There are two stages in a company’s life cycle that are especially attractive to investors for their return vs. risk characteristics. In these two stages, investor remuneration in the form of capital gains is extraordinary.
Considering their special appeal and the different ways businesses must be managed in each stage, we have a fund specializing in each one: Sigma Fund Prudent Growth (+12%) focuses on the “Mid to Late Growth” phase and Sigma Fund Quality Stocks (+4%) specializes in the “Mid to Late Maturity” stage.
Companies’ life cycles can be divided in four stages: Introduction, Growth, Maturity, and Decline. As in our lives, great opportunities arise from crises and transitions from one stage to the next are especially prone to trigger such crises, creating a wide dispersion of expectations for companies’ future development and making their share prices offer attractive gains in the mid term.
Only those companies in the advanced Growth stage –Mid to Late Growth– capable of successfully managing expansion will reach the Maturity stage, attracting large flows of capital from investors. Arista Networks, the global leader in Ethernet Switches, is a perfect example of this type of companies: it has extended its leadership to Cloud Networking infrastructure solutions, and will have a key role in the future development of switch networks. Founded by ex-Cisco entrepreneurs and listed since 2014,s, its share price has already increased 360%.
The best companies in the advanced Maturity stage are those capable of sustaining their leadership, growing over decades thanks to innovation and the creation of intangible entry barriers (Life Cycle Extension). Microsoft is a classic example of companies in this stage: after an extraordinary Growth stage in the 90s, it went through a crisis period in the first decade of 2000 when operating systems sales growth slowed down and it missed out on fast growing markets such as social networks (Facebook) and internet browsers (Google). Nonetheless, it was able to capitalize on the dominance in the business and retail markets of the “Windows” operating system and the (indispensable) “Office” package. Microsoft continued to invest in innovation, buying its competitors in those areas in which it wanted to increase its product offering. It has successfully restructured its business model from selling software licenses to the software as a service (SAAS) model, and is by now the second second-largest provider of cloud-computing software worldwide with an 18% market share. Microsoft’s value has multiplied by 10 since 2009.
Future growth is the business feature that is most underrated by human beings (the compound growth that our brains find so hard to catch on to). This is why it is easier to find attractive price vs. risk ratios in Growth than in Value companies, where discounts are always coupled with significant short term risks.
Our flagship fund this year is Sigma Fund Prudent Growth: it focuses on Mid to Late Growth companies, with high returns, steady cash flow generation and low debt ratios. In addition, the higher volatility and growth rates of these companies allow us to hedge from 30% to 100% of our portfolio using derivatives to contain market falls and take full advantage of their recovery. This year’s performance has also proved the portfolio’s resilience in times of crisis.
Our Mid to Late Maturity equity portfolio, Sigma Fund Quality Stocks, focuses on companies with a good command of the Maturity stage, capable of extending gains well beyond this phase. They are global leaders –or prospect global leaders– in fast growing industries and are able to attract so much investor capital in times of crisis that they are the first to recover. This company profile allows us to build an unhedged portfolio, maintaining only up to 25% in liquid positions, and benefiting considerably from market falls as we have done this year. The fund is 4% up YTD