Grant Pearson

Whether the Democrat’s Kamala Harris (from the blue team) or the Republican’s Donald Trump (from the red team) becomes the next President of the United States, will likely have little or no impact on longer term investment returns, according to Insync Funds Management (Insync).

‘As it draws closer to the big day, media and financial commentators will go into overdrive tempting investors to pre-position their investments for a red or a blue team win,’ said Insync’s Head of Strategy and Distribution, Grant Pearson. ‘Politicians themselves will likely use fear and temptation to try to influence perceptions of how their actions, or those of their nemesis, might impact investment markets.’

But the evidence, as captured below, suggests investment returns will be similar when looking beyond immediate market reactions, regardless of the outcome of the election.

‘If we look at every US election result since President Roosevelt, and how markets actually behaved across each term, we can see that who wins and who loses the presidential race makes little difference to returns at all,’ Mr Pearson said.

Across the last 35 presidencies, Republicans presided over the most negative and most damaging investment return periods. They had 4 negative return rates, compared to 2 for the Democrats.

‘These six presidential terms, however, total a mere 17% of all government terms since before World War II,’ Mr Pearson said.

Positive terms amounted to about the same in number and magnitude, no matter which party won, and so too were the worst falls.

Insync’s Chief Investment Officer, Monik Kotecha, said there are times where a particular sector of the market may be favoured, or not, by a certain presidency.

‘We last witnessed that with Trump in 2016.  Aspects of the healthcare industry, for example, were negatively impacted for a short time by Trump’s unsuccessful attempt to repeal the Affordable Care Act,’ Mr Kotecha said. ‘While overall, politics don’t dictate broad market outcomes, the 2024 election does present the widest range of policy and investment outcomes I’ve seen in my 33 years of market observation.’

Mr Kotecha said this election will likely have more pronounced effects at specific industry and stock levels.

‘This is due to stark differences between the parties on key issues such as trade policy and its influence on the pace of de-globalization, energy policy impacting the oil and gas and renewables sector, and regulatory approaches across industries from financial services to technology.’

The key takeaway for investors, however, is that while US elections can create short-term volatility and impact specific sectors or stocks in election years, they rarely change the long-term trajectory of the overall market.

Mr Pearson said, ‘Traders beware. As for investors, they are best advised to focus on business fundamentals, have exposure across multiple sectors, and maintain a long-term view rather than letting election outcomes drive their investment decisions.’

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Insync CIO, Monik Kotecha, said Mr Byrne has more than 35 years’ experience managing all aspects of funds management operations at some of Australia’s leading investment firms.

‘I personally witnessed the breadth and depth of Conor’s extensive experience when we worked together at the same firm some years ago,’ he said. ‘His appointment will augment, enhance, and strengthen Insync’s operating capabilities.’

Mr Byrne’s experience spans risk management, compliance, finance, legal, human resources, IT, and back and middle office operations, across both listed and unlisted companies. He has held a range of leadership roles including COO, CFO, Board Director, and Chair.

‘We are delighted to have Conor join the Insync team,’ Mr Kotecha said.

Most recently, Mr Byrne was Chief Financial and Operating Officer of Associate Global Partners Limited (ASX:APL). He also served as Chair of Treasury Group for nine years, Director & Chief Operating Officer of Investors Mutual for eight years and Director, Fund Operations with UBS Global Asset Management for seven years.

To bolster its investment capabilities and continue its strong record of success that began in 2009, Insync has also appointed a further two analysts, effective June 2024, building the investment team to five.

‘Given rapid advancements in AI, the personal qualities and skill set required for this role are evolving, and will be crucial moving forward,’ Mr Kotecha said. ‘We have appointed analysts who we believe can successfully leverage AI’s developing capabilities.’

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‘You might say it is bigger than Ben Hur,’ Mr Kotecha said, ‘and shows no signs of being reined in or slowed down, in fact the reverse.’

Global data and business intelligence platform, Statista, reported that in 2024 the Video Games market worldwide is projected to reach revenues of US$282.30bn. The annual expected growth rate is 8.76% between 2024-2027, which would amount to $US363.20bn by 2027. This compares to 2024 global box office revenue projections of around $US41bn and around $US41bn for the digital music market.

