Warren Buffett and Elon Musk might seem anathema, one a living legend of value investing and the other a growth stock poster-child. And yet, both are admired by the high-performance duo heading up the Hyperion Global Growth Fund, CIO Mark Arnold and deputy CIO Jason Orthman.
“Overnight success” is one of the investing world’s biggest myths. Short of buying a winning Powerball ticket – and even then, I often wonder how much people have spent on “scratchies” over the years – few people get rich quickly
When you strip down the messages from some of the world’s best investors, it’s often about prioritising long-term planning over short-term reactions. This aligns with one of Warren Buffett’s tenets to “invest as a business owner”. This is, at least in part, about thinking long-term and being invested psychologically in the stocks you buy rather than just monetarily.
I recently spoke with Arnold and Orthman as part of Livewire Markets’ new Top-Rated Funds series. This features Australia’s 100 top-rated funds, according to Lonsec, Morningstar and Zenith.
Hyperion: By the numbers
- 25 years: The fund manager was founded a quarter-century ago, in 1996
- 23%: The average annual return of its flagship Global Growth Companies Fund (Managed Fund) since inception
- 46%: The fund’s return in 2020, versus just 6% for its peer average
- 15-30: A high conviction fund, it typically holds between 15 and 30 stocks
It remains to be seen whether Hyperion Asset Management’s success will mirror the phenomenon of Berkshire Hathaway’s half-century of high performance. But its Hyperion Global Growth Companies Fund (Managed Fund) has returned more than 23% since launching in 2014, versus the MSCI World’s 13.7% return. And it returned a staggering 46% in 2020 versus just 6% from the global equities sector within the Australian Core Strategies universe, according to FE Analytics.
Riffing on Buffett’s theme of long-term investing, Hyperion CIO Mark Arnold referenced the “Oracle of Omaha” a couple of times during a recent chat on the sidelines of Livewire’s Top-Rated Funds content day.
According to Buffett: “That whole idea that you own a business, you know, is vital to the investment process”.
Echoing this, Arnold says: “Invest with a long-term mindset as a business owner. Only buy a stock if you are happy to hold the stock for at least 10 years, and ignore the short-term noise.”
This was Arnold’s response to a question about the most useful piece of investing advice he’s ever received.
Hyperion’s co-CIO Jason Orthman takes a slightly different tack to arrive at a similar place: “Short-termism is a distraction and typically wealth destructive in investing.”
“Over the long-term, share prices will follow fundamentals such as growing sales, earnings and free cash flows.”
Value is more that just the cost
Orthman emphasises the importance of an analytical mindset in being a successful investor.
“I studied chemical engineering, so I’m analytical, detailed and process-driven,” he says.
“I started my career in financial markets looking for market dislocations and company earnings catalysts, and quickly realised that returns from exceptional businesses led by great stewards of capital are a much better way to produce long-term attractive returns.”
Arnold took a straighter line into funds management, having studied commerce and law while having always had the stock market coursing through his veins.
“I have always believed in the benefits of working hard, saving, and investing for the long-term. These beliefs had a strong influence on where I am today,” he says.
“I’ve been fascinated with the stock market since I was at school, believing that value is not the same as cost and that if you are going to buy something, it is better to focus on its quality attributes relative to its cost, rather than purely focusing on the cost of the item in isolation,” Arnold says.
Hyperion thrives on the pursuit of information
When you consider these responses, their respective answers to another question – what motivates them as individuals – make perfect sense.
Arnold says he “gets a kick out of researching, understanding and investing in exceptional businesses.”
I might be reading too much into Orthman’s response to the same question, but his thirst for “understanding” seems to align with his academic background in chemical engineering before finding himself in financial markets. So, what motivates him? “Trying to better understand the world through markets and investing,” says Orthman.
“This involves a mindset to relentlessly learn and get better. The future is uncertain, so it is an intellectual challenge to try and interpret it better than others.”
Heavy stuff. The pair are clearly deep-thinkers. But what about their investment philosophy? What do such things mean when you’re talking about the almost visceral job of finding companies and management teams that are doing things better, faster and/or cheaper than the competition?
We also asked them what topics or themes are currently locked in their sights as they seek out the best companies for their portfolio. Perhaps unsurprisingly, inflation was mentioned by both, specifically whether it’s likely to remain at such extreme lows over the long term.
Orthman expands further, saying his team believes low growth, low inflation and low rates will continue longer than the “transitory” expansion we’ve seen as many economies emerge from the COVID pandemic.
Inflation and interest rates are likely to stay low
“Inflation has an influence on long-term valuations because, all other things being equal, higher inflation results in higher interest rates,” says Arnold.
In short, this is why Hyperion favours long-duration, high-quality structural growth stocks – possibly suggesting they believe the so-called “value rotation” is also transitory.
