Strategically Aware Investing: the new imperative
Our core investment thesis is that companies need new capabilities to contend with today's — and tomorrow’s — increasingly complex, dynamic, high-velocity environment of global hyper-competition, not to mention the emerging megatrends. Traditional financial analysis is of only limited use in helping investors identify them. New analytical and investment models are required to uncover those capabilities systematically, and we have spent over 10 years developing and refining them.
We call our approach Strategically Aware Investing (SAI). In concert with our sister company LFIP, our approach supports stock picking at all levels by combining three strands of analysis:
- Financial analysis criteria
- Company, sector and thematic research in order to find the best-managed, forward-looking and most “future-proof” companies. Companies that are adaptable, responsive and have innovation capacity are those that are more likely to succeed.
- An analysis of the company’s megatrends exposure
Arguably the single greatest determinant of companies’ competitive and financial performance is its management quality. Despite this, Wall Street and City analysts only rarely analyze it systematically. Companies’ ability to manage these megatrends-driven risks and opportunities better than their competitors is an increasingly robust proxy and leading indicator for their strategic management and execution capabilities.
The variations among company-specific exposures to these emerging megatrends — and their capacity to respond to them — are considerable, even within the same industry sectors. Deltas can be 30 times or more.
Few investors have done the in-depth research necessary to discover which companies are which. Consequently, the substantial differences among companies’ risk and opportunity profiles driven by the emerging megatrends remain largely hidden from investors. This creates significant information inefficiencies and asymmetries which astute investors can exploit.
Those information inefficiencies are particularly pronounced in emerging markets, where the power of IPCM’s information advantage, and the positive sustainability impacts of our portfolios are arguably even greater.
This "megatrends alpha premium" will become even greater going forward, as the secular global megatrends continue to bite deeper.
IPCM’s 5-Factor™ model: a more comprehensive definition of corporate sustainability
75-80% of companies’ true risk profile and value potential lies below the surface, and cannot be captured by traditional financial analysis. Inflection Point’s proprietary 5-Factor™ model has the proven ability to capture these hidden drivers of risk and return:
- Environmental sustainability
- Human capital
- Organizational capital
- Adaptability & Responsiveness
- Innovation capacity
A series of powerful secular global megatrends, combined with the accelerating velocity of change in global markets, is creating an entirely new set of alternative risk/return drivers and competitive imperatives for companies. In this emerging competitive environment, there will be an unprecedented value premium for the most innovative, adaptable, responsive, and forward-looking companies.
The most powerful of these secular megatrends are:
- The dramatically increased complexity, transparency, and velocity of change in companies’ business environments, which places an unprecedented premium on strategic management and innovation skills, as well as corporate adaptability and responsiveness.
- An inexorable shift in the world’s economic center of gravity and dynamism towards emerging markets, where “sustainability”-driven risks and opportunities are inherently greater.
- Substantially increased demand for energy, as well as water and other critical natural resources, driven by a combination of explosive population growth, urbanization, industrialization, demographic shifts, and growing consumer affluence and consumption, particularly in emerging markets.
- Unprecedented societal, governmental, business and investor concern over climate change and its implications.
- A general decline in both the credibility and financial capacity of governments worldwide, with a corresponding increase in the necessity for corporations to shoulder greater responsibility for tackling environmental and social challenges.
- Substantially increased stakeholder expectations for improved sustainability performance from both companies and investors, accompanied by much greater information transparency with which to assess that performance, and more effective communications tools with which to disseminate criticism.
- Growing threats to social and political stability, driven by income inequality and public health issues such as HIV/AIDS and malaria.
- The emergence of a new fiduciary paradigm for investors, requiring much greater transparency and attention to sustainability issues.
Successful investment strategies require integrating insights about megatrends exposures with more conventional fundamental and quantitative financial analysis — from the very outset.