Jason Pohl

In a world of heightened uncertainty, investors can find great value in businesses that identify and focus on niche markets, according to Jason Pohl, partner at ECP Asset Management. 

“Focusing intently on a specific market segment, coupled with innovative growth strategies and unwavering commitment to quality, has consistently led to remarkable business triumphs,” he says. 

“The power of a concentrated portfolio comprising well-executed niche businesses is often underestimated. For investors, identifying these investments assists in achieving sustainable and long-term investment success.” 

By maintaining a focus on high-quality products and services, companies that find their niche can establish strong foundations that support long-term growth. 

A key aspect of the success of these kinds of companies is their ability to reinvest profits effectively, channelling earnings back into their businesses, fuelling innovation, and expanding their market reach.  

“This reinvestment strategy not only fortifies their existing market position but also provides the resources needed to explore new opportunities,” Pohl says. 

A good example of a company focusing on a niche market segment, and reaping the benefits, is locally listed global provider of professional AV technologies Audinate.  

The company’s breakthrough technology, Dante, delivers synchronisation and low latency in audio transmission over a standard ethernet network, and it profoundly influenced the industry in this niche. 

“Its capability to transmit numerous uncompressed audio channels via Ethernet networks distinguished it as a revolutionary technology, propelling Audinate to rapid growth and industry prominence,” Pohl says. 

In Financial Year 2023 Audinate increased revenue by 50 per cent to $69.7 million and recorded a net income of $10.6 million. 

Another solid niche finder is high-performance cooling solutions provider PWR Holdings. It used niche expertise as a stepping stone to diversify into new markets and sectors. 

Initially centred on motorsports, PWR expanded into programs servicing original equipment manufacturers (OEM), and Aerospace and Defence customers by adapting their technologies to meet the complex demands of these varied sectors.  

“The success stories of Audinate and PWR exemplify the immense potential of excelling in niche markets. Their paths demonstrate how mastering a niche, coupled with focused innovation and strategic growth, can be a powerful driver for widespread business success in today’s competitive marketplace,” Pohl said. 

The post Why you should invest in companies that know their niches  appeared first on AdviserVoice.

Jason Pohl

High quality companies with strong fundamentals are better positioned to withstand short-term volatility in the market and a potential recession, according to portfolio manager and ESG head at ECP Asset Management (ECP), Jason Pohl.

“With the spectre of a recession looming, companies in Australia and globally should be focusing on building resilience in the face of escalating costs, high inflation, tight labour markets, and dwindling consumer demand.

“Meeting these challenges head on will ensure competitive excellence through these cycles and provide a higher chance of emerging successful on the other side,” he said.

Mr Pohl adds that investors should not be put off by flat or declining growth, instead they should be looking for companies that are making strategic decisions that position them for growth past any short-term disturbance.

“Identifying companies with clean balance sheets, loyal customer bases, and management teams that understand their value proposition and competitive advantage is really important.

“Markets are likely to be turbulent, and as this happens companies need to strengthen their competitive moat to provide opportunities for the long-term investor.”

In these market conditions, Mr Pohl suggests that companies should be taking advantage of any pull back in business activity and reinvesting in new systems and processes promoting efficiency and productivity in the business that are key to long-term success.

“This period should be used to re-evaluate the business model including the current processes and systems in place. Instead of hiring new workers, companies should be looking at where they can most effectively deploy their existing workforce. Or perhaps consider a new Enterprise Resource Planning (ERP) system that can improve efficiencies and reduce costs,” he said.

Australian listed automotive cooling company PWR Cooling is one such company that Mr Pohl said exhibits the hallmark traits of companies that seek to reinvest in new systems and processes.

“PWR is focused on its niche core competency, continually reinforcing its competitive advantage, and growing its economic footprint sustainably over the long term.

“By investing in the business’ competitive advantage, PWR has been able to secure aerospace and military contracts, and has also started to explore opportunities in providing cool solutions to electric vehicles (EV).

“PWR has also faced difficulty in acquiring appropriately skilled workers. To manage this, it has implemented programs to train workers to the right skill level, bettering labour retention within the company.

“Over the next two to three years, we believe there will be a lot of opportunity for PWR because of its ability to reinvest and stand out in these times of volatility.”

