Onderwerp:                            FW: Monthly update DSM Capital, valuation discipline matters in Growth investing

 

 

 

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Monthly Strategy Update:
DSM Global Growth, DSM US Large Cap Growth & DSM Emerging Markets Growth

Links to the other Candoris Monthlies:
PAM Senior Loans         Coho ESG US LC        VanEck EMD        VanEck EME       SIM US High Yield

 

Good morning,

April was another great month for the DSM strategies, all outperforming their benchmarks with impressive numbers. Below performance numbers till the end of April. May so far wasn't bad either, likely due to the strict valuation discipline that DSM has embedded in their investment process, which protects on the downside. 

What differentiates DSM from other Growth managers is the strict valuation discipline embedded in the investment process. Valuation at time of purchase should be at least 10% below fair value 3 years from now (based on earnings-growth, historical P/E, the P/E of competitors, business model and nr. of competitors). So no Netflix, Salesforce.com, UBER, Tesla kind of stocks!

We believe in: Buying undervalued equities to reduce PE compression risk, lower entry level valuation reduces price risk, scenario analysis: most likely returns– low case return.

Despite this strict valuation discipline the DSM strategies outperformed most Growth managers, while there is some protection in corrections due to the strict valuation discipline.

These are all strategies that DSM runs, how they rank vs peers in eVestment and by how much they outperform annualized since inception. All ran by the same team, same philosophy, just different regions and accents:

  • DSM US Large Cap Growth; Rank 6 out of 101 US LC Growth peers since inc. in 2002; +2.2% ann. outperformance over BM.
  • DSM Global Growth; Rank 3 out of 146 Global LC Equity peers since inc. in 2010; +5.5% ann. outperformance over BM.
  • DSM Global Focus; Rank 1 out of 127 Global LC Equity peers since inc. in 2009; +7.0% ann. outperformance over BM
  • DSM Global Dividend Growth; Rank 4 out of 157 Global LC Equity peers since inc in 2011; +5.6% ann. outperformance over BM
  • DSM EME; Rank 3 out of 212 EME peers since inc. in 2017; +5,3% ann. outperformance over BM


With an up market capture of 126.85%, a down market capture of 97.81%, Beta of 1.08 and an annualized outperformance of about 5.5% since inception in 2010 the DSM Global Growth strategy is one of the best Global Growth managers according to databases like eVestment, Mercer and Morningstar direct (5stars).


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DSM Global Growth Philosophy and investment process 

The firm opened its doors to clients at the beginning of 2002 and is 100% employee owned. There is a strong alignment of interest with clients as the co-founders and employees have most of their assets invested in DSM strategies.

DSM has a team of 9 analysts and investing in about 80 stocks across all strategies. 97% of time of the analysts is spent on analyzing and estimating future earnings. Investments are only made under a strict valuation discipline. Periods of underperformance have always been followed by a period of outperformance as earnings of the DSM stocks typically come through conform DSM’s expectations and valuations follow. 

DSM's simple, logical investment philosophy that has worked since inception of the firm in 2001:
Quality growth companies with predictable streams of earnings generate attractive rates of return over time when purchased at reasonable prices.

in other words:

Construct a bottom-up portfolio that substantially increases earnings year in year out, idea driven with an intermediate to long-term investment horizon and a strict valuation discipline in order to avoid the growth trap and you will outperform!

 

 

DSM Philosophy and process:
DSM Capital runs concentrated growth strategies that are bottom-up, idea driven with an intermediate to long-term investment horizon. A strict valuation discipline differentiates DSM from other growth managers.


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https://gallery.mailchimp.com/4bda11eca84aa87969d24da06/images/01faa77c-eaa0-480e-ab30-db8520e06350.jpgThe EPS growth is by far the most important factor. A team of 9 investment professionals does very in-depth research in a structured framework. DSM seeks companies that grow yearly earnings in the 10- 40% per year range with a horizon of 3 years. As long as the expected EPS growth comes in on target, the investment will most likely be a success. DSM goes further in their research of a company. In order to correctly estimate earnings growth of a company they often consult industry experts, former employees of a company or competitor and sometimes holds in depth surveys (for example among doctors to estimate prescription of a certain drug).

https://gallery.mailchimp.com/4bda11eca84aa87969d24da06/images/ed79c668-3d71-4f00-902f-1624b98f201d.jpgIs typically low for growth stocks and not an important factor.

https://gallery.mailchimp.com/4bda11eca84aa87969d24da06/images/9ac54c88-2520-4111-ac75-ac16623aaff0.jpgA very strict valuation discipline is quite unique for growth managers. DSM only buys a stock if the PE is reasonably expected to increase with at least 10%. So no Netflix, Salesforce. We believe this helps to reduce risk and enhance long term returns. The target P/E is based on a large number of factors. To name a few: growth rate, historical P/E, P/E’s of peers, entry barriers for competition, number of competitors, can they set a price? etc.

