Constructing a portfolio of superstars

As the best football managers know, not every star player is a star performer. A team of galacticos can fail to get results, then along comes a young unknown who completely outshines the stars. The same applies to investment management in the superstar era.
We live in the age of superstar firms. Their fortunes dominate the business pages and often the front pages, too. At first glance, they seem like the perfect stock picks – strong, stable and market-dominant. But the Superstar Economy presents investors with a dilemma. Its ‘winner takes all’ ethos means that there will be losers too and these can drag down the performance of a portfolio. Increasingly it seems, serious profits will be concentrated in a small number of companies.
So how do investors try to make sure that they are exposed to as many of these high-performers and to as few of the also-rans as possible?
What does this mean for investing
Three approaches to constructing a superstar portfolio
There are three common approaches to building a portfolio with superstar firms at its core:

  • Index. A low-cost investment that will provide broad equity market exposure and, therefore, back some winners, but from a very-diluted pack.
  • All-or-nothing. An active approach that seeks to capture high returns by building a highly concentrated portfolio of superstars. To perform well, it relies on the investor’s faith in the asymmetry of returns – that the winners will offset the losers.
  • Active stock-picking: A more conservative stock-picking approach that focuses on companies that can make a respectable return based on the compounding of sustainable returns. It rests on the belief that many of today’s superstar companies will not necessarily be the superstar companies of tomorrow, and investors should therefore pursue firms with steady and consistent returns that can be re-invested for future growth.
While each approach has its merits, at BNP Paribas Asset Management, our equity teams favour the active-stock picking approach. We do so because it enables us to build high-conviction portfolios that integrate investment considerations – like compounding growth and sustainable business practices – that, we believe, lead to better portfolio outcomes.
An alternative strategy: Looking beyond the stars
As we discuss in ‘The superstar firms in the spotlight’, the size of superstar firms often hides some uncomfortable truths such as low productivity, vulnerability or declining innovation. So for longer-term investors looking for the next potential superstar, it may also be prudent to consider small firms – known as small caps – with high or rapidly improving productivity and underlying sustainable growth.
The bottom line: sustainability
Whichever way you choose to invest in the superstar economy, our overall investment viewpoint is to look beyond the immediate needs of today to the important outcomes of tomorrow. For us, this means focusing on business with both sustainable return potential and business practices.
For more insights on superstar firms and the implications for investors, visit Superstar Economy.
Disclosures
The above-mentioned securities are for illustrative purpose only, are not intended as solicitation of the purchase of such securities, and does not constitute any investment advice or recommendation.
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