Mr Kotecha said gaming offers a unique blend of entertainment, social interaction, and immersive experiences that other media forms can’t match.

‘Gaming is such a huge industry because it is part of a correspondingly huge gaming megatrend, which taps into two powerful super drivers – technological breakthroughs and demographic shifts,’ he said. ‘It is an almost perfect example of multiple megatrends converging, a unique confluence of technology, social change, and consumer behaviour.’

Gaming is at the cutting edge of both advanced technology, which requires ever more powerful processing chips, for example, and entertainment creativity, such as the advancements in augmented and virtual reality that add new dimensions to gaming experiences. ‘Artificial Intelligence (AI) also plays a crucial accelerating role, driving innovations in game design, personalisation, and the user experience,’ he said.

‘The social aspect of gaming has transformed it into a digital hangout space, further embedding it into the fabric of daily life. It’s common for groups of players from multiple backgrounds and countries to play the same game – live.’

Nintendo is an excellent example, with a history of over 120 years serving the gaming industry. Beginning with playing cards in Japan, it has developed into a global concern, valued at around $64Bn USD. It has sold 119M units of its iconic GameBoy, 100M Wii consoles, 920M Wii games and 122M Switch consoles. Nintendo also has theme parks and produces movies around its games and characters.

‘Nintendo generates half its overall profit from consoles,’ Mr Kotecha said. ‘Its peers are losing money on consoles in the hope that their games will compensate. Cleverly, however, Nintendo is not using leading edge technology but proven tech which comes at a far lower cost, giving it another big competitive edge. It has excellent financial and cash strength and takes a very long view in running its business.’

Demographically, younger generations, particularly those aged 13-17 (intersection of Gen Alphas and Gen Zers), are increasingly gravitating towards gaming, spending 40% more time in virtual worlds than in any other form of media.

‘As they age, the habits of these generations are likely to influence mainstream media consumption trends,’ Mr Kotecha said. ‘For example, as we have seen with Nintendo, there are now many blockbuster films created off the back of online games.’

The Gaming megatrend is not limited to the western world, or to young men. ‘Large developing economies like India and Mexico have gaming growth rates exceeding 30%. The appeal of gaming is also strong amongst women and those over 55,’ Mr Kotecha said. ‘This growth reflects a deep-seated shift in consumer preferences and behaviours.’

Companies in the sector are also well advanced in extracting further revenue opportunities from the information they gather and other cross-selling services beyond game subscriptions, making them attractive from an investment perspective.

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‘We are heavily engaged in deep specialist research to gauge who will be empowered, what to avoid, and where the most significant value and differentiation lies,’ says Insync CIO, Monik Kotecha. ‘One key area of more immediate benefit is in data.’

RELX is one global company in the Insync portfolio that has a distinct data advantage, making it a major beneficiary of the acceleration of AI.

A global provider of information-based analytics and decision tools, RELX provides products that help researchers advance scientific knowledge across medical, legal, financial services and government industries and sectors.‘What RELX does so well is gather, analyse, and deliver valuable knowledge and insights to businesses and professionals across industries globally, empowering people and organisations to make better-informed decisions.’ Mr Kotecha said.

The company has been using machine learning natural language processing for well over a decade and has been experimenting with generative AI for over 18 months. It employs 10,000 technologists spending about $1.6 billion a year on technology alone.

‘Similar to one of our other holdings, Adobe, it possesses multiple gargantuan databases that result in reliable and trusted sources of data its customers can depend on,’ Mr Kotecha said.

‘Like all companies in our portfolio, both Adobe and RELX are highly profitable companies based on their Return On Invested Capital (ROIC), have a long runway of growth, modest levels of debt, substantial R&D, and are generating prodigious amounts of cash flow year after year,’ Mr Kotecha said.

