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How to Improve Returns in the Public Equity Markets: Think Thematic and Extend Your Duration

By Lorne Bycoff & Douglas Bycoff, CEO & CIO, The Bycoff Group

 

The Bycoff Group believes families can meaningfully improve returns in the public equity markets by thinking thematically and extending the duration of their ideas. While the public equity market provides advantages over other asset classes, including flexibility of company selection, investment entry point, and liquidity post-investment, many families are overwhelmed by the multitude of these choices.


Prior to founding The Bycoff Group, a New York City-based investment firm focused on public companies in the communication, technology, and consumer sectors, we served in investment roles for major hedge funds such as Point72 Asset Management, private equity, and wealth management firms such as Goldman Sachs and Merrill Lynch. As a result of this diverse background, we have had the opportunity to make investments across many different time horizons.


Based on our learnings, families can combine elements of each investment style to improve public equity returns through an approach we summarize as “think thematic and extend duration.” From private equity, we appreciate that business plans can take multiple years to execute. We are willing to back management teams with excellent products or value-added plans to improve company performance. Similarly, we borrow the patience and investment duration of the wealth industry, which often focuses on time horizons exceeding ten years but with limited control and precision over near-term outcomes. Finally, from our time covering Tech, Media, and Telecom (TMT) at the hedge fund Point72 Asset Management, we recognize that a company’s fundamental growth and quarterly results are a major input into the feedback loop that determines a company’s investment performance in the public markets.


In our investment approach, we add a layer of focus on companies with solid secular or “thematic” growth tailwinds. Per Bloomberg data, 8 of the top 10 performing industry groups in the Russell 1000 over the last five years had above-average 5-year sales and EPS growth rates. So clearly, sales and profit growth are critical factors in strong investment performance. To the investor’s benefit, companies with secular tailwinds tend to see their valuations get more attractive as they produce more sales and profit over time. The same is not true for more value-oriented ideas, where profits can shrink and valuations become less attractive over time.


In the uncertain markets of the last two years, we found it especially beneficial to focus on our long-term thematic approach. For example, in 2021, we began researching the semiconductor companies serving the automotive supply chain. The automotive sector is seeing a tremendous increase in the need for semiconductor components driven by multiple factors. These factors include new advanced driver assistance systems (ADAS[1]), such as blindside detectors and rear-view cameras, as well as an increasing number of electric vehicles purchased each year[2]. We determined that these industry tailwinds supported an investment in a semiconductor company with a leading market share in automotive image sensors and an attractive valuation as well. The industry dynamics suggest the company will sell more chips and produce more profit over the next several years. Our thematic approach bolstered our confidence, and as a result, we were able to increase our position in this strong investment, even through a difficult market environment for technology companies in 2022.

In conclusion, families focused on building generational wealth should think about just that – the next generation – while recognizing that companies must execute important milestones to be successful investments. Will this company or secular theme play a more significant role in my life in five to ten years or even the lives of my children and grandchildren?


To learn more about The Bycoff Group or discuss this article, please get in touch with us at info@bycoffgroup.com


Fig. 1.: Illustration of ADAS system in Car








Source: Robotics and Automation News


Fig. 2.: Forecasted Sales of Electric Vehicles in the US












Source: IHS Global Insights via GS Research, 2/10/2023

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