunities, structural growth opportunities which are becoming more and more scarce in equity markets. In fact, if you look at world growth indices, in many cases, they're selected on the basis of growth levels over prior years and future forecast years.

And what's interesting is that many of the indices actually contain, at the bottom end, companies that aren't growing, because there just aren't enough growth companies to even fill an index these days. So this is an opportunity to really identify those growth businesses that, by compounding growth over long periods of time, can therefore see, as a result, compounded returns for investors that will inevitably, over time, outperform indices.

What’s your outlook in the near and medium term?

So on the interest rate cycle, I think we're now sitting firmly in the higher-for-longer camp. I think it's possible we may see one more rise in some areas of the world, but that we're pretty close to the top now. What we need to see is what that's going to deliver in terms of economic growth. What's been interesting is that growth levels remain stubbornly solid, which is of course been good for fundamentals. But I think that once we see that those rates have reached their peak clearly, and for sure, then that's going to act as a catalyst for a further move higher, particularly in duration assets. So that really favours the growth area in which we invest.

In terms of themes that are interesting, the AI theme is clearly dominated a large part of this year and driven a lot of outperformance in key names, but I think a lot of that focus has really been on infrastructure. It's been the old adage of buy the picks. So Nvidia being the sort of cheerleader in a sense, providing almost all of the chipsets for parallel processing in artificial intelligence. And I think that we might well see a pause in infrastructure investment. It's unclear to me exactly how many of these chip sets are required, and whether there's actually almost been an overall ordering of chipsets. So I think there is a chance that we see a quarter in the next quarter or two that perhaps slightly disappoints in terms of infrastructure spend, but what we should begin to see instead, or in tandem, are those companies that are going to benefit from the use of those chips, and that's going to extend across so many sectors, across healthcare, medical technology, industrials, fintech.

There are going to be many areas that benefit from the use of AI, and that's where we're really focusing our attention now. The sort of easy game of picks and shovels I think has been one has happened to a large extent. There are still some names that are not well covered by the market. Dell, for example, is a very big provider of AI infrastructure to the enterprise, and it's on a mere fraction of the valuation of Nvidia because it's not seen in the same sort of classification. But frankly, it is also an infrastructure provider in just the same way as Nvidia is. So there are names in picks and shovels. But far more interesting is going to be those end-use cases where we see models trained, and then the inference from those models offering huge productivity advantages for companies across multiple sectors.

Is there one chart you’re currently monitoring closely?

So we still are looking at the same chart that we've looked at over the last few quarters, and that is the performance of growth versus broader market indices. There's been a very clear choppiness in that metric.

So we've seen in the early part of the summer growth looked as though it was going to break out against broader markets. And then it reached a level and started to come back off again. So it's now trading middle of the range. So we can't really say from a technical perspective whether we're in a growth outperformance period or whether it's going to break down to an underperformance period again. So we're sitting and waiting for that. But the point at which we see the breakout to the positive side is the point at which we would consider going much more aggressively focused on duration names, rather than perhaps a more balanced approach at the moment, to take account of the fact that the break is not clear yet.

Important disclosures and information
The information contained herein is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained herein may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information contained herein. Past performance is not an indicator of current or future trends. The mentioned financial instruments are provided for illustrative purposes only and shall not be considered as a direct offering, investment recommendation or investment advice or an invitation to invest in any GAM product or strategy. The securities listed were selected from the universe of securities covered by the portfolio managers to assist the reader in better understanding the themes presented. The securities included are not necessarily held by any portfolio or represent any recommendations by the portfolio managers.

No guarantee or representation is made that investment objectives will be achieved. The value of investments may go down as well as up. Past results are not necessarily indicative of future results. Investors could lose some or all of their investments.

The MSCI World Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across 23 Developed Markets (DM) countries. The growth investment style characteristics for index construction are defined using five variables: long-term forward EPS growth rate, short-term forward EPS growth rate, current internal growth rate and long-term historical EPS growth trend and long-term historical sales per share growth trend. The Goldman Sachs Non-Profitable Tech Index consists of non-profitable US-listed companies in innovative industries. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in indices which do not reflect the deduction of the investment manager’s fees or other trading expenses. Such indices are provided for illustrative purposes only. Indices are unmanaged and do not incur management fees, transaction costs or other expenses associated with an investment strategy. Therefore, comparisons to indices have limitations. There can be no assurance that a portfolio will match or outperform any particular index or benchmark.

This presentation contains forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of GAM or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made.

Mark Hawtin

Investment Director

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