Successful innovations improve the lives of customers, but that doesn’t necessarily make these companies good investments.
“In some cases, innovation helps us all have a better quality of life, and that doesn’t mean there is directly an investment or business that comes out of it,” Dennis Lynch, Head of Counterpoint Global, Morgan Stanley Investment Management, told the Morningstar Investment Conference Thursday. His team manages several growth equity strategies for Morgan Stanley, including Morgan Stanley Institutional Inception Portfolio MSSMX,
which had an average annual return of 49.71% through the end of August, compared to an annual gain of 12.27% for the Russell 2000 Growth Index. RUO,
Electric vehicles is a business like that, and that’s why Lynch sold all of his shares in Tesla TSLA,
A few years ago.
Lynch said he held shares in the electric vehicle maker in a “small speculative position” when Consumer Reports’ first review of the car came out about half a dozen years ago. At the time, the company started to have “a real source of income ahead of it,” he said.
The team sold the shares after about three years, missing most of the rise in the automaker’s share price.
Explaining her decision, Lynch said selling cars is a tough business and electric cars mean selling vehicles that are expensive for the average consumer and require financing.
It also comes down to one of his metrics that he uses to assess a disruptive business: focusing on the unity economy.
Tesla is capital intensive and has a constant need to obtain funding from the capital markets. This “isn’t necessarily bad, but it potentially puts you, in uncertain times, in a position to rely on the kindness of strangers to continue to pursue the business model in this way,” he said.
Lynch admitted that founder Elon Musk had done “some really amazing things.” But it comes down to whether the business can be profitable.
“When you bank on the financial markets and dream big, there is a fine line between inspiring and making promises you may not be able to keep,” he said.
“We were wrong in that the [stock price] since we sold has worked extremely well, ”he said. “But I think this is an area where it will be really difficult to pick an ultimate winner, especially at today’s prices,” he said.
Lynch spoke during a panel on disruptive companies with Bill Nygren, a leading portfolio manager and chief investment officer of U.S. equities at Oakmark Funds, a value fund manager. Nygren had his own take on disruptive businesses, noting that investors often overlook large space companies that can innovate themselves.
An example is Allison Transmission ALSN,
which makes it possible to manufacture transmissions for heavy off-road trucks, including fully integrated electric axles, he said. The Oakmark Select OAKLX fund,
owns shares of the Indianapolis-based company.
Oakmark Select is up 13.14% at a three-year annualized rate until the end of August, trailing the S&P 500 SPX index,
but has beaten the index since its inception in November 1996 with an annualized return of 12.46%.
The shift to electric vehicles will radically change that business, Nygren said, but he points out that the entire valuation of new companies in the space is similar to what the market values Allison’s electric vehicle production, based on the valuations being a multiple of the money spent. on research and development. “You could argue that the market values Allison’s EV business the same way other pure EV companies are valued,” he said.
As a value manager, Nygren’s team analyzes stocks with a forecast of around seven years at most and won’t invest in something they can justify at current prices, like bitcoin BTCUSD,
“We are just happy to retire. And I think people would be wise not to listen to me on topics where we’ve just decided we don’t know enough to make an investment, ”he added.
Lynch, on the other hand, said he was not against the risk of an unproven business. His team is prepared to make small business bets in the hopes of winning big, rather than making a binary choice or whether or not to own a stock.
“Having a little something where things can go well, but also knowing that there are things that can go wrong is not unreasonable when you have a world that has such disruptions, and where these positive scenarios end up. to be so big, “he said.
Lynch has small positions in Bitcoin and Square SQ,
due to its exposure to cryptocurrencies. Bitcoin has persistence as a trend, one of the metrics it uses when examining innovation. Cryptocurrency talks go up and down with prices, with some critics claiming it won’t last with every drop, only to rebound. “I like to say that Bitcoin is kind of like Kenny from South Park, you know the guy dies every episode and he’s back,” he says.
He called bitcoin “anti-fragile,” something that takes advantage of clutter, which he also appreciates as the potential for diversification. A major risk is that governments could ban these alternative currencies, Lynch said, but overall a small speculative position is worth having.
“It’s kind of part of the portfolio, maybe it’s something that can go well when the rest of our portfolios have something going wrong…. Ten years from now, given the persistence of bitcoin, it’s worth a little speculation, ”he said.