You might have heard about our Swiss & Global Equity team’s investment approach, which revolves around cash-flow return on investments (known as CFROI – Source: UBS HOLT) and the selection of companies with high and stable CFROI only for some of its portfolios. This is a measure that gives an indication of a company’s ability to create value.
Positive links have been drawn between superior levels of value-creation (as measured by high and stable CFROI), larger market capitalisations, and stable earnings estimates.
Long-termism is a prerequisite for an investor seeking to benefit from these qualities: it’s all about time in the market rather than timing the market. Focusing on the momentum factor (market timing) implies frequent portfolio rebalancing and often selling and buying the same stocks repeatedly. Time in the market, on the other hand, has proven to be more beneficial for longer-term investors focused on quality companies with strong fundamentals.
Recent volatile trends in the US technology sector, for example, illustrate the power that value-creation capacity has on a company’s, or an entire segment’s ability to stay at the top of the performance charts despite changes in the business and investment landscape in which it operates: the US semiconductor sub-segment has been among the best performance contributors to the S&P 500 index since the beginning of the year, but is starting to show signs of weaknesses and more defensive segments such as healthcare or software have shown to come back into favour during market corrections.
Semiconductor companies can experience sell-offs during downward cycles, as they typically have more cyclical CFROI profiles. This contrasts with the higher and less volatile CFROI levels of software companies, which build on better pricing power and recurring revenues from licencing and subscription fees, and from maintenance services.
The semiconductor segment initially benefitted from the technology sector’s need for hardware infrastructure for implementing cloud computing and generative artificial intelligence (GenAI) capabilities. Investors since then started to somewhat question these companies’ abilities to translate investments into earnings growth and the focus started to shift to value-added software solutions such as applications, gaming, and AI assistants.
By detecting attractive bottom-up opportunities in ‘beating-the-fade’ companies, investors can improve the aggregate CFROI level of their portfolios. Quality investing based on value creation remains, in our view, key for compounding performance in core global equity portfolios.
