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

 

 

Good morning,

All DSM strategies outperformed the benchmarks again in January 2020. Global Growth outperformed with 3.9%, the Emerging Markets Growth All Cap strategy did so with 3.3%. US Large Cap Growth outperformed the Russell 1000 Growth BM with 0.21% and the S&P 500 with 2.51%. Since inception all strategies outperform their benchmarks and almost all  peers with outperformances of between 1.8% and 6.5% annualised! (gross of fee data*). 

DSM invests since 2002 according to the same philosophy and process with very limited team chances. Most employees own stock in DSM and invest their private wealth alongside investors.

The successful investment approach is built on the simple indisputable fact that over timeEarnings Win” because businesses tend to appreciate in value as earnings grow.

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

We continue to believe that the ongoing strength in earnings creates a favorable opportunity to add to our portfolio's of premier quality growth businesses. This combined with a strict valuation discipline makes that all DSM strategies outperform almost all peers since inception


 

Click here for the Global Growth documentation:
 


DSM Capital Partners actively manages growth stock investment portfolios for a wide range of clients, including pension plans, foundations and endowments, other institutions, and individual investors. The firm follows a disciplined investment process designed to identify quality companies presenting compelling and long-term revenue and earnings growth and selling at prices that provide attractive returns.

DSM was founded in 2001 by Daniel Strickberger and Stephen Memishian. Today the firm remains 100% owned by all but its newest employees. The investment, operations, client relations and administrative teams are staffed with seasoned and capable professionals solely focused on the achievement of our clients’ financial objectives.

From headquarters in Palm Beach Gardens, Florida, DSM manages over $7 billion across domestic, international and emerging equity markets and through a variety of investment vehicles.

 

 

Downside Market Capture is below 94%, Upside Market Capture is 124%!
DSM Global Growth 2010-2020 period

 

 

 

What differentiates DSM from most growth managers with high earnings growth holdings in portfolio and how come they have such strong performance with a relative low Beta and Downside market capture?

DSM’s holdings show relatively stable earnings growth. On top of that the holdings that DSM selects beat EPS consensus. DSM has a team of 8 very senior analyst/PM’s and a CIO, with only 80 holdings across all DSM strategies, they do very in depth research and have their own capital wealth invested along-side investors. They do not want to put their own capital at risk by investing in companies with volatile earnings growth

 

EPS “Beat” vs Consensus(%) Shows the percentage of how much the portfolio of DSM beats the estimate of earnings by the market. So the DSM holdings report better earnings than expected by consensus. This is a strong indication that DSM selects companies that do well. Especially the consistency of beating earnings expectations is impressive.
 

On top of this DSM has a very strict valuation discipline
DSM's investment philosophy is based on the belief that high-quality companies, across all sectors and geographies, that consistently grow their earnings, as long as their shares are purchased at reasonable valuations, should produce attractive returns over time. We combine intensive fundamental research withdisciplined valuation methodology. We buy a stock when business fundamentals are strong, and the valuation is attractive on next four quarters of earnings. Our valuation discipline helps us avoid overpaying to buy a stock, thereby reducing stock price risk. The combination of research and valuation discipline reduces risk and enhances return.
 
By not paying too high multiples for fast growing companies, one avoids the risk of buying companies that grow earnings at more or less the same speed as P/E comes down. Resulting in fast growing companies with mediocre equity returns. Example: a company with a P/E of 80 and earnings growth of 60% is not very likely to continue to grow earnings with 60% year in year out. After a couple of years the earnings growth slows to say 30% and the P/E comes down from 80 to 30, hence the company has grown earnings, but the return for you as an investor may be limited.
 
As a result the downside market capture of DSM is lower than that of the benchmark, despite having a very high upside market capture:

 

 

DSM and ESG:
ESG is an important part of DSM’s investment process and is fully integrated into stock selection, monitoring, and selling.  For every stock that DSM invests in or is considering investing in, DSM assigns a proprietary ESG score to that company.  Scores range from 0 to 10 (with 10 being the best) and DSM uses MSCI’s scorecard system as a starting point to make adjustments to ESG scores across five key categories: environment, customer, human rights & community, labor rights & supply chain, and governance.  These five categories are then broken further into over 20 subcategoriesEach analyst will do in-depth research on ESG issues impacting a company and assign scores using a consistent in-house methodology.  In addition, DSM stores all ESG related communications and developments in centralized folders on DSM’s networks so that a company’s ESG history and DSM’s ESG activities are transparent and easily accessed.   In addition to weekly updates from MSCI, the research team also uses their in-depth ongoing monitoring to identify ESG issues that are not fully captured by MSCI.  Where appropriate, analysts reach out to portfolio company management teams on ESG issues and those interactions help formulate DSM’s ESG assessment.  ESG scores are also included in DSM’s internal summary portfolio spreadsheets that include other key information such as earnings growth and valuation.  These spreadsheets are used by the CIO and research team for portfolio decision making. 

 

DSM’s associate attorney is responsible for actively managing DSM’s ESG/Responsible investment policies.  For situations where there is a material, ongoing negative ESG assessment, the applicable analyst will discuss it with the CIO and together they will determine if any action is to be taken with respect to any investment held in DSM’s model portfolio investment strategies.  ESG considerations have both kept DSM from investing in certain companies and have led to DSM selling portfolio holdings.

 

DSM has a simple, logical investment philosophy that has worked since inception of the firm:

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 andstrict valuation discipline in order to avoid the growth trap and you will outperform!

 

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 8 analysts and a CIO 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 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.





Identifying companies with predictable revenue and earnings growth is an 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).

 

Create detailed earnings models for candidate while focusing on major cost drivers.



A 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, only select equities selling below intrinsic value to reduce risk. 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.

 

 

DSM US Large Cap Growth 

 

 

 

Links to updated presentation and other documentation

Click to receive the information


 

 

 

DSM Emerging Markets Equity Growth 

 

 

Links to updated presentation and other documentation

Click to receive the information