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Trends – Institutional Monthly
The Industrial Life Cycle approach to emerging markets


The diversity and volatility of emerging markets provides a fertile hunting ground for the ILC investment approach. Such an innovative approach, which focuses purely on stock selection, is well positioned to deliver unique sources of excess returns.

Trends – Institutional Monthly

So far in 2015, emerging markets have underperformed developed market equities as investors continue to face strong headwinds from recent weak economic growth, sharp volatility in Chinese equities and a stronger US dollar. These challenges, however, are not uniform across the asset class. In our view, selectivity is key to finding attractive opportunities for investment.

Industrial Life Cycle (ILC), powered by HOLT, aims to pierce through these complexities by applying an innovative approach to stock selection based upon the concept of the corporate life cycle to seek unique insights into companies in the pursuit of stable, consistent and repeatable excess returns.

A uniform platform for stock evaluation

The ILC investment approach is based upon HOLT's Cash Flow Return on Investment (CFROITM) framework. HOLT is an independent research division of Credit Suisse, which converts noisy accounting data into a standardized set of economic cash flows as a function of a company's asset base. The core HOLT thesis is that accounting data is prone to distortions, especially when viewed across borders and sectors. When left unadjusted, these distortions can lead to inferior insights regarding both the absolute and relative attractiveness of companies. HOLT makes adjustments for varied accounting rules across geographies, rates of inflation and company risk profiles to provide a more uniform platform for stock evaluation. The ability to evaluate companies on a consistent basis provides ILC a broad and diverse set of investment opportunities within emerging markets – such opportunities for finding lucrative investment ideas are untapped by many traditional fundamental managers.

Generating unique insights into companies

As companies grow and age, they progress through predictable life-cycle stages. Each stage brings new organizational complexities requiring different strategic decision-making by management in order to create and sustain shareholder value. Most companies experience rapid growth and low returns in their early stages, with returns improving as the company matures. Competition among companies is real, and ultimately drives the profitability of all firms towards the cost of capital. In light of this, ILC has identified five different stages of corporate maturity: Start-Up, Growth, Cash Cow, Fading Winner and Restructuring.

In broad terms, the higher the CFROI level, asset growth rate and price to book, and the lower the financial leverage, the greater the likelihood the company will fall into the Growth stage. The inverse (low CFROI, growth and price to book and high leverage) heightens the probability that the company classifies into the Restructuring stage. 

In this issue:

• Investment strategy and asset allocation: Growth scare overdone

• Alternative ideas: Reshuffled cards in the Swiss second homes market

• Food for thought: Prepare for a less liquid world

To read the full article download the latest "Trends – Institutional Monthly" (PDF) 

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