Mark Arnold

Hyperion Asset Management (Hyperion) has today announced that it has neutralised its net climate impact by offsetting its historical emission since its inception in 1996.

The announcement is the latest step in the equity manager’s “carbon light” approach and commitment to cutting global emissions.

Commenting on the announcement, Hyperion’s Managing Director and Chief Investment Officer Mark Arnold said that reducing and neutralising carbon emissions was of paramount importance and that the asset manager had partnered with environmental consultancy South Pole to assist in this process.

“In our view, the single biggest structural headwind to the global economy and everyone’s general quality of life is the negative and worsening effects of climate change. Our portfolios are extremely carbon light, but we wanted to also ensure that Hyperion’s carbon footprint was being offset to minimize the negative net impact our business activities are making on the climate and the environment.”

“We believe that investors with direct and material exposures to fossil fuel-based energy businesses will underperform. This underperformance will occur because they will be disrupted by renewable energy generation and storage systems and electric vehicles. In the long-term these companies will be forced to internalise environmental costs relating to climate change that they have historically externalised.”

“Looking ahead, we expect economic growth to remain lower for longer and believe that the role of fossil-fuel based businesses will substantially diminish over the next decade. Long-term investors who fail to recognise the economic imperative to decarbonise their portfolios will do so to their own detriment,” he added.

Hyperion, which currently manages $8.6 billion across three strategies, engaged South Pole to assist in the planning and implementation of its carbon credit strategy which has seen it achieve South Pole’s ‘Climate Conscious’ label. The program with South Pole contributes to various initiatives both in Australia and abroad including EcoAustralia Biodiverse Tree Planting project, which aims to plant one million trees across Australia.

Jason Orthman, Hyperion’s Deputy Chief Investment Officer said: “Sustainability has been core to Hyperion’s investment philosophy and process since it was established. Our portfolios are made up of disruptive, high-quality, and innovative companies with sustainable competitive advantages. When you look at the amount of carbon which is produced by the companies we own, it is a small fraction of their relevant benchmarks.

“We believe that good investment returns are interlinked with sustainability and environmental outcomes and as cheaper renewable energy options continue to become commercially viable, carbon-intensive businesses will struggle to compete with those that are “carbon light” in the decade ahead.

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Mark Arnold

According to recent Morningstar reports, Hyperion Asset Management’s (Hyperion) funds have returned market topping performances both over the last two decades and in recent months, despite market volatility and a poor end to FY2020 for the ASX. 

Hyperion’s Australian Growth Companies Fund has been named the top performing non-geared fund over the 20-year period to 30 June 2020, outperforming 521 other large cap Australian equity funds^[1]. The report, based on the Morningstar Direct Global Fund Manager database, shows that the Fund’s unit trust delivered an average annualised return of 9.80 per cent after fees over the two-decade period.

The Hyperion Broad-Cap Equities Composite delivered an average annual return of 10.6 per cent after fees during the 20-year period to 30 June 2020. The fund has been managed by Hyperion since September 2002.

The Fund was the nation’s best performing large cap Australian equity fund* for the 20 years to May 31 2020, according to the Morningstar Global Fund Manager database.

But despite adverse market conditions, Hyperion has managed to keep its significant lead more recently as well. Its Global Growth Companies Fund delivered a return of 14 per cent after fees from 1 Jan to 30 June 2020, outperforming Morningstar’s World Large Growth category by 10.21 per cent, while the Australian Growth Companies Fund and Small Growth Companies Fund not only still topped the Equity Australia Large growth and Equity Australia Mid/small Growth categories respectively over the same period, but were the only funds not to deliver a negative return.

The Small Growth Companies Fund was also the top performing small-cap fund of the decade to Dec 31 2019 according to Mercer’s 10-yr fund manager performance survey.

Outside of Australia, Hyperion’s Global Growth Companies Fund is also the best performing fund out of 70 Morningstar Equity World Large Growth category over a five-year period, as at 30 June 2020.

An approach that continues to deliver

Managing Director and Chief Investment Officer, Mark Arnold said, “Our performance demonstrates that it is possible to take a long-term view and deliver short-term results with the same fund, growing our investors money through lean times and bountiful. We design our portfolios in a way that allows us to consistently profit from market highs as well as to protect capital during periods of market volatility. Our results prove that you do not need to use complex hedging strategies and derivative products to protect your capital during downside movements.” 

The data compiled by SPIVA in the Australia scorecard reveals that over the 10 and 15-year periods, 83.9% and 85.30% of Australian equity general funds underperformed the S&P/ASX 200 on an absolute basis respectively.^[2] The findings demonstrate that Hyperion is one of a very small group of managers able to consistently outperform over the short and long term.