 

 

As we wrote in December 2018, we believe the market will rebound during 2019 and DSM’s performance should rebound significantly as well. In our view earnings growth will continue to be solid going forward, while trade war tensions gradually dissipate causing the global economic outlook to brighten. In 2018, despite earnings growth of more than 27%, the Global Growth portfolio underperformed due to various macro concerns including a US-China trade war and slowing global economic growth, as well as political turmoil in the EU due to Brexit, the ‘yellow vest’ protests in Paris and political problems in Italy.
The portfolio’s earnings growth and valuation entering 2019 closely mirror those of early 2017 when the portfolio appreciated 46% post-fee.

 

 

DSM Global Growth 

 

DSM Global Growth Composite data                                           DSM Global Growth Fund Facts
 

Alpha

4.53

 

 

 

ISIN

LU1016061043

Beta

1.08

 

 

 

Benchmark

MSCI All Country World Index Net

Std Dev

14.87

 

 

 

Currency

EUR

UMC

126.85

 

 

 

Bloomberg ticker

DSMGGI2

DMC

97.81

 

 

 

Asset Class

Equity

Information Ratio

0.83

 

 

 

Type

Growth

Tracking Error

6.56

 

 

 

Region

Global

Sharpe Ratio

0.92

 

 

 

Dividend policy

Accumulating

 

Active Share

91.20%

as of 31-12-2018

 

 

 

 

 

Data as of 30-4-2019 source eVestment

 

DSM’S INVESTMENT PHILOSOPHY

Quality growth companies with predictable streams of earnings generate attractive rates of return over time when purchased at reasonable prices.
Click  here for: 
DSM Global Growth Philosophy and investment process 

 

 

Annualized return DSM Global Growth v. Benchmarks and Peers since inception in 2010

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DSM US Large Cap Growth 

 

DSM US Large Cap Growth Composite data                               DSM US Large Cap Growth Fund Facts

Alpha

2.76

 

 

 

ISIN

LU1016061126

Beta

0.92

 

 

 

Benchmark

Russell 1000 Growth

Std Dev

14.82

 

 

 

Currency

EUR

UMC

100.98

 

 

 

 

 

DMC

90.22

 

 

 

Asset Class

Equity

Information Ratio

0.35

 

 

 

Type

Growth

Tracking Error

6.44

 

 

 

Region

United States

Sharpe Ratio

0.62

 

 

 

Dividend policy

Accumulating

 

Active Share

78.72%

as of 31-12-2018

 

 

 

 

 

Data as of 30-4-2019 source eVestment

 

DSM’S INVESTMENT PHILOSOPHY

Quality growth companies with predictable streams of earnings generate attractive rates of return over time when purchased at reasonable prices.
Click  here for: 
DSM US Large Cap Growth Philosophy and investment process 

 

 

Annualized return DSM US Large Cap Growth v. Benchmark and Peers since inception in 2002

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DSM US Large Cap Growth active trading performance

 

Buy and Hold vs Active Management


 
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*The table above is as of 31-12-2018 and shows the performance of the actual DSM strategy and a virtual buy and hold portfolio. The buy and hold portfolio is based on the performance of weights and holdings per the 31st of December (no trading took place). You can clearly see that trimming, adding and switching names does add value.

 

 

Links to updated presentation and other documentation
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DSM Emerging Markets Equity Growth 

 

Annualized return DSM Emerging Markets Growth v. Benchmark and Peers since inception in 2017

 

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DSM has launched their Emerging Markets Growth strategy in the summer of 2017 (July 2017), the strategy follows the same successful DSM investment philosophy and process of the Global Growth and US Large Cap Growth strategy.

DSM Capital runs concentrated growth strategies that are bottom-up, idea driven with an intermediate to long-term investment horizon. A strict valuation discipline differentiates DSM from other growth managers.

This leads to an unique strategy focused at concentrated growth active in Emerging Markets Equity space.

 

 

More about DSM

The firm opened its doors to clients at the beginning of 2002 and is 100% employee owned. There is a strong alignment of interest with clients as the co-founders and employees have most of their assets invested in DSM strategies.

DSM Capital runs concentrated growth strategies that are bottom-up, idea driven with an intermediate to long-term investment horizon. A strict valuation discipline differentiates DSM from other growth managers.

Since inception the Global Growth and US Large Cap Growth strategies rank in the top few percentiles versus all peers in the eVestment database till April 2019. 

DSM has a team of 9 analysts and investing in about 80 stocks across all strategies. 97% of time of the analysts is spent on analyzing and estimating future earnings. Investments are only made under a strict valuation discipline. Periods of underperformance have always been followed by a period of outperformance as earnings of the DSM stocks typically come through conform DSM’s expectations and valuations follow.