Episode 11: Growth Investing Amidst a Pandemic

Portfolio Manager Greg Dunn discusses why growth investing continues to perform in a challenging environment and the long-term themes driving it.


Growth Investing Amdist a Pandemic Final-8-25-20

Zach Wehner:   Hi.  Welcome to another episode of Away from the Noise, Thornburg Investment Management’s podcast on key investment topics, economics and market developments of the day.  I’m Zach Wehner, Client Portfolio Manager here at Thornburg.  Today, we are joined by Thornburg’s own Greg Dunn, a managing director and portfolio manager on Thornburg’s International Growth Strategy.  Greg, welcome to the show.

Greg Dunn:        Thanks, Zach.

Zach Wehner:   Greg, you’re a father of three, avid biker and snowboarder which means your life has certainly been disrupted this year by the pandemic, just like the rest of us.  I think a question on a lot of investors’ mind is how has this, you know, disruption that we are experiencing in our own lives impacted international equities and, you know, especially what themes are you seeing from that?

Greg Dunn:        Yeah, it has been an impact, obviously, for, for all of us, and the secular themes has really been heavily impacted as we’ve seen COVID really spread around the world.  And it’s been impacted in a really positive way for a lot of these secular themes, and they often play a prev, prevalent role in, in the thesis of many of our investments, and as growth investors, we’re actively looking for disrupted businesses, and that in some ways naturally positioned us well for a pandemic, never part of the, what we were, what we were looking for, but it, it happened to work out that way, and the pandemic has, has accelerated the adoption and grown of some of these secular themes like e-commerce, online education, streaming video, gaming, digital payments and, and more broadly, digital transformation.  And so, in our portfolio, you know, for ecommerce, some of the examples there are Mercado Libre in Latin America, Alibaba in China, they’ve seen accelerated growth as we’ve seen around the world as people can’t shop in a brick-and-mortar store.  They’re going more and more online to make their purchases, and a company like Wix which enables small and medium-sized businesses to take their business online.  And so before where maybe they had no online presence now in the midst of a pandemic for them to survive, they have needed to take their business online and not just have an online presence but be able to transact online, and that’s something that Wix help them do.  But then gaming, we’ve known for a long time Ubisoft and Activision, Evolution Gaming and Tencent and, and obviously, with everyone at home, people are spending more time playing videogames, and it’s also accelerated the transition from a physical delivery of games to a digital delivery of games which is margin to create for these businesses.  Digital payments, we own companies like Adyen in Europe and Network International which covers Middle East in some emerging markets, and ecommerce has kind of tied in the payments in terms of moving those transactions online makes them all electronic and moves away from an accelerates the trend away from cash and check.  Online education, we own TAL Education in China, and they’ve been a beneficiary of this just like everywhere around the world, kids have been sent home from school.  Parents are looking for alternatives, and they’re looking for ways to supplement their kids’ education.  Streaming video, we own Netflix and HUYA.  Netflix is a business that you might be surprised is in our international growth portfolio, but more than half of their subscribers are outside of the U.S., and that cohort is growing faster.  So Netflix is really a, a global/international business with a lot of growth outside of the U.S., and, and HUYA is a business in China that’s in the, in the streaming business for, more for on the, uh, the videogame side.  And digital transformation, you know, we own companies like Atlassian and Ali Baba with their Cloud business, and we’ve seen enterprises because of what’s happened with the pandemic, they’re looking to get more nimble and, and be able to adapt their businesses in a tough environment, and one of the ways they do that is by, by digitizing their business and putting more of their software and their data in the Cloud which gives them easier access, especially when they have a, a workhorse that’s more, more and more remote.  So we see these broad, fundamental improvements across many of these businesses who are driven by some of these themes.  You know, we’ve added to a few names during the pandemic, pandemic, but really, we’ve mostly benefited from having already identified these themes and have been present.

Zach Wehner:   Now Greg, a lot of us have experienced some sort of, you know, delays in shopping on ecommerce, a lot of shipping delays, capacity issues.  Is this something that’s also being experienced, you know, around the world, and some of the names that you follow, are they experiencing any capacity concerns or have they been able to sort of meet the demand?