Mr Arnold credits Hyperion’s consistent results to its strict proprietary investment process which allows the team to separate the winners from the losers.

“Going forward we believe it will be more crucial than ever to identify the winners as they become fewer and further between. COVID-19 has further pushed the global economy into a period of low growth and we think that only a select group of companies will be able to continue to grow in this challenging environment. We see this growth stemming from their ability to innovate and take market share from their competitors.

“We invest with the mindset of long-term business owners and evaluate not only the quantitative side but also the less tangible qualities including company culture, leadership team and investment in research and development.”

Disruption and innovation for returns

Jason Orthman, Deputy Chief Investment Officer, added that Hyperion’s focus on disruptive and innovative companies has had a large impact on the manager’s success over the past two decades. 

“We back these new-world companies that are challenging the status-quo and shaking up entire industries. These are businesses which consistently demonstrate that they can thrive in the disrupted world we live in. We think that many old-world companies’ business models are fundamentally challenged and with the overall economic pie no longer growing, earnings growth will come under increasing pressure and especially as they lose market share to disruptive newcomers. 

“We have been watching the electric and autonomous vehicle space for many years now and see that as one area which will have a big impact on transport in the future,” Mr Orthman added.

 ———

[1] Luk, P. & Gupta, A. (2019) SPIVA Australia Scorecard. Available at https://www.spglobal.com/spdji/en/documents/spiva/spiva-australia-mid-year-2019.pdf.
[2] The large cap Australian equity funds report sourced from Morningstar Direct includes the following Morningstar categories: Equity Australia Large Value, Equity Australia Large Growth, Equity Australia Large Blend and Equity Australia Large Geared

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Mark Arnold

Hyperion Asset Management’s Global Growth Companies B Fund has topped a table of 295 Equity World large cap funds as per the data from the Morningstar Direct Global Fund Manager database, which reports that the Hyperion Global Growth Companies Fund B delivered a total annualised return of 18.34 per cent over the five year period (ending 30/04/20).

The next best performing fund returned 14.81 per cent (or 3.53 per cent less) and the median return of all funds delivered 7.39 per cent (or 10.9 per cent less).

Commenting on the news, Managing Director and Chief Investment Officer, Mark Arnold, credited the top ranking to Hyperion’s strict proprietary  process which allows it to separate the highest quality companies from the average: “Some of the factors we look for in a company are a strong value proposition, a highly committed management team that has skin in the game, good investment in R&D and new tech and strong balance sheets.

These are companies which we believe will continue to grow and deliver for our investors. And while some people may consider growth stocks to be expensive, investing in them doesn’t mean overpaying.”

Mr Arnold went on to say while the intense market volatility sparked by COVID-19 is a short term issue, he expects that the economic recovery from this period will be difficult and will be hindered by pre-pandemic headwinds including high debt levels, rising wealth inequality, ageing populations and disruption coming from  technology and climate change.

“We are currently in an economic environment of stagnation where most companies will experience lower earnings and lower growth and we expect this period will last many years. With the economic pie not growing, companies will need to secure more market share in order to prosper.”

Jason Orthman, Deputy Chief Investment Officer added that Hyperion’s approach is based on the team being forward looking but patient: “We have taken advantage of the market drop to purchase shares in some companies which we had liked but considered overpriced at the time.

We are laser focused on protecting and growing our investors’ capital over the long term by investing in companies which continue to perform in all market conditions. We believe that this result is a testament to that goal.”

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Commenting on the award win, Managing Director and Chief Investment Officer Mark Arnold said: “We developed Hyperion Asset Management’s bottom up, structural growth focused investment process over two decades ago. While some may not find it exciting, we have consistently applied our rigorous standards to our investment decisions across our domestic and global equities products and as a result we have delivered substantial excess returns for our clients since the business was established in 1996.

“We are a research driven business that has always taken a long-term view and invested as business owners, rather than as short-term share traders. We continue to focus on delivering long-term outperformance for our clients, and delivering for our clients over the long-term is what we find exciting,” said Mr. Arnold.

He went on to say, “Hyperion’s proprietary investment process is what allows us to identify high-quality businesses with clear and sustainable competitive advantages that are well-positioned to outperform in the long term.”

Hyperion Asset Management beat out Greencape Capital and Platypus Asset Management to claim the title.

Hyperion Asset Management has won the Domestic Equities Small Caps category four times prior and the Domestic Equities Large Caps category twice in previous years.

