Insync Funds Management are pleased to report a strong finish for the year with the funds up +9.5% in June. This is because of Insync’s intense focus on investing in the most profitable businesses that are benefitting from the tailwinds of global Megatrends delivering consistently strong earnings growth at multiples of GDP. Ultimately share price increases over time follow the consistent growth in earnings of quality companies; thus the performance of the fund over the past 12 months comes as no surprise.
Insync are expecting the portfolio to deliver +15% compound EPS growth over the next two years with sustained high growth rates in the subsequent years following. With markets trading at high valuation multiples (based on P/E ratios), strong future investment performance is more likely to be delivered from companies that can deliver high earnings growth (than further P/E multiple expansion). This is Insync’s sweet spot.
Multiple sources of out-performance a key Insync characteristic
A big differentiator from many of its peers is that Insync’s performance is not generated from just one or two stocks in each period. In June, for example, 80% of its stocks contributed positively across a number of Megatrends including Pet Humanisation, Food Away from Home, the Internet Of Things/5G and the Contactless Economy. Examination of its Megatrend line-up shows it does not rely solely on technology.
A key reason for portfolio inclusion
Insync has a measurable point of difference from peers in that they not only have one of the highest quality portfolios, based on profitability of businesses, but also a portfolio delivering high sustainable earnings growth. This is reflected in two ways:
- Correlation of Excess Returns: A strong way to identify differences between managers is the correlation of excess returns against a peer group (e.g. other international managers). Insync’s is 0.2, which is very low. This means Insync’s alpha generation (outperformance over the MSCI benchmark) is unique.
- Active Share: This measures how Insync’s stock positions differ from its peers. Insync sits at 85%. The higher the number the more differences there are from our peers (scores between 80–100 is deemed highly significant).
‘Growth’ returns + ‘Core’ risk profile is ideal
When analysing the historical holdings and performance-based data of the fund over the past 10 years, Insync can be seen to deliver a risk/return outcome differentiated from its peer group.
Independently verified analysis by a leading research firm shows that Insync has a return profile of a Growth-oriented manager, yet possesses the risk profile of a Core manager. Being able to quantify useful differences for the client’s benefit is of course a crucial aspect in using multiple funds in any portfolio.
Differences between typical Growth managers and Insync’s sustainable growth approach
Typical Growth managers are largely focused on high revenue growth and less on profitability. They tend to invest in businesses in the expectation that hopefully, one day, they will become highly profitable. This is in sharp contrast to Insync’s approach. Insync focuses on businesses that are highly profitable today. They must also be established leaders within a Megatrend; and are almost always benefiting from multiple Megatrends.
Businesses that pass our hurdle for inclusion are also profitably reinvesting a large proportion of their existing cash-flow into a runway of growth (i.e. R&D). This delivers strong and sustainable earnings growth over multiple years, and sometimes decades, driving share prices higher on a consistent basis.
Insync studiously compiles all the important data points (from a vast array of sources), and so is better able over time to measure and value the cashflows of each business held. This means it holds a far higher degree of certainty than a Growth manager usually would have on these key aspects. Based on its proprietary Discounted Cash-Flow (DCF) valuation approach the Insync portfolio is 49.7% undervalued.
Full June 2021 fund commentary (pdf): Insync Monthly Adviser Update – June 2021
Learn more about Insync’s investment philosophy