Why do they believe this? As Arnold says, it’s because inflation and interest rates are likely to stay low over the next decade because of:
- structural headwinds such as high debt levels,
- ageing populations,
- natural resource disruptions, and
- the hollowing out of the middle class, which will impede real demand growth and inflation.
“In addition, technology disruption and innovation will exert downward price pressures on most sectors including energy, transportation, healthcare and human capital markets.”
Orthman slices through a little more cleanly, saying that certain investment styles are more effective than others in different economic frameworks.
“Traditional value investing has underperformed significantly since the GFC in a tough macro world,” he says. “But structural growth investing will be very effective in a modern but low growth world, where it’s a winner-take-all market.”
This leads onto another crucial question, and one which has bounced around dramatically since the pre, mid and (arguably) post-COVID period in which we sit.
Where are we now in the market cycle?
Both fundies say we’re in the “optimism” phase when you think of the market as a four-part cycle built on Pessimism, Scepticism, Optimism and Euphoria.
And to be clear, this doesn’t mean they believe the market is right in this assessment. But Arnold says investors are overwhelmingly in the Optimism phase, with many believing we’re in a sustained high-growth era with strong economic growth.
Orthman highlights the reasons, which are similar to those in the bulleted list above: an ageing population, wealth inequality, high debt levels and natural resource constraints.
“This means a lot of cyclical, commoditised companies that are enjoying expanding earnings currently will face a much tougher outlook post-COVID-19,” he says.
“In contrast, certain structural growth companies that are being caught in the value-to-growth rotation are well-positioned to grow their earnings sustainably over the next 10 years.”
Which companies are set to grow earnings sustainably over the next decade?
The force of nature we know as Elon Musk continues to be a polarising figure, when he’s actually running his company, Tesla, and not hosting late-night variety TV shows. But he’s clearly struck a chord with Hyperion.
“Tesla is a highly disruptive business with excellent products with strong value propositions,” Arnold says.
“The company has an extremely innovative culture with an important corporate mission to accelerate the transition to sustainable energy.”
A core reason for Arnold’s belief is Tesla’s several large addressable markets. These include:
- The global automotive market,
- The global energy market, and
- Ride-sharing and mobility markets.
Digital payments, double-digit growth
Orthman rings up a modern payments business – and no, it’s not Afterpay (ASX: APT) – as his pick of companies here.
“Invest in modern payment businesses like Paypal that are benefitting from multi-decade tailwinds,” he says.
Orthman cites the company’s huge customer base of both consumers and merchants – more than 360 million and 30 million, respectively – as a core reason to own Paypal. “And it can continue to innovate and offer more products. Under its current leadership and product roadmap, it looks to have years of sustainable double-digit earnings growth ahead.”
Tying it all together
Think long-term. Be analytical. Find the structural growth winners. These are the standout messages I took from my time with the dukes of Hyperion. Playing it straight has served the high-conviction fundies and their investors very well over the years. It’s also nice to see they embrace some of the more flamboyant companies out there, but I can’t see them headlining Saturday Night Live any time soon.
Australia’s 100 top-rated funds
Livewire’s Top-Rated Fund Series gives subscribers exclusive access to data and insights that will help them make more informed decisions.
Click here to view the dedicated website, which includes:
- The full list of Australia’s 100 top-rated funds.
- Detailed fund profile pages, with data powered by Morningstar.
- Exclusive interviews with expert researchers from Lonsec, Morningstar and Zenith.
- Videos and articles featuring 16 top-rated fund managers.
Disclaimer – Hyperion Asset Management Limited (‘Hyperion’) ABN 80 080 135 897, AFSL 238 380 is the investment manager of the Funds. Please read the Product Disclosure Statement (‘PDS’) in its entirety before making an investment decision in the Funds. You can obtain a copy of the latest PDS of the Funds by contacting Hyperion at 1300 497 374 or via email to email@example.com.
The fund changes its name from Hyperion Global Growth Companies Fund – Class B to Hyperion Global Growth Companies Fund (Managed Fund) on 5 February 2021 in order to facilitate quotation of the fund on the ASX.
Hyperion and Pinnacle Fund Services Limited believes the information contained in this communication is reliable, however no warranty is given as to its accuracy and persons relying on this information do so at their own risk. Any opinions or forecasts reflect the judgment and assumptions of Hyperion and its representatives on the basis of information at the date of publication and may later change without notice. The information is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. This communication is for general information only. It has been prepared without taking account of any person’s objectives, financial situation or needs. Any person relying on this information should obtain professional advice before doing so. To the extent permitted by law, Hyperion disclaim all liability to any person relying on the information in respect of any loss or damage (including consequential loss or damage) however caused, which may be suffered or arise directly or indirectly in respect of such information contained in this communication.