Jason Orthman, Deputy Chief Investment Officer added that Hyperion’s long-term focus is a vital ingredient of their success.

“We always take the long-term view rather than be distracted by short-term noise. It allows us to uncover the innovative and high-quality structural earners who are able to take market share in all sorts of environments, including economic downturns. As we head into an extended period of economic deterioration in the next five to ten years, this is ultimately what will allow Hyperion Asset Management to continue to deliver attractive returns for our investors.”

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Mark Arnold, Chief Investment Officer at Hyperion said the “Highly Recommended” rating from Lonsec is a tick of approval for Hyperion’s disciplined, well developed and repeatable investment process as well as the high calibre and long tenure of the investment team.

“The fact that Lonsec has given our Global Growth Companies Fund a “Highly Recommended” rating is evidence of the consistent quality of our rigorous bottom-up investment approach, which focuses on identifying high-quality companies which will produce long-term, sustainable returns for our clients.

“The Global Growth Companies Fund is available to advisers on Macquarie Wrap, BT Panorama, BT Wrap, Asgard, Hub24, mFund and Netwealth.”

In its report, Lonsec praised Hyperion for its strong investment research culture and well-developed bottom-up research process that is repeatable and robust.

Lonsec notes Hyperion’s investment style is well suited to a global investment universe, as the larger opportunity set in global equities allows Hyperion to set a high bar when it comes to identifying quality businesses and to exercise rigid discipline in terms of valuation.

Hyperion’s Deputy Chief Investment Officer, Jason Orthman, said that Lonsec’s rating is the highest-possible endorsement of the quality of Hyperion’s investment team and investment process.

“Our portfolio is made up of disruptive and creative companies – those that have strong value propositions, a sustainable competitive advantage and the ability to significantly increase earnings over the next decade,” he said.

“Hyperion’s Australian equities funds have outperformed the market consistently in the 22 years we have been investing, and we see no reason we won’t continue to achieve the same outperformance in global equities.

“In fact, we are confident that our investment team and robust investment process will continue to produce strong returns from equity portfolios, both here and overseas,” Mr Orthman said.

The Hyperion Global Growth Companies Fund was the top performing Global Equity Fund of 2018 in both the Morningstar and Mercer surveys, delivering investors 17.8% p.a. return (after fees) over the past four years, generating 6.7. p.a. above the fund’s benchmark, the MSCI World Accumulation Index (AUD), as at 31 December 2018.

The Hyperion Global Growth Companies Fund also received a “Recommended” rating by Zenith Investment Partners on 30 November 2017.

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Mark Arnold

“Results from this reporting season reveal that the best Australian companies have a competitive advantage and grow their businesses on the back of sustainable earnings rather than debt. Weaker ones lack pricing power and are unable to guarantee a predictable earnings stream.”

These are the comments of Mark Arnold, Chief Investment Officer at Hyperion Asset Management, who yesterday explained what the February reporting season results reveal about winners, losers and businesses worth watching.

“For us, winners are those companies with ‘earnings resilience’, meaning the ability to grow earnings organically on the back of a strong value proposition, a track record of profitability, low gearing and a high return on equity.

“When these factors are present, earnings growth is strong, and evidence shows that strong and sustainable earnings growth is what really drives share prices higher over the long term.

“At Hyperion we are long term investors. This doesn’t mean that results from individual earnings seasons are not important, but we assess short term performance measures in the context of long term business fundamentals, which can put us at odds with the market on occasion.

“This is because the market tends to over-emphasise temporary themes and short-term factors, so it’s not unusual to see quality companies undervalued in the short term.

“In our eyes that can be a buying opportunity, it is exactly the kind of market inefficiency we look to exploit,” Mr Arnold explained.

Mr Arnold then gave the example of some of Hyperion’s major long-term holdings, including Cochlear, Domino’s Pizza and the REA Group as highlights of winners in the February reporting season.

“Cochlear had earnings per share (EPS) growth of 91%, Domino’s Pizza of 46% and REA Group of 36%, far in excess of the market as a whole, and industrials excluding banks, which had EPS
of -2% and 8% respectively.

“These earnings results are excellent and contributed significantly to the performance of our Australian Growth Companies Fund, which outperformed the ASX 300 by an average of 5.8% p.a. (after fees) over three years. However, the most important thing for us is our belief in the quality of these companies’ underlying business models, and their ability to continue to grow earnings over time,” Mr Arnold said.

Mr Arnold went on explain Hyperion’s aversion to resources and banking at the moment, describing these as the ‘losers’ in the current economic environment.

