Our Growth portfolio manager Anatoliy Cherevach explains his approach to growth investing.
At KKRA we provide comprehensive and highly customized portfolio management and financial planning to our clients. Our Growth portfolio, which we manage internally along with other portfolios, is just one of the tools we use to provide appropriate asset allocation for each client.
Can you describe your general philosophy of growth investment?
It might sound like a trite cliché, but I think the aphorism of “skating to where the puck is going” would be aptly applied here. We look for areas of disruption and where the secular winds are shifting, and then we try to create a portfolio with those winds at its back. Whether it’s new developments in social media, 5G, genetic medicine, or cloud computing – we try to identify the best-positioned companies with strong or growing competitive advantages and big addressable markets that create a long runway for growth. We like investing in emerging platforms, disruptors, marketplaces, and brands that are positioned to capitalize on changing market preferences.
What about FAANG*?
We continue to like many of these mega blue-chip growth companies. Their monopoly or near-monopoly market power has translated into incredible profitability and free cash flow generation and, in spite of their size, they continue to grow at enviable rates, as shifting secular winds tipped the scales in their favor. Having said that, we are mindful that some of them are either approaching or are well into their trillion-dollar valuations. At some point, we have to do the GDP math to see how much bigger they can become. With that in mind, we also invest in many smaller companies with high growth potential.
Can you give us some examples of how the portfolio is invested?
We have had a big concentration in the Communications sector, primarily in several social media platforms as well as online dating. Technology is also a big area for us with focus on cloud computing, payments, security, semiconductors, and 5G. We also have a large exposure to SaaS (software as a service) companies. In Consumer, we invested in e-commerce, athleisure apparel, and premium outdoor brands. In Healthcare, we like areas of medical devices, liquid biopsy, rare disease, and companies that provide research tools for drug discovery and development. In the Industrial sector, we have positions in transportation disruptors and recruitment marketplaces. We currently do not have any exposure in the Energy sector, but our focus here would be on renewables and away from conventional hydrocarbons.
What about valuation?
We are very focused on valuation, and in many parts of the growth universe valuations look extended. We are still able to find the companies that we think are attractively valued vis-à-vis their opportunities in the marketplace. While for some of the established tech leaders, conventional valuation measures are very relevant, for many emerging companies, that might not yet be profitable, we look at their valuation versus the size of their addressable market, the market share we expect them to win, and the margins we expect them to eventually get to as they scale up. I think while some of these names will look expensive using conventional metrics on today’s earnings or revenues, their addressable markets look big, and in many cases, they have barely scratched the surface.
Is the Growth portfolio highly diversified?
Yes and no. We typically hold 30-40 names in this portfolio, and while we do have exposure to many different growth areas, we do not have exposure to all the economic sectors. The idea here is not to provide a highly diversified low risk portfolio, but to have a distinct tool that we would use as part of a broad range of products, which would include other equity products, listed real estate, and fixed income to achieve an appropriately diversified portfolio for our clients. In other words, we create diversification by mixing asset classes, and in that way, we want the asset classes to be very distinct.
Is the Growth portfolio appropriate for all clients?
In our Growth portfolio, we invest in emerging technologies or products that we believe are well-positioned to win in the marketplace, but not all of them will succeed or thrive. This means that this portfolio will generally experience higher swings and can be viewed as higher risk. On the flip side, it gives our clients exposure to important parts of the future economy, and despite higher volatility, it should produce attractive risk-adjusted long-term returns. How appropriate this portfolio is for each of our clients depends on their risk tolerance assessment. We have clients that invested exclusively in our Growth portfolio, and we have clients who don’t have any exposure, but for most clients we use it as one of our allocation tools based on their specific risk/return goals.
*FAANG is an acronym that stands for five major, highly successful US tech companies: Facebook, Amazon, Apple, Netflix, and Google.
If you would like to learn more or if you think KKRA might be the right firm for your investment needs, please connect with us, and let’s start the conversation.