How to find sustainable growth

Instead, finding companies with compounding, sustainable growth is key, especially in today’s challenging investment environment, says Bo Knudsen, CEO of C Worldwide Asset Management in Denmark.

Knudsen, who’s also managing director of global equities, practises high-conviction investing and limits his portfolio to 30 stocks.

“You shouldn’t dilute your exposure to a certain factor by adding mediocre companies,” he said. “Why not go for the ones that can best exploit the factors you find most interesting?”

Knudsen looks for firms that can compound their growth over the long-term and that are well-positioned to weather climate change. He particularly likes companies that facilitate society’s digital transformation.

New York-based S&P Global Inc. is one example. While the company is primarily a ratings business, it boasts a broad understanding of data, and sells that data to a key client segment, noted Knudsen. The company has a one-year return around 10%.

Another example is Swiss firm Nestlé S.A. He noted that Nestlé doesn’t deliver high growth on a yearly basis (the company has a one-year return of 0.36%). But it has posted steady growth over time, which fits his mandate.

“The company reduces the risk in our portfolio,” Knudsen said.

On the sustainability front, the company announced in December that it will invest 3.2 billion Swiss francs to combat climate change over the next five years. Nestlé plans to use 100% renewable electricity by 2025, and to halve its carbon emissions by 2030.

Being a long-term investor, Knudsen is wary of companies that grow quickly in a short period.

“I think this illusion about making fast money is alive and well, but it’s more a game of speculation than anything to do with investing,” he said. “It takes longer to create returns at this stage and going forward.”

Tesla Inc. could be one example of “an object of speculation,” according to Knudsen — and its future dominance is far from assured.

“We think there’s going to be a lot competition coming from existing players from Germany, from the rest of the world, and in this very big segment of consumer goods,” he said. “So we think the competitive landscape is hard to predict right now, and that’s why we stay on the sidelines.”

To find sustainable growth, he analyzes the company’s culture and business model.

“You look at the company behind the stock,” he said. “Start understanding and focusing and researching the company. Then you look at the stock afterward.”

The pandemic has further highlighted the importance of strong balance sheets. Companies with large debts are “being run by debt holders,” he explained.

“The debt holders want their money back, and they can essentially force a company to focus on the short term. [A] strong balance sheet gives the company management the power, the opportunity to take strategic decisions and think long-term.”

Investors will have to look globally to find future growth. “Europe is taking the lead when it comes to the agenda of sustainability,” he said. He also suggested the growing middle class in countries such as India will continue to “deliver fundamental growth.”

Knudsen added, “In the decade ahead, investors and stakeholders will reward companies with sustainable business practices. We would advise to weigh up and emphasize sustainability of growth, rather than magnitude of growth.”

This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.