What's been happening?

• Since the Great Financial Crisis, macro investing has morphed into factor investing or sector rotations
• Quant funds rotate their capital between value and growth factors during different periods
  • One indicator that capital moves on is the shape of the yield curve
• Rates this year have taken off, the 10 US Treasury yield is up nearly 90% since December 31, 2020
  • This steepening of the yield curve resulted into a huge rotation into more distressed areas of the market and the hardest hit segments
• The yield curve steepening is positive, it indicates an improving economy and for Noah
  • An improving economy bodes well for his companies and their growth
  • A manager needs to know why certain stocks are selling off or underperforming and if its due to a market rotation, he understands that and historically those are great times to buy
• An example of this is the 4th quarter of 2016 when rates pushed higher and it was a tougher period for growth but also a great entry point
• Noah understands interest rates may push higher overtime but is very bullish on the individual growth in his companies

Investment Process

• Noah’s process is to look for fast growing companies
• His team is looking for high teens or more in both revenue and earnings growth
• After they screen the universe of about 5000 companies, they end with a list of 100-200 names and do the fundamental, bottom-up work
• Sticking to this process and discipline is the key to Noah’s success – overtime, the companies that can grow, the stock price follows

Secular Growth

• Pre-pandemic, the secular shifts in e-commerce, cloud computing, and online payments was already taking place
  • How we view and consume media was changing, along with the future of reaching and interacting with customers
• We are entering the next generation of technology
  • How you engage and communicate with customers – this is transformative for all businesses
  • Using digital channels to interact with customers and develop business – more efficient than traditional channels
• This is the future of capitalism and how we engage with companies
  • This is in the very early stages and there is a long way to go (banking, travel, media, healthcare)
• These changes are secular in nature and will be intact long after the pandemic has past

US vs. Global

• Opportunity set globally is larger
• Noah does not think in terms of geographic or sectors – everything is driven via his process and bottom-up
• There are tons of opportunities globally:
  • Emergence of digital banking and Fintech in Brazil
  • E-commerce and gaming in Asia
  • Payments in Europe
• Many areas of secular growth that we have talked about and seen in the US markets are global in nature, this is not changing going forward

Central Banks

• Looking at the markets today, with the move higher in yields – the market is arguing the FED will be raising interest rates a lot sooner than they said they were
• They are trying to avoid raising interest rates too soon
• Inflation is a big topic right now, but the year-over-year comparison gives you that with last year as the base year
• We do not really know where inflation comes from
  • For Noah, he does not want to get caught up in the macro discussion, just focuses on his process and company fundamentals
• The worry is about central bank mistakes
• The central bank stimulus and bond buying programs have allowed questionable companies with questionable balance sheets to use the market as a refinancing tool
  • These companies have doubled or tripled their shares outstanding and issued bonds
• There are several companies from an operating standpoint that would have been insolvent

SPACs – Special Purpose Acquisition Company

• These companies are listed on an exchange and acquire private companies and take them public
• Noah, in one of his hedge funds has spent a ton of time on these SPACs and at least four of them have proven to be very profitable shorts for the Global Growth Opportunities Fund
• His advice for individual investors is not to participate if you do not know the sponsor or what is going on
• The sponsor makes a tremendous amount of money and there is a lot of dilution that happens
• Investors need to be wary of this market
• It will all settle down and the market will separate the winners from the losers
• He is avoiding this on the long side and taking advantage on the short side – such as one company that has no earnings potential for the next seven years, but was looking for a deal

Negative News on Hedge Funds

• Noah’s hedge funds did not own Gamestop or the Chinese firms from the recent liquidation
• Deleveraging can impact a large group of stocks
  • This is an opportunity for investors if nothing has changed with the fundamentals
• Credit Default Swap spreads on the banks look good
• No major signs of stress in the system – so for now, not systematic
• He will change and adjust if the facts change

Growth Investor

• Noah is a top growth investor in North America
• He has constantly praised true value investors and their exposure within a portfolio
• Investors need to diversify by style and have a true growth and true value manager
• Recent markets have been the best opportunity and performance for value managers in a long time
• Either style need to focus on company fundamentals
• Noah is not going to sit there and say here is one of his companies growing their revenues at 30% with 1Bil in revenue and the potential to take that to $20Bil
  • But now market is looking favorably at cruise lines and movie theatres so you should buy that exposure
  • These areas of the market were not great before the pandemic and now the market is saying they are going to be great after
• Noah cannot do that – he is a growth manager and will stay with what investors should be looking to pay for – future earning
• The main difficulty investors have is sticking with something when it is not working – like value in recent years
• If investors can stick with things through tougher periods – this is what drives performance overtime
• Growth has had a recent correction, but if you go up a lot such as 2020, investors should expect a pullback, and then a move higher from there
• Investors are now moving to factors and factor investing
  • Index providers – their value funds are essentially an investment in Financials and Energy and their growth is Technology, Healthcare and Communication Services
  • This is not value vs. growth, but expensive vs. cheap or low price-to-book vs. high price-to-book
• This is more sector rotation than it is rotation between manager styles
• There are cases where a stock falling is driven by fundamentals, and it is his job to distinguish between that and a market rotation

Here is a link to the original podcast

 

Learn More

---