Secular Trends: a sustainable and high-performing equity fund

Started only five years ago by an independent investment manager in Geneva, the “Secular Trends” investment strategy consists in buying with a long-term perspective in mind quality companies exposed to growth themes. It has continued to demonstrate its value by performing noticeably better than global stock market indexes.
Interview with its lead manager, Paolo Bozzo, Managing Partner at de Pury Pictet Turrettini.

How did you get the idea of starting a global thematic stock portfolio?

I spent nearly 12 years working at various investment banks, including Bank of America Merrill Lynch, in the Capital Markets department. There, I learned a lot about company analysis methods and stock market dynamics. I also spent a lot of time with CEOs and rubbed shoulders with many fund managers. I’ve always been struck by the short-termism of market actors, whether they be analysts, managers or investors. I am convinced that it is preferable to analyse a company with a long-term view, by taking an approach similar to that applied to illiquid investments such as real estate or private equity. This makes it possible to avoid falling into the temptation of playing the short-term game and subjecting one’s portfolios to erratic movements hinging on market sentiment. In addition, many fund managers are forced to build their portfolios by minimising deviations from their reference indexes, which often makes them over-diversified and limits their ability to generate overperformance.

These behavioral biases inherent in fund management have convinced me of the potential of a low turnover ratio investment strategy which is uniquely interested in companies’ long-term prospects. Additionally, the rise of growth themes around digitalisation, demographic changes, and climate risks have led me into the adventure of management.

When did you take the plunge?

In 2015, I decided to join de Pury Pictet Turrettini, a Geneva-based independent investment company that is now managing about 7 billion Swiss Francs, and to start a global stock market investment strategy that invests in a portfolio focused on about forty companies exposed to secular growth themes and meeting strict quality criteria.
The themes selected are population ageing, health and well-being, security, millennials, robotics, energy transition, water, and the rise of the middle class in emerging countries. It is with this strategy that I started managing my first mandates 5 years ago, before launching a UCITS fund in Luxembourg which has recently celebrated its third anniversary.

Since its creation, the Secular Trends fund has generated a net average annual performance of +28.5%, versus a reference index (MSCI AC World NR) of +17%, with similar volatility and a markedly lower maximum drawdown. The assets under the fund’s management now total 750 million dollars.

What can your investors expect after such performances? Can this keep going?

We believe so on the long-term but we will never be able to avoid phases of temporary under-performance, given that our investment strategy favours the sectors of healthcare, technology, and consumer discretionary, but also because of our low exposure to cyclical sectors such as raw materials and financial services. We are certain that our quality/growth style and the low turnover ratio of our portfolio are two essential ingredients to keep generating overperformance. The companies that make up our portfolio are well equipped to face the challenges of tomorrow.

Out of the 1,500 companies in our universe, we have selected only the 40 best. We focus on those benefiting from sustainable competitive advantages, helmed by quality management, and offering higher than average growth prospects, healthy balance sheets, and self-financing capacities allowing them to require little external financing. For instance, we have invested in Infineon, a German company active in the semiconductors that are indispensable for vehicle electrification, Keyence, a Japanese company specialising in the automation of production processes, and Intuitive Surgical, an American company that is a pioneer of robotic surgery.

After five years of existence, this strategy has proven its ability to generate performances markedly superior to those of global stock indexes in market environments that have changed a lot from one year to the next.

The world is grappling with major changes: don’t the supply chain issues or the soaring energy prices risk putting the companies making up your portfolio at a disadvantage?

The companies in our portfolio have a sustainable competitive advantage that reduces their vulnerability to inflationary pressures because of their ability to pass on cost increases to their customers. Their low debt also limits the impact of any potential rise of interest rates. Finally, the supply chain issues which our companies currently have to deal with are only delaying deliveries and have little effect on a demand that remains healthy. The rising energy prices actually support the argument in favour of energy transition, a theme which the Secular Trends fund is well exposed to.

Which links do you have with Geneva?

I have a personal connection since this is where I grew up and chose to settle with my family. Same goes for de Pury Pictet Turrettini, which was founded 25 years ago by three Swiss luminaries and now employs nearly 50 qualified persons, mainly in Geneva.
The persons making up my team are particularly important. I am lucky to be able to count on two very complementary profiles, a fundamental analyst and a quantitative one. A new analyst just joined them so as to accompany the growth we are currently experiencing.

We hear a lot about sustainability and ESG investing but also the issue of greenwashing. What is your take on this subject?

At de Pury Pictet Turrettini, the Environmental, Social and Governance (ESG) criteria are not alibis. As pioneers of sustainable finance, we started our first engagement equity funds over 15 years ago and we were among the first to adopt, back in 2008, the Principles for Responsible Investment enacted by the United Nations. So, we have led by example and we will continue to do so, particularly by placing sustainability analysis at the heart of our management process, but also by ruling out the companies that do not take the measure of these issues.

Transcript from an article published in CCIG Info (January 2022)