The post Quality fundamentals key to withstanding looming recession appeared first on AdviserVoice.

Jason Pohl

In Australia and around the globe, companies face escalating costs, high inflation, tight labour markets, and dwindling consumer demand. The spectre of a recession looms as well. But the companies that are focussing on building resilience in the face of these challenges are those that will ensure competitive excellence through these cycles and emerge successful on the other side.

On a recent investor trip to the US and UK we were impressed by the lengths some companies are going to, to position themselves for this future outperformance. We were also reminded of the uniqueness of our approach – by focusing on the quality of a company’s fundamentals, while appreciating longer-term opportunities we can withstand short-term volatility.

A year of normalisation

Industries that did well out of Covid, like food and deliveries or online luxury goods, have experienced a pullback as the world returns to ‘normal’. However, companies that have managed to take advantage of the increase in customer numbers, and the higher retention rates of those customers, are positioning their business for long-term growth.

During this time, many are taking advantage of this pull back in activity to reinvest in new systems and processes, while others are withdrawing from less successful areas and focussing on profitable lines of businesses. Instead of hiring new workers, they are looking to where they can most effectively deploy their existing workforce. Or perhaps they may be considering new Enterprise Resource Planning (ERP) systems that can improve efficiencies and reduce costs. Efficiency and productivity are key.

One positive we picked up from our investor trip was that consumers overseas are quite resilient. Compared to what we read about consumer sentiment in the US and UK, what we saw was actually quite positive. Something as simple as the US offering 30-year fixed mortgage rates means many Americans don’t have the same financial strain Australian mortgagees have.

Firms are realistic and many are expecting a recession by the end of this year. But the companies we like are those that are forward thinking and strategically preparing for such a situation by, for example, analysing their customer base and focussing on more profitable or loyal customers. Those that are doing this well have been able to take market share from their competitors during this period and have accelerated their competitive position.

Customer loyalty

One of the great takeaways of the post-covid world has been the importance of customer loyalty. We notice this in Australia but observed it during our investor visits in the US and Europe to a greater extent.

Customers have always wanted to feel valued and appreciated. Using loyalty as a tool to enhance the customer experience helps companies manage the reduced market demand more effectively.

Companies who can do this, and centre their business model around the loyal consumer, are also finding it benefits the bottom line.

We observed the distinct prevalence of loyalty programs during our travels. Across the board, companies that have been able to understand and home in on their core customer through these programs, and other means, have experienced substantial improvements in profitability.

These programs need to offer more than just points and provide the loyal consumer with reasons to keep using the company’s services or products again and again.

Poster children

PWR Cooling (ASX: PWH)

Australian listed automotive cooling company PWR Cooling (ASX: PWH) supplies cooling products around the world. In 2015 it acquired US-based cooling and fabrication company C&R (now known as PWR North America). PWR North America now supplies to US motorsport markets, aftermarket, and now aerospace and military markets.

We were able to spend a considerable amount of time at their new factory when we were in the US. While we have been invested in this company since its IPO in 2015, being able to observe their activities on the ground further confirmed to us the rapid growth in their business. PWR is one company that exhibits the hallmark traits of companies we seek to invest in – focusing on their niche core competency, continually reinforcing their competitive advantage, and growing their economic footprint sustainably over the long term.

They have been incrementally investing in the business’ competitive advantage to the point that they’re now on aerospace and military contracts. They are also exploring opportunities in electric vehicles (EV) and providing electronic cooling solutions for EVs.

By visiting their facilities, we were able to better understand their growth options. Their expectations for growth in the aerospace and defence space became obvious through observing the sheer size and scale of that facility. We believe there will be an explosion of opportunity for PWR over the next two to three years.

We also like what they are doing with regards to labour retention. Faced with difficulties in finding appropriately skilled workers, they have implemented programs to train workers to the right skill level. They have initiated grassroots talent development initiatives and are working with schools to develop apprentices.

Domino’s Pizza Enterprises (ASX: DMP)

Domino’s has experienced a few hiccups in Australia over the past 12 months. Post-covid inflationary pressures have impacted franchisee margins and profitability, and disappointing first-half earnings saw a 23 per cent drop in the share price in February this year.

