Volatility Equities Blog

Lessons from Equity Investing with a Very Long Lens on Growth

August 07, 2024

3 min read

Thorsten Winkelmann| Chief Investment Officer—European and Global Growth Equities

Marcus Morris-Eyton| Portfolio Manager—European and Global Growth Equities

Four interlinked principles form a compelling investment philosophy for uncovering promising growth companies.

Equity investing is a learning process, in which portfolio teams must be highly disciplined yet always open to evolving. Here are some lessons that we’ve learned from investing in European and global growth stocks over the last two decades.

Remember What Really Drives Long-Term Returns

Earnings and cash-flow growth are the basic sources of long-term equity investment returns.

It may sound like a truism, but this simple principle is often forgotten in volatile markets. Over time, the performance of the MSCI Europe Index has closely tracked the earnings growth of its constituent companies (Display). And the MSCI Europe Growth Index, whose members have higher growth than the broad market index, has delivered even better returns. This suggests that investors who are able to identify companies with stronger earnings growth than the market tend to be rewarded with outperformance.

Equity Market Returns Have Closely Tracked Long-Term Earnings Growth

Bar chart shows the annualized predicted long-term earnings growth, realized earnings growth and equity market return for the MSCI Europe and MSCI Europe Growth indices, from 2004 to 2023.

Past performance and current analysis do not guarantee future results.
EPS is earnings per share. Predicted long-term EPS growth is based on analyst estimates for the long-term earnings growth rate. Realized earnings growth is the five-year EPS growth rate before extraordinary items.
As of December 31, 2023
Source: MSCI and AllianceBernstein (AB)

To do this, we believe cash flows should be prioritized in fundamental analysis. That’s because cash flows are the lifeblood of a healthy business and underpin a company’s ability to sustain earnings growth over time. Even when macroeconomic challenges and geopolitical hazards rattle market performance, equity returns over time are ultimately driven by a company’s underlying earnings trajectory.

Look Far into the Future

As active equity investors, we think a minimum five-to-10-year time horizon is optimal.

That may sound like an especially long time to project an investment’s future. However, we think this approach creates advantages for investors. It requires us to zoom in on business dynamics, which provide greater visibility of a firm’s earnings trajectory, no matter how volatile the surrounding environment may be. In a world of ever shorter attention spans, those with a very long view can benefit from what we call time arbitrage. That is, when a company’s shares are unfairly punished by the market because of short-term uncertainty, we can strengthen positions and adjust holdings with conviction in the long-term earnings outlook.

Think Like a Business Owner

Equity investors often buy a stock with a future sell date in mind. Business owners don’t do that.

Owners purchase a business to develop it, without a specified end date for engagement. With a business-owner mindset, investors will focus on operational attributes, such as the competitive moat around a company’s products and services or the corporate culture, and how they help support the sustainability of earnings.

This provides a very different perspective in which the fundamental business health is the highest priority. It can help investors filter out market noise that may distract investors from the essence of earnings success. And it can lead investors to companies in sectors and industries that aren’t always associated with growth potential, such as European industrials.

A business-owner approach can lead to even longer holding periods than our typical five to 10 years. In fact, select successful businesses may even deserve to be held in an equity portfolio for 15 or 20 years, which provides an added potential bonus of the compounding effect on returns.

Short-Term Volatility Brings Long-Term Opportunity

Equity investors with a strategic long-term view can take advantage of short-term volatility to bolster positions in stocks that are likely to recover over time.

Market volatility is a fact of life, and even the best managers will suffer a very bad quarter or year at some point. Of course, downturns and periods of underperformance can be unsettling. But before jumping to conclusions, ask why the portfolio has underperformed. If the portfolio team is disciplined in implementing its stated strategy and philosophy, don’t write it off. It’s far more concerning when portfolio managers chase crowds and fads with little strategic rationale.

Clients who develop a close relationship with portfolio management teams become partners through the ups and downs of market cycles; it’s easier for them to give a vote of confidence to a strategy during a rough patch. They’ll understand that periods of weakness don’t undermine an actively managed strategy. Good active managers will stick to their knitting through volatile periods and emerge with even stronger performance over a multiyear horizon.

The lessons that we’ve accumulated over the years are interconnected. When you understand the drivers of long-term returns, it makes sense to develop a five-to-10-year outlook. To gain confidence looking so far into the future requires the mindset of a business owner. And with that mentality, it becomes much easier to weather bouts of turbulence. Taken together, we believe these concepts can guide a portfolio to meet investors’ long-term financial goals with a compelling strategic investing philosophy.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

About the Authors

Thorsten Winkelmann

Thorsten Winkelmann is Chief Investment Officer of European and Global Growth Equities. Prior to joining AB in 2024, he spent more than 20 years at Allianz Global Investors, where he was CIO of the Global Growth team and a portfolio manager for the Global Equity Growth and Europe Equity Growth strategies. Before that, Winkelmann was a portfolio manager within the Allianz Global Investors European Equity Core and Multi-Asset teams. He holds an MA in economics from the University of Bonn. Location: Frankfurt

Marcus Morris-Eyton

Marcus Morris-Eyton is a Portfolio Manager for European and Global Growth Equities. Prior to joining AB in 2024, he was a portfolio manager at Allianz Global Investors, which he joined in 2011. Morris-Eyton also worked as a discretionary sales manager at Allianz Global Investors in London, and in equity research at Credit Suisse. He was named one of the Top 40 Under 40 Rising Stars in Asset Management by Financial News in 2015. Morris-Eyton holds a BA with first class honours in English and philosophy from the University of Leeds. He is a CFA charterholder. Location: London

Lessons from Equity Investing with a Very Long Lens on Growth

Remember What Really Drives Long-Term Returns

Look Far into the Future

Think Like a Business Owner

Short-Term Volatility Brings Long-Term Opportunity

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