Our investment process is simple: we seek to identify positive changes at company level that are not yet understood and priced in by the market. We believe this bottom-up stock selection is the most powerful - and repeatable - driver of outperformance. As such, we focus our energies and our analytical resources at finding such stock-specific opportunities across all our equity investment strategies.
How does this process look in practice? Take, for example, the ever-changing automotive industry. Over the last decade, consumers have increasingly shunned their large gas-guzzler in favour of greener and more fuel-efficient alternatives. Engines, like the cars they power, have become smaller and less wasteful as a result.
However, such engines tend to generate lower horsepower and are therefore relatively slow. To combat this, manufacturers are increasingly incorporating turbochargers into their engine models.
One company that has been quick to acknowledge and capitalise on this trend is BorgWarner (BWA). This US-based firm manufactures automotive components and parts for carmakers around the world. BWA's particular area of expertise is making powertrain components - notably turbochargers – designed to improve an engine's efficiency and output.
We believe that demand for these parts will only grow as the world's major carmakers increasingly downsize the engines they use. The signs are already there. Volkswagen, for example, has indicated that 100% of its engines will be turbocharged by 2020. Honda and Toyota have also announced plans to roll-out turbocharged models. Even BMW, known for its high-performance vehicles, has acknowledged that it too is at the early stages of engine downsizing.
The market, though, is currently pricing in weak demand from Europe for BWA's products and has little confidence in the recovery in the US.
We disagree. The secular shift towards smaller engines is now established and on an upward trend. As such, we envisage multi-year double-digit sales growth for BWA, as it continues to penetrate markets across the globe. And, while turbochargers remain the principle organic driver of growth, the take-up of BWA's suite of fuel efficiencies and lower emissions enablers should further boost returns. The firm is also cash-rich, with a good eye for growth-enhancing M&A opportunities. The list goes on.
Finding such companies, then, is all about thorough research. Kicking the tyres is all well and good, but it is only by getting under the bonnet of a company that we can fully understand how it works and what will propel future returns. That is why we place rigorous, bottom-up research at the heart of our investment process. By identifying change and, more importantly, taking meaningful positions in companies, we can therefore build high-conviction portfolios that aim to deliver outperformance for our clients.