This view was expressed by Mark Arnold, Hyperion’s Chief Investment Officer, who said that the evidence provided by the success of Hyperion’s investment process, with its overarching aim of identifying Australian companies with fundamentally positive long term economics, has led to this view. Hyperion was recently named Australia’s 2013 Fund Manager of the Year by Money Management.

“We are focused on long term growth potential which means we look at sectors and companies alike over a five- to ten-year time horizon, and hold stocks for an average of ten years. And when it comes to the ability to realise growth potential, small-cap and medium-cap companies are often better placed than the big players,” said Mr Arnold.

“We start by assessing a company’s addressable market over a ten-year period, which means looking at the sector as a whole. If the sector is growing and the company is small relative to the market, it has higher organic growth potential, and that means better returns over time.”

Mr Arnold further explained that Hyperion looks for two factors when identifying companies likely to outperform: a high quality franchise which must include a sustainable competitive advantage and the potential for long term revenue and profit growth.  Companies should also be capital light and should not carry excessive debt.

By way of example, Mr Arnold pointed to online businesses such as realestate.com.au, seek.com.au and carsales.com.au, all of which operate in a growing sector and all have been an important part of the Hyperion portfolio for some time.

“Each of these companies has a sustainable competitive advantage and a strong value proposition which in turn produces pricing power,” he said.

Another example of Hyperion’s investment process in action is JB Hi-Fi. When Hyperion bought the stock a decade ago, all it had to offer was an attractive retail story and a small number of stores, primarily in Victoria. Hyperion saw the potential for the company to be rolled out into other States, and it performed very well for investors. Hyperion has since sold out of JB Hi Fi, because it is now a mature stock with a less compelling growth story.

Size isn’t the whole story, however. Hyperion expects to achieve similar strong results with Brambles, a large company, but one that is targeting growth by driving successful products into new markets.

According to Mr Arnold, another favoured story at Hyperion is global rollouts.

“Products which are successful in one geographic location can often perform successfully in others,” he explained.

“That’s why we have invested in the University pathway provider, Navitas, and financial software provider IRESS Financial Solutions. Both have products that have proven themselves here, and are now being rolled out in other countries including the UK, the US and Canada.”

Mr Arnold then said that, while Hyperion is strictly a bottom-up, fundamentals-based investor, it also bears mentioning that companies in certain sectors often share some common features that do marry with this investment approach. In general, these are sectors that benefit from ‘secular tailwinds’; meaning that businesses in the sector operate in growing markets.

“Healthcare is a great example. An ageing population means that demand for healthcare services is increasing all the time. That’s why we like Ramsay Health Care. What it all comes down to is an ability to assess every company on its long-term economic merits,” concluded Mr Arnold.

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