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Greetings from 2030: Growth investing for the next decade
Anne-Marie Peterson
Equity Portfolio Manager

Companies, Anne-Marie Peterson observed early in her investing career, go through life cycle changes just like people do. Where individuals can experience childhood, college, raising children and having careers, companies might go through periods of rapid growth, maturation, shifts in their competitive landscape and sometimes stagnation.


“Consider Home Depot, which you could say grew up too fast,” recalls Peterson, who got her start as an equity analyst covering U.S. retail companies. “They opened a lot of stores rapidly, without building the necessary back-end infrastructure, like supply chain management systems.” With the market saturated and growth stagnating, Home Depot continued to open stores. The company appeared to be reaching its breaking point.


An outsider, Frank Blake, was hired as CEO. “He had no retail experience but was a great listener and had a knack for making the complicated simple,” says Peterson. “He identified the problem, halted new store openings and set about fixing the supply chain on the back-end. In other words, he stopped growth to ultimately resume growth.”


Like many of her colleagues at Capital Group, Peterson’s early experiences as an analyst helped shape her approach as a portfolio manager. “Retail is a very idiosyncratic sector,” she explains. “What I learned covering retail is that people matter a lot, and growth can come in many forms.”


Peterson recently sat down with us to share her perspective on growth investing over the next decade and offer some predictions for what the world might look like in 2030.


What characteristics do you look for in a growth investment?


My underlying investment framework is driven by three key principles:


Principle 1:


Revenue growth drives earnings, which in turn drive stock prices. My starting point is to look for above-average revenue growth as a path to long-term earnings growth potential. Take the cloud as an example. Last year Microsoft’s Azure and Amazon Web Services together generated about $60 billion in revenue, which represents a fraction of the $700 billion addressable market for corporate IT spending.


Principle 2:


People matter. When I invest in a stock, I tend to look at it as underwriting a management team or culture, so I find it important to feel comfortable with a company’s leadership. In fact, I spend as much time trying to understand the people as I do the business and financial statements. For example, when I was evaluating e-commerce company Shopify, I met several times with Tobi Lutke, the company’s CEO, to get to know him. This is a founder who is mission-driven and working hard to ensure Shopify is a 100-year company.


Principle 3:


Change is a key catalyst for growth. Sometimes a CEO change can be a major catalyst, as was the case with Frank Blake at Home Depot or Satya Nadella at Microsoft.


During periods of significant change, industry structures can shift — for better or worse. Some companies get stronger, others grow weaker or fail. There's uncertainty, but also an opportunity to identify what the market might be missing about a company’s prospects. And there are few periods of change more significant than the one we are living through now.


Are today’s coronavirus-related behavior shifts creating a fertile environment for growth investing?


There are opportunities to find great long-term investments in any environment. The current period is no exception. Every market downturn is different. What’s interesting about the current period is that the disruptive tech and consumer companies that led during the expansion have continued to lead. Typically the market leaders going into a downturn haven’t led during or coming out of a downturn, but I think we are seeing a fundamental shift happening.


The bar chart is titled “Growth, led by disruptive tech and consumer businesses, continues to outpace value shares.” The chart shows the relative returns of U.S. growth stocks, as measured by the Russell® 1000 Growth Index versus U.S. value stocks, as measured by the Russell® 1000 Value Index, for each calendar year from 1998 through 2020. Relative returns show a gain of 23.1% for 1998; a gain of 25.8% for 1999, which is identified as the high prior to 2020; a decline of 29.4% for 2000; a decline of 14.8% for 2001; a decline of 12.4% for 2002; a decline of 0.3% for 2003; a decline of 10.2% for 2004; a decline of 1.8% for 2005; a decline of 13.2% for 2006; a gain of 12.0% for 2007; a decline of 1.6% for 2008; a gain of 17.5% for 2009; a gain of 1.2% for 2010; a gain of 2.3% for 2011; a decline of 2.3% for 2012; a gain of 1.0% for 2013; a decline of 0.4% for 2014; a gain of 9.5% for 2015; a decline of 10.3% for 2016; a gain of 16.5% for 2017; a gain of 6.8% for 2018; a gain of 9.8% for 2019; and a gain of 26.1% for 2020. 2020 returns are as of June 30, 2020. Sources: FTSE Russell, Refinitiv Datastream. Growth and value represented by Russell 1000 Growth Index and Russell 1000 Value Index, respectively, and are total returns in USD as of June 30, 2020.