‘While investors are fretting over when interest rates will peak, and the impact on both the economy and company earnings, a select group of companies often deliver excess relative returns versus the benchmark again and again,’ he said. ‘This is especially so during historical periods of monetary tightening and general gloomy headlines, such as we are experiencing today.’
 Results from such companies, even in the current environment, should not be surprising he said. ‘We find they often maintain and even strengthen their strong competitive advantages during challenging times, and this enables them to consistently generate economic value even as the cost of capital is rising.’

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However, negative macroeconomic and geopolitical commentary means the investment community risks losing sight of the fact that something much more exciting and profound is going on and will continue to go on.

Insync CEO, Monik Kotecha says, ‘Megatrends, such as those driven by technological change, for example, are rapidly and exponentially reshaping the world. So much so, that we are actually at a defining moment in history, which presents extraordinary investment opportunities.’

While slow to form, megatrends are extremely powerful waves of change. They significantly influence the future, possess an aura of inevitability, have a far and wide-reaching impact on society and are nearly impossible to reverse.

‘Companies riding a megatrend wave are largely impervious to market conditions,’ Mr Kotecha says, ‘So over-focussing on the macro and geopolitical environment may be counter-intuitive.’

He says opportunities for investment lie in companies that are riding a megatrend wave, are benefiting from it, and are also profitable, with debt-free or low-debt balance sheets, and above-average earnings growth.

‘Over the long term it is sustainable earnings growth that drives share prices,’ Mr Kotecha says. ‘The last two years proved that companies with these attributes that are also harnessing the power of a megatrend, have great resilience and strength. They not only survived but thrived, despite what can only be described as a stormy macro and geopolitical environment.’

Mr Kotecha says the recent significant surge in the share prices of artificial intelligence (AI) related companies is a good example of a megatrend at work. ‘Many of these companies are some of the most profitable in the world, with little or no debt on their balance sheets,’ he says. ‘Adobe is a case in point. The company has been riding a technological innovation wave for years, as evidenced by its long history of investing in artificial intelligence.’

Adobe has come to dominate in content creation software with its iconic Photoshop and Illustrator solutions, both now part of the broader Creative Cloud.

‘Adobe has been leveraging its AI engine, Adobe Sensei, to power new AI features across its different product lines. Many of these new AI features, especially for Creative Cloud products, represent a potential paradigm shift in the day-to-day workflow of content creators. This has been significantly enhanced with the recent unveiling of their generative artificial intelligence services for creative professionals and marketers. They include Adobe Firefly, a new family of creative generative AI models focused initially on image generation and text effects.’

Mr Kotecha says large Global 1000 companies are highly constrained in their ability to create content for marketing and other purposes. Generative AI could significantly speed up content creation and Adobe is well-positioned because clients require trust in any content generation.

‘It is an extremely profitable business which is in a strong position to benefit from the exponential deployment of artificial intelligence,’ Mr Kotecha says.

More than 30% of Insync’s portfolio is exposed to the technological megatrend, either directly through companies that provide the processes to manufacture AI chips, what can be described as the ‘picks and shovels’, to companies providing the large language models (LLM) and machine learning models (MLM), through to software and analytics companies that are embedding these tools to accelerate their growth rates.

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Jackie Taranto

Insync Funds Management, a leader in investing in global megatrends, is excited to announce the formalisation of our research partnership with Paradigm Shift, a renowned team specialising in key technological shifts shaping the world today.

This strategic alliance, which began two years ago, has now taken a significant step forward with Paradigm Shift’s key members, Jackie Taranto and Gilad Grinbaum, operating directly from our offices.

Jackie Taranto, a seasoned business executive with over thirty years of experience, brings her expertise in technology, finance & investment, and more to our team. Jackie’s unique ability to foster business collaboration and extract economic value from technology and talent aligns with our forward-thinking approach. Her extensive network across various industries and countries will further enhance our global market insights.

Gilad Grinbaum, an impassioned strategist with over 15 years of experience in emerging technologies, complements Jackie’s expertise. Educated as an electrical, computer, and PV engineer, Gilad has worked in four continents focusing on paradigm-shifting tech, including crypto & blockchain, smart cities, and advanced manufacturing, to name a few. Gilad’s deep understanding of global trends and geopolitical developments will help shape our strategies and inform our investment decisions.