“Resources companies lack pricing power and competitive advantage, and their earnings are unpredictable as a result. Banks have run their course in our view, the credit environment is very subdued and likely to remain so, interest margins are tight, capital requirements are rising, bad debt levels are very low and likely to be a drag on profits going forward.” Mr Arnold said.

Banks may have run their course, but according to Hyperion, non-bank financial companies are on a growth trajectory, as is healthcare. Consistent earners, like REA Group and Seek, both showed good earnings momentum in the first quarter of the year, and are likely to continue to grow earnings consistently.

“Within the non-bank financials sector, we like the Henderson Group and Veda Group, among others, and Ramsay Healthcare and Healthscope are our picks in the healthcare sector,” Mr Arnold said.

Mr Arnold concluded by saying that reporting season results are always revelatory, but that the real lesson to be learned is that quality fundamentals, rather than short term results, are what will consistently deliver. And the real skill lies in identifying companies with these quality fundamentals.

“There are no guarantees in investing, but the probability of future performance emulating past success is much higher with a disciplined investment process and stable team in place.”

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Mark Arnold

Aussie equities manager urges investors to embrace innovation in 2015

The clear winners in the year ahead will be Australian companies positioned to profit from innovation and disruption, which means investors should be choosing their stocks accordingly, according to Mark Arnold, Chief Investment Officer at Hyperion Asset Management.

The effects of disruption and innovation on the investment landscape is a key theme in Hyperion’s year ahead outlook, along with a number of others cited by Mr Arnold.

“At the macro level, global growth concerns are weighing on investors’ minds, particularly in Europe. But it’s not all bad news. The US economy is a definite bright spot with the data indicative of steady, if not spectacular growth, so we remain generally positive about the outlook for equity markets.”

Irrespective of the macro factors, Mr Arnold went on to explain that, as fundamentals investors, Hyperion focusses on the economics of the businesses they invest in – which is where the theme of disruption and innovation has become increasingly evident.

“Over the past few years, innovation in technology has led to a structural shift in the way we interact with each other and the businesses we transact with. For investment managers looking for businesses with a sustainable competitive advantage, the challenge lies in identifying those which are positioned to profit from the changing landscape,” he explained.

“That’s why we have a large exposure to online companies. They are very much at the heart of changing consumer behaviour. However, it’s crucial to understand that not all online businesses are created equal. Hyperion is only interested in those with substantial market share, a strong network effect, and pricing power.”

Mr Arnold pointed to a number of examples of Australian companies using disruptive technology either as the basis of, or as a growth agent in, their business models.

RealEstate.com (REA) has a leading market position and competitive business model within the real estate market in Australia and the ability to continue to grow earnings and profits organically over time, a key hallmark of success.

Domino’s Pizza has an innovative culture and a commitment to using the latest in information technology to drive growth. These characteristics have seen it perform remarkably well on the world stage, as it has moved into new overseas markets.

“In France, for example, Domino’s is already the market leader. And given that France is the most profitable market in the world for KFC and McDonalds, we anticipate that Domino’s will be able to grab their share of this lucrative market, continue to grow, and steal profits from the incumbents,” Mr Arnold said.

Hyperion’s strict selection criteria mean that themes such as disruption and innovation influence its analysis as to whether companies possess essential characteristics such as predictable earnings streams and the ability to grow organically over the medium to long term.

“Looking to 2015 and beyond, developments in technology will continue to create winners and losers between and within sectors. Focusing on business fundamentals is the only way investors can reliably identify winners,” concluded Mr Arnold.

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Mark Arnold

Market sentiment has improved over the past year, and with it investors’ appetite for risk, according to equities specialist Hyperion Asset Management.

Hyperion’s Chief Investment Officer, Mark Arnold, and Portfolio Manager Jason Orthman, said that equity markets in general had performed well over the past year, with many stocks re-rated upward as the lower earnings of the past few years started to pick up.

“Investors are feeling more comfortable taking on more risk, moving back into growth assets such as equities. And when it comes to which stocks are favoured, the companies that can demonstrate the potential to deliver positive future earnings growth have been trading at premium price to earnings (P/E) ratios,” said Mr Arnold.

In addition to P/E ratios, in the current low interest rate environment, dividend stocks were another major focus for investors in 2013. Accordingly, the major banks and Telstra, both of which offer appealing dividends, both rose sharply over the year.
However, Hyperion cautions that this trend may not continue.

“The long-term outlook for credit growth is subdued, and with regulatory requirements for higher capital levels, earnings per share (EPS) growth from the big banks is unlikely to move above the mid-single digit level for the next five years,” said Mr Arnold.

