Spotting companies with the x-factor
The TV talent show is a format that transcends all national and cultural boundaries. No-one can resist the excitement of picking out the next superstar – that special performer with the x-factor to rise above the rest. But in the world of investment management, talent spotting is more than just an armchair pastime, it’s a vital part of building a strong portfolio.
This is where active investors come into their own – searching the world for the up and coming businesses and putting them under the microscope to discover whether they have the potential to be tomorrow’s superstar companies. And most importantly, uncovering that potential before others recognise it.
Focusing on the right sectors
Where are the next superstars to be found? Imagine if this article had been written 20 or 30 years ago. Then, you would have been looking at the technology and computing sectors, the internet pioneers and those companies with the business models to monetize new technology.
As a stock picker, you need to have the right mindset and investment philosophy to discover companies in ‘undetected’ industries. Who would have had the foresight to identify the likes of Amazon and Google and later Facebook and Netflix? Keep in mind that in the search for superstar firms, nearly 50% of all superstars fall out of the top 10% in every business cycle, many of them falling to the bottom 10%. And the churn rate for superstar companies is higher in emerging markets compared to developed markets.
So, which sectors are best placed today to offer significant transformation across the global economy? The answer may lie with the disrupters in the technology and healthcare sectors, those businesses with truly innovative new products and services in the fields of Cloud, Artificial Intelligence, Automation and the Internet of Things, for example.
Searching far and wide
The search for the next superstars is a global one. Talent can be found in both the developed and developing world and in every sector of the marketplace. In the digital and technology sectors, for example, this means looking beyond the favoured businesses of Silicon Valley and looking towards Asia, for example, for tech companies that could challenge Apple, Amazon and the other household names.
Similarly, within the healthcare sector, biotech companies are now some of the biggest innovators in the market and offer an exciting alternative to ‘Big Pharma’.
In this search, we believe location can be a major asset. With a team of specialists based in Boston, the heart of America’s biotech industry, the BNP Paribas Asset Management team is well located to scrutinise some of the world’s most innovative companies in the sector, meeting them face-to-face to better judge whether they are likely to offer long-term growth.
The talents of a talent spotter
To be a successful stock-picker requires deep sector knowledge, through-the-cycle experience as a portfolio manager and proprietary fundamental research as an active investor. It’s not all about identifying the next ‘superstar’; rather it’s about identifying the companies that offer long-term sustainable growth. Persistence and perseverance to look beyond the headlines along with following conventions associated with identifying potential and you increase the chances of finding those companies able to disrupt their field and grow consistently in the future.
Who are the young contenders that may emerge to challenge the current superstars? And who will crash and fall into anonymity? We will be watching eagerly.
For more on how to approach investing in the superstar economy, visit Constructing a portfolio of superstars.
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.