Greg Dunn:        You know, I think by and large, uh, ecommerce companies have, have done a pretty good job of meeting the demand.  Early on, there was delays.  There was limited access to some things, but they’ve been able to move pretty quickly and, and add capacity in terms of shipping and fulfillment and, and really meet that demand.  So I think that’s something that they’ve been pretty adaptable with.

Zach Wehner:   Yeah, and you’ve talked about a lot of themes in growth markets that, you know, have been rewarded over the past couple of months, and I think that brings up a natural question in investors’ minds about valuations.  Uh, you asked, markets are hitting almost all‑time highs, and international growth indices are actually hitting their all‑time highs this month in August.  So the question is have valuations sort of outpaced the growth of these companies or do you think this is just a natural result of, you know, pull forward of demand and, and the valuations are appropriate?

Greg Dunn:        You know, I think in some cases, the stocks are, are really expensive, and in some they aren’t.  You know, on some level, I think investors are reacting to big near-term stock price appreciation and evaluation that when you look at it, it’s really, uh, it looks optically very high, and really, it’s taking into account near-term results more than anything.  But I think it’s important to remember that for some of these businesses, their, their near-term and long-term fortunes have changed dramatically.  There’s been an accelerated adoption that makes them more valuable, and so what we’re trying to do is to discern between the businesses that have a new higher level of sustained demand and those that are experiencing a bubble in demand, and we also recognize that sentiment and momentum play a role in stock prices, and so we’re trying to manage our, our position sizes and, and exposures accordingly and, and recognize when, you know, we might have a business that, you know, we love, we, we wanna own it for the next 5 to 10 years but recognize that maybe a little too much of that future success is reflected in today’s stock price and, and we should own it at a, at a smaller rate than maybe we normally would.

Zach Wehner:   And that brings me sort of to another question, you know, and that’s about international investing as a whole.  You’ve highlighted a lot of themes that have done well over time and certainly during the pandemic.  Given the more affected pandemic responses around the globe and Europe’s newfound unity in the form of a fiscal package, do you think now is a better time to invest in international equities than recent memory?

Greg Dunn:        You know, I think as an international investor, the, the two most important markets are Europe and China, and the, the way Europe has handled the stimulus has been encouraging.  They’ve taken a, a different tact than the financial crisis where they started with austerity and then they followed with loans and forced budget cuts, and with this stimulus, you know, there’s an element of it that’s, that’s in the form of grants, so that’s different and new, and they’re also issuing debt as an entire region at a, at a much larger scale than they ever have before.  So this might indicate, you know, some enhanced fiscal capacity, and it, uh, could bode well for future policy response.  Uh, uh, I think it’s more supportive of growth in the region than the approach they’ve taken in the past, and already, we’ve seen the currency response, so the euro has gotten stronger versus the dollar over the last couple months as this package has come together and then been passed, and as we know from before the financial crisis, that decade heading into the financial crisis was a great period for, for international investing, and part of that was driven by, it was a period of, of a weak dollar and, and strong international currencies.  And if you think about where we’re at today with the euro, we’re at about 118 that peaked when, for the euro’s strength, before the financial crisis back in the 2000s was 160.  So, if we’re sitting in front of another period of sustained gradual ex-U.S. currency strength, that could bode really well for U.S.-based international investors especially, obviously.  And then China, you know, they had a, a really strong, coordinated, quick response to, to COVID and a, a strong response in terms of stimulus to support their economy, and I think that’s very beneficial to them and to the, to those Chinese businesses that we’re invested in.  When you think about the China-U.S. tensions that are kind of ongoing for the last couple of years now really with the Trump administration, that’s probably gonna have and has had a negative impact on those Chinese companies’ global opportunities.  But I think it also creates this element where it shields them, shields those national champions especially from outside competition, and China itself is a massive economy that has the potential for a long growth run, runway in front of them, and, you know, they have a political and s, and a social mandate in place really I think to, to drive growth.  So I think, you know, those two regions are, you know, those primary regions that we’re invested in, Europe and China, are attractive.

Zach Wehner:   All right, Greg.  Well, thank you for your time today and thanks for joining the show.

Greg Dunn:        Thank you, Zach.

Zach Wehner:   Today’s episode was produced and edited by Michael Nelson.  You can find us on Apple, Spotify, Google Podcasts, your favorite audio provider or by visiting thornburg.com/podcasts.  Subscribe, write us and leave us a review.  Please join us next time on Away from the Noise.

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