On the other hand, the performance of a number of Hyperion’s holdings over the year looks likely to continue to be strong in 2014. Three investments, REA Group, CarSales.com and Domino’s Pizza Enterprises are cases in point. All delivered strong earnings per share (EPS) growth over the year, up by 26%, 16% and 12% respectively, and were significantly re-rated as a result.

Mr Arnold went on to explain that, over the longer term, earnings and dividend per share growth is the best indicator of long term performance.
“Price to earnings ratios are an important metric, but they are not the best predictor of future value,” he explained. “Long term stock prices should, on average, grow in line with earnings and dividends per share growth, so these are the factors that investors should focus on.”

Mr Orthman predicted that performance in 2014 will be all about delivering in line with expectations, with predictability and sustainability of earnings growth crucial.

In addition to REA, Carsales and Domino’s Pizza, which Hyperion believes will again deliver strong EPS growth in 2014; Mr Orthman also cited examples such as Ramsay Health Care and Twenty-First Century Fox as stocks to watch for 2014.

“We expect that Ramsay Health Care (RHC) and Twenty-First Century Fox (FOX) will deliver solid growth next year. RHC had offered guidance of 12% to 14% growth in FY14 which should be comfortably achieved as it continues to expand its capacity in its existing portfolio of private hospitals. High utilisation rates, rising medical costs and the aging population mean RHC is well positioned to deliver consistent double digit annual EPS growth. FOX should also produce double digit EPS growth over the medium term due to its growing high margin subscription revenue and regular share buybacks. With quality content and high investment in new channels, we expect strong price rises over the medium term,” said Mr Orthman.

While online and health care stocks rate highly in Hyperion’s view for 2014, it is resources and mining related stocks that should be viewed with caution, according to Mr Orthman, who says their predictability will be low next year.

“We are not confident about the consistency and sustainability of their earnings,” he explained. “That’s one of the reasons Hyperion is underweight the mining sector.”

Mr Arnold concluded by saying that the recent spate of successful initial public offerings, such as OzForex Group, and strong share price movement of market sensitive stocks, such as Macquarie Group and Henderson Group, along with a willingness to support early technology plays like Freelancer was a sure sign that investors’ risk appetite is on the rise.

“It’s great to see renewed confidence flowing into the market,” he said. “But for investors looking for long term performance, a focus on strong, predictable earnings growth is still the best guarantee of success.”

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Look deeper into results: Hyperion.

Too often investors take reporting season figures at their face value instead of looking deeper to see the real story, says Australian equities fund manager, Hyperion Asset Manager.

As a consequence, they may be making decisions that lead to missed opportunities – whether selling unnecessarily, or missing the chance to buy low in the cycle.

According to Hyperion’s Chief Investment Officer, Mark Arnold, with reporting season just completed the lesson for investors is to be wary of using short term, discrete earnings results as the only – or even the key – indicator of a quality company.

Mr Arnold explained that for Hyperion, when assessing whether or how a results announcement should affect investment decisions, the key question is to not to look at the numbers per se, but at how ‘value relevant’ the information is. That means, to ascertain whether the announcement alters the forecast timing and magnitude of a company’s free cash flow over the long term and/or the general level of uncertainty or risk arising from those cash flow forecasts.

“If reported profit and other related information does not change these factors, then there is no reason for the profit result to have any impact on the valuation of the company or its share price,” he explained. “And it’s important not to forget that looking at results over a number of years can really add value in terms of extra information.”

Mr Arnold went on to explain that market movements outside of reporting season can be relatively more pronounced and can reflect non-fundamental factors such as momentum and speculative activity. Hyperion, as a long-term investor, often discounts these movements if it considers them to be unrelated to the intrinsic value of a stock.

“Sometimes the market can become too focused on short-term or cyclical factors,” he explained. “Look at the massive sell off of Seek Ltd shares during 2008 and 2009 due to concerns about rising unemployment as just one example.

“Having said that, if, during reporting season, the market does drive the share price away from the long-term intrinsic value of a company by ‘over-weighting’ the value relevance of short-term trends, there can be good buying opportunities,” he said.

Mr Arnold finished by saying that reporting season does provide valuable information, particularly in terms of sales and earnings growth and a company’s ability to deliver earnings growth though short-term or cyclical headwinds.

“Nonetheless, at Hyperion, we look for companies with strong and sustainable value propositions, derived from unique and difficult to copy aspects of their products or services. When such a value proposition is present, a company has pricing power, and this gives management the ability to protect long term profit margins and organically grow revenues.

“And that’s the hallmark of a quality company,” he said.

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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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