Barry Dargan knows a crisis. The CEO and founder of Intermede Investment Partners started his investment career not long before the 1987 crash and proceeded to work around the globe through every major crisis since.
He lived in Japan through the 1990s super-long bear market. He invested through the emerging market crash of South East Asia and the Russian Financial Crisis of 1997/98, the dot-com bust of the early 2000s, the GFC in 2008 and, of course, the COVID-induced crash of March 2020.
He is a financial crisis savant.
Dargan spoke with Livewire recently on the lessons from working through crises and the startling research showing only 4% of available stocks provide most of the returns in the market.
Lessons in a crisis
Dargan managed to stay successfully invested through Japan's drawn-out bear market. Between 1989 and December 2012, the market fell continuously, dropping 74% over the period.
Not many stocks will work in a market like that, said Dargan, but those that do work will make you money.
In fact, only 19 stocks made positive returns over the 22-year period.
Along the way, Dargan has picked up a few lessons on how to assess and choose long term holdings that would survive, and even thrive, through a crisis.
His time spent working and investing in Japan also gave Dargan a unique insight into COVID-19, as he had already navigated the local response to the SARS virus, when it struck Japan in 2003.
Dargan was reviewing the portfolio in early January 2020 and stress testing the stocks to see what would likely perform if a one to two-year lockdown came about.
This exercise helped us review and better understand the intrinsic value of a business even when it was going through a "disaster scenario".
One example is Disney (NYSE: DIS), which collapsed 40% in the COVID-crash.
"We knew that the value lost was not more than about 20%, so this was a great opportunity to pick up some great long-term growth companies that normally trade quite richly at deeply discounted prices," said Dargan.
Buy the 4%
So, with Dargan's wealth of experience through market highs and lows, what lessons can be drawn from the vagaries of market cycles?
The number one lesson is quality.
"We think if you get distracted and you look at other things, you dilute your ambition and end up getting a few duds. And so it's best just to focus on these great companies," he said
Dargan's life-long investment strategy has more recently been backed by academic research, which he highly commends.
Academic research by Hendrick Bessembinder , a Professor of Finance at Arizona State University unearthed a rather terrifying fact:
- Only 4% of companies account for all of the net stock market gains
- Out of 26,000 stocks studied between 1926 to 2016, less than half generated a positive lifetime return.
- Over the same time period, only just over 42% have a return greater than the one-month Treasury bill, which is as close to risk-free as you can get in investing.
The magic 4% of companies is what Dargan homes in on.
How do you find the winners?
Dargan has previously shown how the Intermede screening process works. He calls it the "5-10-15" criteria.
One tool we employ in our screening process to find winners is the ‘5-10-15’ rule: annual average growth of 5% in revenues, 10% in earnings per share, and 15% (and rising) return on equity (ROE) over the previous 10 years.
Overall, he finds about 600 stocks will pass this "5-10-15" screening process, but with COVID-19 having a negative impact on rising ROE, this number is now closer to 350 stocks.
Then this is further whittled down to just 40 stocks, based on more qualitative factors such as good management.
"We spend a lot of time qualifying a company to make it into the portfolio," said Dargan.
But the important thing to do is to let the thesis work, and that takes time.
"One of the things I've learned is to be patient. And don't second guess yourself if you've done a lot of work, you've qualified it," he said clarifying that you have to still stay on top of the initial investment thesis.
However, he throws down the gauntlet to challenge Aussie-only investors. Why would you want to limit yourself, he asks, when the best company in any given industry could be based in US or Japan or China? He wants exposure to the best companies no matter where in the world they are.
"If we have another crisis, and I'm sure we will at some point ... we'll be in good shape if we are in the right companies."
Barry and the Intermede team apply laser-like focus to just one thing – high quality global companies that they expect to consistently deliver double digit percentage earnings growth, year in, year out.
For more information on the Intermede Global Equities Fund, please visit mlcam.com.au/intermede, speak to your financial advisers or contact us on 1300 738 355.
This publication is provided by Antares Capital Partners Limited (ABN 85 066 081 114, AFSL 234483) (‘ACP’), responsible entity of the Intermede Global Equities Fund (ARSN 602 927 739, APIR code PPL0036AU, ASX mFund code INT01) (‘Fund’). ACP has appointed Intermede Investment Partners Limited (‘Intermede’) as investment manager of the Fund. Before making any decision about investment in the Fund, you should consider the product disclosure statement (‘PDS’) of the Fund available from mlcam.com.au/igef or by calling 1300 738 355. ACP is part of the IOOF group of companies (comprising IOOF Holdings Ltd ABN 49 100 103 722 and its related bodies corporate) (‘IOOF Group’). Any references to “we” include members of the IOOF Group and any officer, employee, agent, adviser or contractor. An investment in any such financial product referred to in this communication is subject to investment risk, including possible delays in repayment of capital and loss of income and principal invested. The information in this communication is general in nature. It has been prepared without taking account of any individual investor’s objectives, financial situation or needs and because of that investors should, before acting on the advice, consider the appropriateness of the advice having regard to their personal objectives, financial situation and needs. Some information in this communication has been provided to us by Intermede, It comprises their opinion and judgment at the time of issue and are subject to change. We believe that the information herein is correct and reasonably held at the time of compilation. Neither ACP nor any member of the IOOF Group, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this publication. Any projection or other forward looking statement in this publication is provided for information purposes only. Though reasonably formed, no representation is made as to the accuracy of any such projection or that it will be met. Actual events may vary materially.