An update from WCM on the recent volatility in growth stocks

We recently filmed a brief video update with Ryan Quinn from WCM Investment Management to address the volatility in growth stocks in the beginning of 2022.

Transcript

What is WCM’s view on the recent pullback in growth stocks?

Markets have gone a little bit tumultuous in recent weeks. There’s a bit of an investor rotation, a lot of momentum in the marketplace. This has caused some impact on our returns in the short term, but here at WCM, we create concentrated high conviction portfolios with a view towards the long-term. Every single one of our businesses we own is a great franchise with a growing competitive advantage that has a culture that is going to support that competitive advantage. So, these periods of volatility should be expected to come, and we expect these managers of companies to really be making their best decisions from their front foot to make the business better coming through this volatility. And then, when it comes to our portfolio, you know, we’re taking that five-year time horizon when we’re making an investment thesis. We want to be correct in the out years with companies that can have extremely durable earnings growth. We’re not going to be making decisions around a three-week timeframe because that’s when a lot of noise happens in the marketplace, which kind of feels like what we’re at right now.

 

Has the recent volatility changed your view on any of the companies in the portfolios?

I don’t think our view on a company has ever changed in three weeks. It’s usually, you know, a slower process to a thesis creep. Every single business that we own we can point to drivers of its moat trajectory and help that moat trajectory grow or be positive as we discussed here internally. The environment certainly is something we have to respect. Will there be more inflation? What will happen to input costs for our companies? So that makes it important to own businesses that have very strong brand control, have some degree of pricing power within their businesses, sticky customer relationships. These are all typical characteristics of businesses we own. And so, the last three weeks has been a period where we’ve been, I would say out of favour, but our businesses, we feel like, are doing everything that they’re expected to do.

 

How are you responding to the recent volatility?

Volatility usually presents opportunity for us. We are constantly working on our existing portfolio of names and making sure we know them as well as we can, but we’re also constantly working on the opportunities that are competing for capital to get into the portfolio. Periods of volatility like this, we saw it once before recently. First quarter of 2020 was quite volatile. It was a little sharper. It was a little shorter term, but we were able to operate from our front foot purchasing businesses we felt upgraded the portfolio, and we’ve had performance that has proven that that was an upgrade. However, in this environment, it seems a little bit more prolonged. And so, we’re taking our time with our capital. We want to make sure that we make great decisions based on what the environment is giving us, and not because things are getting cheaper.

 

What are you hearing from your companies about the current environment?

A number of our companies have been in, you know, thankfully, been able to pass costs along to the consumer, to the end-user so the pricing power has been proven to be good. When we talk about the competitive environment, you know, many of our investments and management teams are talking about how it is more challenging. They’re noticing inflation in cost. They’re noticing impact from the supply chain tightening. However, none of them are throwing their hands in the air. They all feel like they have their eye on the ball. They feel like they’ve got their mission in front of them. And they’re supported by employees that understand the culture of the business. It’s well-aligned. It’s adaptable for the inflationary environment, the rising rate environment. And it’s strong, meaning that everybody around the company knows which direction to be rowing.

 

Do you remain confident in the moat trajectory and culture of the businesses within the portfolios?

By definition ‘being in the portfolio’ means that we have conviction in that positive moat trajectory. There are times when certain businesses are more in favour than others. Think about the semiconductor industry. Right now, there’s a significant demand imbalance creating a really great strong tailwind in that space. So that grouping of names that we own might have a stronger position at this time than maybe some of our healthcare businesses that are being impacted by hospitals utilizing their space for COVID patients, rather than some of the other surgeries that some of our healthcare businesses address. So sometimes the opportunity set is better for some of our businesses, but every single time we hold the business, we can point to drivers and moat trajectory that is positive.

 

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