As of June 30, the Standard & Poor’s 500 Composite Index was down 3.1% year-to-date, but that figure represents the sum of several individual companies. A look beneath the surface reveals a wide divergence of returns. On the one hand, there are those that have benefited from coronavirus-related demand, like e-commerce platforms Amazon (up 49%) and Shopify (up 138%), and streaming services like Netflix (up 41%). On the other, there have been a number of companies that have struggled, like United Airlines (down 61%), Royal Caribbean (down 62%) and Boeing (down 43%). So it's been a tale of the haves and have nots. And I think the key question for long-term investors is, which of these moves are enduring?


Which trends today have that potential to endure?


The headline is that COVID-19 accelerated the secular shift toward digitization. As Shopify’s Lutke put it, “We are experiencing 2030 in 2020.” If the digitization sailboat was cruising along with steady tailwinds before, the pandemic turned those tailwinds into strong gusts. And that sailboat turned into a speedboat and covered more ground.


I believe this represents the acceleration of a structural change that will be long lasting. Traditional TV’s scheduled programming and advertising model is more challenged than ever. Bankruptcies among retailers have accelerated, surpassing the global financial crisis, and I think more are coming. And while these shifts have been happening for a long time, what's interesting is that they're still in the early innings. In the U.S., e-commerce is growing rapidly but still represents only a fraction of total U.S. retail sales, and trails adoption in China and other markets.


The mountain chart is titled “Digitization of daily life is here to stay.” The chart shows the rise in e-commerce retail sales as a percentage of total U.S. retail sales from 2010, when e-commerce represented 4.2% of total U.S. retail sales, to 2020, when e-commerce represented 11.8% of total retail sales. Sources: Statista, U.S. Census Bureau. E-commerce data shown from March 31, 2010, through March 31, 2020.

Payments provide another example. During the pandemic, many of us have been forced to pay for things digitally. It can be difficult to change a habit, but once you do it can be sticky.


Even with respect to the public sector, the digitization shift is picking up momentum. Many local government offices have fallen far behind the digitizing curve. But companies like Tyler Technologies, a software developer founded in the 1960s, have been helping government agencies move their systems to the cloud, digitizing processes like the issuing of parking tickets and even operating courts virtually.


What other sectors are experiencing these shifts?


In health care, the adoption of telemedicine, or online patient-doctor visits, exploded in March, a trend that I think is going to endure. Patients have had access to these services for a long time, but the adoption rate had been low. As a result of COVID-19, regulators and health care providers relaxed their rules to allow more digitization. At the same time, patients and doctors, partly out of necessity, got more comfortable with remote appointments.


Jason Gorevic, the CEO of telemedicine provider Teladoc Health, recently said, "What we thought would take years to happen happened in a matter of months. This isn't an inflection point. It's a shift in the demand curve." This shift is also important news for patients. Where you see this digitization happen, it's leading to better outcomes and lower costs.


You said growth comes in many forms. Can you talk about the types of growth you look for?


I try to look for companies whose products or services can make the world better, and a lot of the transformational change we are seeing today has that potential. I define growth more broadly than the traditional definition. I look for growth in three broad stages, depending on where a company is in its life cycle.


The chart is titled “There are three potential stages of growth in a company’s lifestyle.” It places the stages along an S curve in the following order: stage one, Early-stage growers; stage two, Durable businesses with long potential growth runways; and stage three, Mature companies getting more out of existing assets. The first includes Shopify and Teladoc Health as examples; the second includes Amazon and Netflix as examples; and the third includes Home Depot, Boston Scientific and CSX Transportation as examples. Source: Capital Group.

Growth stage 1:


The first group is what I would call early-stage growers. These tend to be innovators whose offerings have the potential to disrupt existing business models. They often have potentially large addressable markets and their products are early in the adoption curve. A recent example is Shopify, which provides small merchants with resources for payments, customer engagement, shipping and marketing. While Amazon’s focus is on the end consumer, Shopify’s is on the small business owner. Its services enable small businesses to run their stores and websites for hundreds of dollars a month and to access consumers globally. Lutke, the founder, is a product guy — he developed his software originally to sell snowboards. He is on a mission to empower small merchants of the world.