Domino’s Australia has a large exposure to Europe but even though Domino’s US and Domino’s UK are quite separate businesses, the insight from the international perspective is a return to franchise profitability. The US, for example, is also doing very well out of its loyalty program, with their 30 million active loyalty members delivering improved engagement and order frequency.

Looking at Europe specifically, we are observing some food and energy costs stabilising, leading us to believe the business will return to growth. This all gives us comfort that the outlook will improve while the company repositions itself through this year of normalisation and its operational improvements take hold.

Final word

Our message to investors for this year would be – don’t be put off by flat or declining growth and instead look out for companies making smart strategic decisions that position them for growth past any short-term disturbance.

Our US and UK trip brought home to us the importance of identifying companies with clean balance sheets, loyal customer bases, and management teams that understand their value proposition and competitive advantage. As the year of normalisation passes, quality companies will strengthen their competitive moat, providing opportunity for the long-term investor.

———-

By Jason Pohl, partner and head ESG officer

The post Playing the long game appeared first on AdviserVoice.

Jason Pohl

Black swan events are low in predictability but high in impact. Crucially, it’s not the share price performance that is the focus of business during these events, rather the performance of the underlying business. For investors, a black swan event is usually a cause for panic, and it’s a good idea to put in place preventative measures to protect portfolios from unpredictable risks. But black swan events may also have a silver lining.

In his book ‘Antifragile: Things That Gain From Disorder’, author Nassim Taleb introduced the concept of antifragility. It is based on the idea that randomness, uncertainty, and chaos are all good things, and when systems come under stress, they build up resilience and improve. It’s about gaining from disorder – and antifragility is the antidote to black swan events.

How ‘antifragility’ fits into an investment strategy

The current environment is putting added pressures and stresses on businesses globally. There are production constraints, triggered by the pandemic and accelerated by the ongoing invasion of Ukraine. Inflation is increasing worldwide and the onset of a recession is becoming all too real. We are now living in a world that is shaped by supply, with the current inflationary environment being driven by these supply-related issues, as opposed to excessive demand.

It is a test for companies to see if and how they prevail through these headwinds.

Such events reveal resilient and growing companies, and these are the antifragile companies that investors should be considering adding to their portfolios.

What makes a company antifragile?

Companies that are flexible and move quickly to take advantage of opportunities while capitalising on market trends and demand will succeed competitively and provide long-term opportunities for investors. A company’s ability to do this makes it a sustainable company, and an antifragile one. Companies need black swans to stress-test their framework as a mechanism to ensure the company is in good shape and can continue to grow and perform under these uncertainties. Through times of market volatility, these investments are those that have been proven to outperform.

One example is IDP Education, a global student placement platform and IELTS distributor. The education sector felt the full effects of the pandemic, but IDP Education adapted by extending its competitive advantage to having a multi-destination strategy in place. Although the Australian market was the hardest hit, with the largest decline in student numbers, its other target market, the UK, remained relatively open during the pandemic making IDP Education more resilient to the pandemic than its competitors which only service single destinations. IDP Education is an antifragile company, resilient to these black swan events.

Domino’s is another example of a resilient and antifragile company. When the inflationary black swan swooped in, pressure was placed on franchises as inflation seeped into the costs of food and labour. As Domino’s continues to focus on franchisees, nurturing human capital, and continued operational efficiencies, we believe this will ensure that its store-rollout objectives will continue to be realised over the long term. It overcame these pressures by predominantly rolling out its coupon and loyalty programs to drive consumer behaviour toward higher margin products.

What the future holds

Market volatility is likely to continue in 2023 and investors need to not just react to black swan events, but use them as a time to assess how well a company performed under these tail events. Successfully emerging from a black swan gives substance to how sustainable a company will be in the long-term. Its ability to adapt and find competitive advantages is key to becoming an antifragile company. The market’s tendency to overreact to short-term events presents a unique investment opportunity for investors looking for resilient and antifragile companies to add to their long-term investment strategy.

Resilience and antifragility are the blueprint for living in a black swan world. And for investors, identifying these antifragile companies is the true secret to success in growing one’s long-term wealth.

By Jason Pohl, head of ESG officer

The post Finding the antidote to black swan events appeared first on AdviserVoice.