Alphinity: Laser-focused on earnings

For boutique fund manager, Alphinity Investment Management, their earnings-focused investment process is their North Star and is applied with discipline across all strategies at the firm.  This is why they have approached investing in artificial intelligence in the same pragmatic way, by concentrating on finding high-quality companies where AI is likely to continue driving positive earnings surprises in the foreseeable future.

“Our core investment philosophy is applied zealously across different market conditions, and we don’t want to depart from that on anything.  Including big disruptive themes like Artificial Intelligence (AI),” said Alphinity global portfolio manager, Jeff Thomson.

He said of course Alphinity recognised that AI represented significant potential benefits for both consumers and companies in the future, but added, “we are approaching this thematic with our eyes wide open to potential risks as well”.

Which explains why Alphinity’s technology specialist and global portfolio manager, Trent Masters says that they have gravitated towards some of the biggest names in tech for AI exposure, such as Microsoft and Nvidia.

“AI is looking quite different in terms of other technology breakthroughs in that the benefits are, at least initially, accruing to incumbents. AI is allowing an extension of current capabilities, which is seeing companies such as Microsoft and Nvidia benefit enormously from this shift” Masters said. “While there are many companies talking about AI, and seeing their share prices react accordingly, there are only a handful where we can confidently touch and feel the earnings inflection that will flow from it” he said

These companies tick all the right boxes for Alphinity; both are reasonably valued, high quality businesses where Alphinity believes that AI is likely to continue surprising the market with stronger than expected earnings for some time to come. Other AI beneficiaries in the Alphinity Global portfolio include ASML and Cadence Design.

To understand the Alphinity approach and its strict adherence to investment process it is necessary to understand its origins and the belief that its history and boutique structure allows it to ensure that its performance is closely aligned to investor expectations.

Alphinity was originally established by a team of four portfolio managers from Alliance Bernstein in 2010 and the subsequent success of the business is a testament to the strength of the culture and investment process established by these original founders.

“We have a somewhat different culture at Alphinity, with a relatively flat structure of experienced portfolio managers that prioritises a respectful, team-based approach to investing.  This helps to manage key person risk and creates a more resilient business over time.  We also believe the culture helps to create strong alignment with the best interests of our clients,’ Thomson said.

“We value a team-based approach where you work together to establish differentiated insights, but also to be humble and always open to learning from others. And then, of course, there is just good, old-fashioned hard work.”

“Alphinity is built on that combination of a team-based culture and a powerful, repeatable, earnings-focused investment process. The original group of four founders have worked successfully together since 2003, which is a testimony to the power of the structure if you can get it right,” Thomson said.

He said the durability of the Alphinity process has been well tested and has over time proved to be resilient and successful over various different market conditions and cycles.

The Alphinity investment process is focused on investing in high-quality businesses where the team believes the market is under-appreciating the fundamental outlook for earnings.

“We think it is the earnings-surprise element, more than anything, that drives performance.  There is solid evidence to support that, but it should also be intuitive.  When a company surprises market expectations then, all things equal, the share price should also respond positively.”

However, Thomson said that quality and valuations were also key ingredients.   History shows that the consistency and predictability of positive earnings upgrade cycles are significantly improved when they are also backed by quality in the form of high and rising returns, solid balance sheets and strong free cashflows. And it is also important not to overpay for these opportunities.  Alphinity always seeks to invest in companies trading at reasonable valuations, offering upside to internal fundamental price targets.

These investment opportunities can change over the course of the cycle, for example during periods of strong economic expansions cyclical stocks such as banks or industrials will likely have the strongest earnings surprises, while during periods of weaker growth defensives or growth stocks will likely be earnings leaders.

“While we are very disciplined about what characteristics we are looking for in an investment, we are relatively agnostic as to where those opportunities are found. For example, we invest across all sectors in the market from banks to technology stocks. As long as they fit our process. We are guided by earnings leadership which gives us flexibility to deliver consistent returns through different market cycles for our clients,” Thomson said.