With the strengthening of our strategic alliance with Paradigm Shift, we are reinforcing our commitment to staying ahead of the curve and ensuring the best outcomes for our clients.

“While this move represents an evolution, our core investment philosophy and commitment to delivering optimal performance remain unaltered,” says Monik Kotecha, Chief Investment Officer. “This partnership strengthens our ability to navigate the rapidly evolving market landscape while adhering to our consistent and systematic investment process.”

At Insync, we are excited about the opportunities this partnership brings. We look forward to harnessing the insights and expertise of Jackie and Gilad as we continue to deliver exceptional results for our clients.

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After a recent wild swing backwards, impacting almost all stocks, deserved or not, Insync Funds Management (Insync) anticipates Goldilocks economic conditions will soon prevail.

In a September email to investors, Insync CIO, Monik Kotecha says he expects economic conditions will be neither too hot, nor too cold and therefore investing in sustainable growth companies now makes more sense than ever.

“For the best part of 10 years, we’ve enjoyed the tranquil waters of low and stable inflation and even lower interest rates,” Mr Kotecha said. “That’s all changing. As we have just experienced, the rather dramatic swing with hikes in energy prices, interest rates and a temporary spike in inflation mean those days are over. Yet mostly economies and jobs are fine. The world continues to turn.”

While many companies will struggle in this new world, Mr Kotecha said a small group will thrive. “These companies have one thing in common – sustainable compounding earnings growth. The evolving economic backdrop is only accelerating the business performances of these types of stocks, which are backed by one or more megatrends.”

Insync has identified 16 megatrends which are providing tailwinds for growth, irrespective of the economy. “These megatrends include things such as demographic shifts, digitisation or even pet humanisation. They are the reason why we remain fully invested despite market swings and the often-touted fears of commentators,” he said.

Insync recently released an industry White Paper Will the second half and beyond for equities be different to the first?, setting out its equities expectations for the remainder of the year.

Read the white paper.

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Monik Kotecha

Simply comparing the success of a portfolio against benchmarks is useful but not sufficient if looking to build sustainably higher returns in a fund compared to the market.

Investors ‘running their own money’, or working in tandem with their financial advisers, need to possess a deeper understanding of the performance of the portfolio in rising and falling markets, especially when it comes to equities.

If using specialist managers, trustees increasingly expect those managers to outperform the market when it is rising but protect them in falling markets. Otherwise, they can just buy a benchmark cheaply and accept a constrained return without any real Alpha contribution.

Why is this important?

At the most basic level, a portfolio that falls less than the market is protecting member assets, and for people in pension phase, or getting close to retirement, that means a longer period before money runs out, or a higher living standard.

Think about a simple example, a market correction of 30%, requires an investor to make a positive return of almost 43% to get back to where they were. But a fall of only 20% needs only 25% to break even with pre downturn level.

A portfolio that is protecting members on the downside is ensuring they will recoup losses quicker, and/or extending the longevity of assets. So, it’s not all about the upside, the downside protection is critical.^[1]

What does that mean for stock or manager selection?

Quality businesses that invest heavily in their future activities are future proofing their growth and building a ‘moat’ around their earnings. Many fintech businesses, for instance, have low barriers to entry unless the firm is investing to keep raising that barrier. Amazon is an example of a tech stock investing heavily to future proof their market position through all parts of the economic cycle. This is important for SMSFs to consider when chasing sustainable growth in benign or rising markets, and also to mitigate market downturns.

Quality firms that are profitable and positioned well through disruption generally are not punished by market corrections to the same level as more speculative stocks with lower levels of profitability and free cashflow.

Hence taking a higher exposure to quality firms over time in a portfolio becomes more attractive as members move towards retirement to reduce the potential impact of a market mishap. No immediate pre or post retirees want nasty surprises, and extensive research proves the highest quality firms, i.e. large, profitable and innovative firms retain their high ROIC over time and produce sustainable growth through all market cycles and increasing stock price levels in the long term.

