Asset allocation update How we're thinking about markets...

Source: Saltus/Bloomberg

Questions remain over the path of interest rates, given Trump’s policies have the potential to be inflationary. US treasury yields and the US dollar moved up sharply in the aftermath of the election, but both have now moved back to where they were prior to the election in November. The message may be that the market expects Trump’s bark to be worse than his bite, and some of his rhetoric may be watered down before he takes the reins in January 2025. 

European Turmoil

If the return of Trump has bought four years of political stability, at least in terms of who is in power, Europe is experiencing the opposite. Economic growth in Europe has been slowing for a number of quarters now, with Germany leading the way down given the economy’s dependence on manufacturing and autos especially. To rub salt in the wounds, the governments of France and Germany – Europe’s two largest economies – have collapsed in the last month.   

First to go was Olaf Scholz, the German Chancellor, whose coalition government fell after he sacked his finance minister following a dispute about next year’s budget. This has paved the way to a federal election set for 23 February 2025, seven months earlier than planned. Then in France, a no-confidence vote toppled the Prime Minister Michel Barnier after he proposed an unpopular deficit-reducing budget. Under the constitution, the president cannot call new legislative elections until July 2025, and so policy drift is likely to carry on for many months. 

These political ructions come at an awkward time for Europe, with the uncertainty over policy that Trump brings. Europe has found itself in the middle of US and China tensions and will likely have to increase defence spending over the coming years. In both France and Germany, fiscal rules are being reconsidered which likely points to more stimulative fiscal policy on the continent. Now though, the turmoil is weighing on France’s stock and bond markets, with yields on the government’s debt yielding the same as Greece’s. If political stability and government spending do materialise in 2025 though, there could be an opportunity in unloved European assets.

Source: Saltus/Bloomberg

Below is a summary of our views for each asset class, from strongly negative (- -) to strongly positive (+ +).

Summary

This fund is a relatively new addition to portfolios and it complements our current range of global equity managers by offering unique exposure to the secular growth theme, which focuses on long term trends like technology, demographics, and sustainability that drive persistent economic growth.  

The team behind this fund have been focusing solely on higher growth equities for 25 years and have a remarkable track record of outperformance. The boutique nature of Jennison and a sole focus on higher growth equities has fostered a team of specialists that have identified multiple secular growth themes over time. 

The team focuses solely on innovative and disruptive companies that exhibit strong and sustainable earnings growth, durable competitive advantages, and the ability to compound at high growth rates over time. They aim to find companies that are in their rapid expansion phase which allows them to potentially capture superior returns, but with a stringent focus on exiting at the right time, when growth is plateauing and the company is maturing. 

Valuation is an important consideration in their investment process, however the primary focus is on growth potential which is estimated through extensive fundamental research. 

PGIM, Jennison and the Team

Jennison Associates was founded in 1969 and is a wholly owned subsidiary of PGIM – the investment management business of Prudential Financial Inc (PFI) which is an American life insurance conglomerate with over $1tn of assets under management (AUM).  

PGIM comprises a collection of boutique asset management brands, of which Jennison is one. Over 1,300 investment professionals fall under the PGIM umbrella, 75 of these are at Jennison, and Jennison’s AUM is around $200bn. The majority of these assets are invested in growth-focused equity strategies. Jennison operates as an independent company and has full autonomy over their investment philosophy and process. They have a low staff turnover.  

The fund has been managed by Mark Baribeau and Thomas Davis since its inception in 2011. Rebecca Irwin joined the team as a fund manager in 2023. Baribeau started developing the fund’s investment process in 1999 at Loomis Sayles, joined by Davis in 2000. The managers are supported by a team of 11 career analysts, split by sector, who have an average tenure of 15 years with Jennison Associates and 21 years in equity research. The analyst sector split is skewed to higher growth sectors such as healthcare, technology, and consumer services, with the team only focusing on higher quality growth equities. 

Philosophy

At its core, the team believes in active management and their ability to exploit growth opportunities. The team set the bar very high for investment opportunities, and will only invest in a small number of genuine growth companies. The team look to invest in companies which are experiencing early stage growth, or are at an inflection point in their growth cycle. They look for stocks with a diversified set of growth drivers and themes  – something they believe will reduce the overall level of portfolio risk as the stocks will behave and move differently.  

