Successful Growth Investing Demands A Clear Focus

By Author: Gaurav Rachewar
Total Articles: 8
Comment this article

usiness A management team concentrating on one business gives us greater confidence in Zebra’s ability to remain nimble to take advantage of new market opportunities that arise in its dynamic industry.

IMPROVED RISK MANAGEMENT: APTIV PLC VS INFINEON

One of the additional benefits of investing in best-in-class growth companies with focused business models is that we can better understand risk at the portfolio level, particularly given our focus on building a concentrated growth portfolio that is still highly diversified.

In a 40-stock portfolio, for instance, understanding where potential investments may share a source of revenue or have similar expenses is critical in ensuring the portfolio is diversified. Since growth businesses often change over time, being able to keep ahead of these changes can help avoid instances where companies that once had little overlap begin to see greater exposure to a common market.

For instance, on the surface, Germany-based semiconductor manufacturer Infineon Technologies AG might not appear to have much in common with global auto parts manufacturer Aptiv PLC. But ...
... as cars and auto components have become more sophisticated and as the number of chips powering these systems have increased, Infineon’s business increasingly overlapped with Aptiv, given their exposure to auto production.

Two Sectors, One End-Market Exposure

Our experience has been that changes such as this can be more evident in companies that operate a single business or set of highly complementary businesses. To manage portfolio risk, particularly in a concentrated portfolio, we must be able to recognise when these shifts occur. A portfolio containing conglomerate businesses can make this type of risk analysis more difficult.

CONCENTRATING ON THE LONG TERM

The universe of growth stocks is large and diverse and finding opportunities that can outperform across a market cycle is challenging. In-depth, fundamental research is necessary to identify high-quality companies, with sustainable business models that offer the most attractive combination of growth, quality, and valuation.

Our experience as growth managers has reinforced our view that a focus on pure-play companies can help to build a concentrated, yet still highly diversified portfolio of best-in-class growth stocks. Often this can lead us down the market cap spectrum toward lesser-known names, however we also believe that there are plenty of large cap names which operate highly focused businesses, capable of generating attractive returns over the long term.

Though the world has become more uncertain in the past year, high-quality companies tied to long-term secular growth trends should continue produce compelling shareholder value, regardless of the macroeconomic environment. For growth investors, selectivity, and focus will again be key.

Francyne Mu is a Portfolio Manager of the Franklin Global Growth Fund. Learn more about the Fund HERE
1. The information provided should not be considered a recommendation to purchase or sell any particular security.
2. Goldman Sachs, Company Data
3. Source: Franklin Templeton, Honeywell Company Filings, 2020.

IMPORTANT INFORMATION
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable, nor are the securities necessarily held by the portfolio.

Issued by Franklin Templeton Investments Australia Limited (ABN 87 006 972 247) (AFSL. 225328). This publication is issued for information purposes only and not investment or financial product advice. It expresses no views as to the suitability of the services or other matters described herein to the individual circumstances, objectives, financial situation, or needs of any recipient. You should assess whether the information is appropriate for you and consider obtaining independent taxation, legal, financial, or other professional advice before making an investment decision.

A Product Disclosure Statement (PDS) for any Franklin Templeton funds referred to in this document is available from Franklin Templeton at Level 19, 101 Collins Street, Melbourne, Victoria, 3000 or Mutual Funds | Investments | Franklin Templeton | Franklin Templeton or by calling 1 800 673 776. The PDS should be considered before making an investment decision