Insync is a global equity manager that has demonstrated the ability to add value through consistent upside and downside participation as shown by the following table. The firm has outperformed consistently outperformed the market by growing in excess of 110% of the MSCI for over all time periods up to 10 years, but also only dropped by 73% of the MSCI falls on average over that same 10 year period – i.e. the best of both worlds.

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Monik Kotecha

Does the company behind disruption have the expertise and finances to exploit the opportunity? Moreover, is the company immune to disruption itself or a true agent of disruption? Insync Fund Managers asks if disruption advantage is enough of an argument for investing in a stock.

Disruption has always been a force in the development of open economies that are using innovative technologies/online platforms to upset traditional business models. However, is evidence of disruption or the threat of disruption enough in its own right to build an investment strategy?

Monik Kotecha CIO of Insync sees disruption as only a part of the puzzle: “Successful disruptors in the short term have themselves faltered on the back of competition due to low barriers to entry. Look at the malaise impacting Uber since entry of similar apps like OLA and Didi.”

Monik suggests firms positioned within global megatrends such as Low Emission Energy, Beautification or Online Gaming have a natural tailwind to growth, and this is at least as important to any disruption advantage they may enjoy.

“Even so, these two things are like a two-legged stool when viewed in the context of time.

“Disruption may be providing a short-term advantage to a firm, and the megatrend maybe supercharging growth, but history shows only the healthiest firms are enduring.

“We examine high quality firms who are very profitable given there is substantial research supporting that these firms overwhelmingly remain so, and even improve that profitability over 10 years.

“The marriage of quality businesses with megatrends provides the perfect mix for growth.  But factors such as Reinvestment Rates within a firm helps retain competitive advantage and lifts barriers to entry for competitors, and underpins the sustainability of that growth,” said Mr Kotecha.

When viewed in its entirety, disruption advantage may provide short term and often supercharged growth when undertaken within a global megatrend, but there is much more to the story when it comes to generating sustainable growth.

Insync’s investment philosophy concentrates on high quality companies at first instance, then revolves around disruption and its interrelationship with a global megatrend rather than just investing in disruptive companies.

They look for the most highly profitable companies that are reinvesting for the future and benefiting from disruption within global megatrends. This is delivering a portfolio profile with sustainable growth and relatively lower volatility, nirvana in an investment sense.

By Monik Kotecha, CIO

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Monik Kotecha

HUB24 has added the Insync Global Quality Equity Fund to its platform. It is expected the fund will be available in both Investment and Super Accounts by the end of December 2020. This new fund is in addition to the Insync Global Titans SMA managed with the same strategy on HUB24.

Wes Gillett, National Manager Distribution at Insync Funds Management, was delighted that their global megatrend focussed strategy with a decade of excellent performance is now available on the country’s fastest growing investment platform.

“The fund is consistently performing in the 1st quartile over every time period and our senior investment team look for opportunities amongst the world’s most consistently profitable firms. Our portfolio has performed at 16.84% pa^[1] over its 10-year life, and consistently delivered outperformance well in excess of 5% pa* to the MISCI ACWI.”^[2]

“The international element of a portfolio is now of even more interest for the advice industry when volatility and the income drought limit growth potential for portfolios. Our fund shows very low correlation in outperformance with all our international peers and should therefore deliver enhanced performance in blended portfolios over the long term” said Mr Gillett.

The firm was launched in 2009 by Monik Kotecha and Garry Wyatt and has a consistent long-term track record of picking up most of the upside in rising markets, and most importantly, an inherently low downside participation in declining markets.

Insync’s investment philosophy revolves around very high-quality companies that are benefiting from disruption, have long runways of growth through exposure to global megatrends, and are highly profitable.

“We wrap deep quantitative analysis around insights on industry disruption and the 16 key megatrends that our firm has identified as being predictive of long-term growth” said Insync’s CIO Monik Kotecha.

Insync funds are available on HUB24, Macquarie Wrap, Netwealth, Powerwrap and ASX mFund.

The fund has received a superior rating from SQM, and Insync also recently won the Emerging Manager of the Year Award from Money Management.

———

[1] Gross of fund MERs
[2] Insync

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