The team employ a rigorous fundamental research process to identify stocks which have the following attributes: 

1. Innovative and disruptive businesses driving structural shifts in their respective industries
2. Defensible business models with significant barriers to entry
3. Secular demand trends driven by superior product offerings 

The different themes in the portfolio include cloud computing and infrastructure, food delivery, digital payments and technology-enabled direct-to-consumer businesses such as e-commerce platforms. The team have a conservative philosophy, preferring to sell out of a stock as a company approaches its slowing growth phase. 

Process

The investment process for the fund has been refined and executed over multiple decades, so not only is there consistency across the team, but more importantly they have shown precision when it comes to identifying sustainable higher growth ideas. The team try not to think in terms of growth stocks, rather they think about growth themes which will play out over multiple years. They then choose the companies at the forefront of the themes. 

The fund doesn’t invest in pre-revenue companies but will consider companies that are not yet profitable provided there is a clear roadmap to profitability over the next 3 years.  

The team meet daily to discuss new and existing ideas in addition to holding a weekly meeting where best and worst performers are discussed. They will also hold monthly performance reviews of the underlying investments of this fund which run concurrently with writing commentaries. Sector analysts are responsible for the day-to-day research of their respective area and the team are in continual communication with each other. 

The process is split into 5 stages: 

1. Idea Generation – ideas are generated in-house by the sector analysts. The team will use screens to reduce the investible universe from 5000 companies to around 300. Each analyst will not cover more than 20 companies at a time as they will undertake extensive fundamental analysis on these stocks. They will engage with industry experts to more fully understand new growth themes.
2. Fundamental Research – from the 300 stocks, the team will seek companies with distinctive business models that exhibit sustainable competitive advantages and high barriers to entry. They also look for catalysts and superior financial performance. A strong balance sheet is preferred, and meeting management is a crucial part of their research process. 
3. Valuation – the team seeks to find underestimated growth opportunities without overpaying for that growth potential. A variety of valuation methods are employed depending on the stage of each company’s growth trajectory.  
4. Portfolio Construction – there are no sector or country limits. Position sizes are usually between 1.5% – 8% but can go to a maximum of 10%. The size of the position is a function of conviction around the idea. As the team are investing significantly in a handful of themes, a lot of diligence is taken when considering the relationship between each of the investments so the portfolio doesn’t become too risky. 
5. Sell Discipline – the key factor in deciding whether to sell the investment is whether it has reached the end of its high-growth phase. The sell discipline is designed to ensure companies are sold before growth matures and valuations start to fall. 

Portfolio and performance

The portfolio is mostly focused on developed market high quality and high growth equities, which will predominantly be large companies. There is an emphasis on technology and consumer discretionary sectors given the capital-light and innovative characteristics in these sectors. There are some sectors which have not yet featured in the fund such as energy and utilities. Given the growth bias of the fund, the fund’s multiple is meaningfully higher than the market.  

The fund is currently invested 70% in the US and 22% in Europe. However the team have a global remit and historically have had as much as 20% invested in Emerging Markets. There is a bias towards higher quality companies with low financial leverage. Liquidity is very high as the portfolio includes some of the largest and most traded companies. The top five holdings are Apple, Microsoft, Nvidia, Meta and MercadoLibre. The top ten holdings usually make up 40%-50% of the fund, and the average position size is 3%.  

Since the inception of the European version of the fund in 2017, it has achieved top quartile performance versus peers and has strongly outperformed the global stock market. A high proportion of this outperformance has come from stock selection. 2020 was a particularly good year, with the fund up 67%. The fund will likely perform well towards the middle and end of the economic cycle when growth is scarce and interest rates are falling. When there is strong cyclical performance, the fund will likely underperform the market. 

Saltus Rationale

This fund gives portfolios targeted access to the secular growth theme in equity markets, but with a management team that have evidenced their ability to outperform by selecting the best stocks over many decades. They are growth equity specialists with a huge amount of experience, a proven process, and a disciplined approach to risk management and selling stocks. 

There is an element of valuation risk with this fund given that the growth theme is expensive. Whilst the team are conscious of valuation, it doesn’t lead the process as they want to identify companies that are in the early stages of rapid growth, and will grow to justify and increase current valuations. The team monitor the relationship between the stocks in the portfolio to ensure that the exposures are diversified, which should reduce portfolio risk.  

The fund sits within our global equities bucket, which includes managers with a value bias, or with a core approach of value and growth, and so the fund provides a diversifier in the portfolio rather than an addition to a style.

Saltus use this fund as part of a diversified portfolio. This is not a recommendation to invest in this fund. Saltus will not be liable for any losses incurred as a result of investing in this fund.