Another example in this category is the aforementioned Teladoc, which has seen demand for its offerings rise as patients and doctors have gotten more comfortable with remote appointments.


Growth stage 2:


A second type I look for are the durable franchises with long potential growth runways. Amazon could be considered an example. Platforms like an e-commerce site are strengthened by the number of participants. And sales beget more sales. As a result, they have more to invest in their technology. As I mentioned earlier, e-commerce today still only represents a fraction of total retail sales in the U.S.


Growth stage 3:


A third growth category is mature companies able to get more out of existing assets, whether it is through a turnaround or an existing approach. A decade ago, Home Depot would have fit this category. Examples today might potentially include medical device maker Boston Scientific and railroad operator CSX Transportation.


When you first joined The Growth Fund of America® as a portfolio manager, how did you prepare for the role?


One thing I did was look through Capital’s archives back to 1974 and read every annual report. I wanted to get a strong sense of the fund’s personality — what we're trying to accomplish for our shareholders — from the voices of my predecessors. I was struck by a write-up in the 1982 report that featured several investment professionals discussing fundamental change in the industries they covered. Claudia Huntington, who is still a portfolio manager at Capital and was covering technology at the time, mentioned this thing called a cell phone that would be available in the future. And our late chairman Jim Rothenberg, who was a mentor to me, predicted the development of the flat-screen TV. At the time it must have sounded like crazy, pie-in-the-sky stuff, but it came to be. We're still trying to identify change today.


Pull quote dated 1982 from Claudia Huntington, former president of AMCAP Fund®, that states, “Eventually, you’ll probably have a telephone the size of a pocket calculator that you can carry with you.”

How do you think the world will be different in 2030?


I think one of the most interesting things we could see in 2030 is a version of David and Goliath: the rise of the small business and the power of the individual over the large corporation. We are seeing a new wave of online software providers and e-commerce companies that are developing back-end infrastructure tools that have the potential to empower small- and medium-sized businesses. Historically, a big investment budget and big IT department would be needed to run a retail business.


The tools being developed today lower the barriers of reaching customers and managing inventory. Someone will be able to start a business, selling T-shirts around the world for example, in 15 minutes. Whereas the benefits of the first wave of online services developed by Google and Facebook accrued to a few big companies, I think the next wave of advances can lead to the dispersion of economic power and opportunity to smaller companies.


Pull quote dated 2020 from Anne-Marie Peterson, portfolio manager for The Growth Fund of America®, that states, “Remote medical devices and robotics will allow a specialist in Japan to perform a procedure on a patient in Nebraska.”

Similarly, in the health care sector, I think we will see the democratization of health care. Today most of us don’t have immediate access to fluctuations in our cholesterol or heart rates. I think we'll see more remote monitoring that can connect to smart delivery systems of medication and other therapies.


We are seeing glimpses of it. Companies like Insulet and Dexcom are developing devices that enable remote monitoring and delivery of medication for diabetics. A decade from now this could be more broad-based and might include sending alerts to your doctor. With companies like Intuitive Surgical developing robotics for surgeries, these advances could converge to the point where remote medical devices and robotics will allow a specialist in Japan to perform a procedure on a patient in Nebraska. Anyone will have access to leading specialists, no matter where they live. The pieces are in place for this to happen, and all of this has the potential to improve outcomes and reduce costs.


The bottom line is that we are living in an incredible time of change. Change drives opportunity for active investors like us.


And at Capital, we have the luxury of thinking very long term. My bonus is mainly paid over an eight-year period, so I am truly paid to think about what 2030 will look like — or at least 2028. There are new emerging companies today that we may not hear about, but a decade from now will be household names providing value to their customers. Out of every crisis is born something good.



Anne-Marie Peterson is an equity portfolio manager with 25 years of investment industry experience. She also covers the U.S. retail industry as an investment analyst. Prior to joining Capital, she was a partner and research analyst for Thomas Weisel Partners and before that, she was a research associate at Montgomery Securities. She earned a bachelor's in economics from the University of California, Irvine, and is a CFA charterholder.


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