Hyperion takes credit for finding growth in Aussie equities

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The post-GFC credit cycle has seen a reversal of fortune for companies with low levels of gearing and organic growth, according to Australian equities fund manager, Hyperion Asset Management.  

Mark Arnold, Hyperion’s Chief Investment Officer, believes these companies now have a strong long-term return advantage because they can grow revenues, profits and dividends at attractive rates.

“Access to cheap debt in the decades prior to the GFC resulted in an explosion in the earnings growth rates of mediocre companies.  Both businesses and consumers were encouraged to gear up and increase spending on consumption and investment, and strong earnings and dividend growth over multi-year periods appeared to be the norm. 

“Businesses with strong fundamentals didn’t stand out, because even the most average companies were achieving strong short-term earning growth.”

Arnold suggests subdued investor confidence has resulted in deleveraging across the market, and with global investment markets remaining depressed and the local housing market soft, gearing levels are unlikely to rise substantially in the near future. 

“GDP and profit growth are likely to be below the levels experienced over the past 50 years,” he said.

“Now is the time that we are starting to see the better quality companies shine.”

Arnold said that the situation was unlikely to change in the immediate future, as Governments, households and investors continue to repay debt, build cash buffers and reduce exposure to risk and growth assets. 

“Capital light businesses with long-term organic growth options should outperform in a subdued economic environment,” he said.

Arnold concluded by saying, “The Hyperion Australian Growth Companies Fund has low levels of gearing, strong sustainable competitive advantages and attractive organic growth options. They are unlikely to need to raise significant equity capital through time and thus should not suffer material dilution to their long-term EPS growth rates arising from additional shares being issued. 

“We have always focused on companies with sustainable and attractive long-term earnings growth profiles and this has been the core driver of our alpha generation since inception in 1996. Since 1996, our portfolio has averaged 10% per annum growth in earning per share, which compares with around 6% for the market as a whole over the same period.  This differential in earnings per share growth represents a core component of our long-term alpha generation.”

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