Source: Hyperion Asset Management
The GFC taught the investment team several lessons allowing us to be even better prepared to withstand and benefit from periods of short to medium-term market volatility and fundamental market corrections. This has been validated with strong alpha of +11.19% & +11.78% in March and +19.95 & +15.61% over the past 12 months net of fees across the Hyperion Australian Growth Companies Fund & Hyperion Small Growth Companies Fund, respectively. Over the last 24 months the investment team has increased cash levels to double digit rates (where IMA restrictions allow), removed highly cyclical positions and increased the weights of positions that have robust business models with strong value propositions and low or modest levels of financial gearing. For example, portfolio weights have been reduced across past winners such as REA-AU, SEK-AU and CTD-AU who all have inherent cyclicality in their business models. Conversely, the weights in some world class healthcare operators such as CSL-AU, RMD-AU and FPH-AU has been increased.
Economic disruption also has the added benefit of accelerating the shift to businesses that are market leaders, who possess strong sustainable competitive advantages through the offering of disruptive products and solutions that have a strong value proposition for their customers. In addition, the intrinsic value of these businesses should continue to rise, as they are highly likely to win new long-term customers given the stickiness of their products and solutions. We continue to believe we are relatively well placed with a concentrated portfolio of modern businesses. In contrast, the quality of the Australian equity benchmarks remains low growth and low quality which we highlighted in two of our articles which can be found here: Beware the index! (part 1) and Beware the index! (Part 2).
Through the current market volatility, we’ve taken advantage of the situation by adding new names to our strategies and simultaneously repositioned weights using our proven proprietary portfolio management process. Looking forward we will retain high cash levels as we continue to observe the extent and length of containment and economic contraction currently unfolding. Hyperion is confident that during this difficult period we will continue to add considerable value through this next cycle and beyond. The domestic portfolios 5-year forecast IRR are now looking more attractive and have increased from forecast low double-digit annual returns to high teen forecast annual returns. In an uncertain environment, we believe the relative quality of the portfolio and high forecast IRRs provide a large margin of safety for our clients.
Our Global product continues to add significant value to clients including through the containment crisis and with a 5-year forecast IRR above 20% pa we remain confident in its quality and return outlook. The addressable universe is larger globally and we continue to experience significant research synergies by managing both domestic and global equity portfolios.