From the ground up: Gardening and the art of portfolio management
juillet 28, 2022
In this week’s commentary, we take a different approach. Written by Sain Godil, Portfolio Manager, he shares how the alchemy of art and science that goes into gardening is similar to Global Alpha’s investment philosophy.
Recession, war, supply disruption, inflation, and Bitcoin crash – it seems that this is much of what you hear in the news these days. Our recent weeklies have focused on how our portfolio is extremely well positioned to benefit in periods of turmoil. We have also talked about how and why small caps tend to outperform in a global recession. So, we don’t need to cover these themes again.
Today’s weekly topic is a bit different. It came to mind while I was tending my garden. Like most people, once the first signs of spring arrive, I begin thinking about what vegetables and flowers to grow.
Gardening has become a hobby of mine because it gets me outside and pulls me away from my digital devices. It allows me to show my kids where food comes from and what goes into growing your own plants. Plus, what’s better than watching seeds transform into a tasty salad you share with your friends and family over a glass of wine?
While I was pruning my tomato plants, it occurred to me there are many similarities between gardening and the Global Alpha investment philosophy. Just like investing, gardening is an alchemy of art and science. You need a proven process, vigilance, and patience to yield fruit. Here’s how I see the parallels.
Step 1 – Preparing the ground
Gardening – It all begins with a vision of where you want to position your garden bed. The type of soil and fertilizer you choose will have a direct impact on the yield you get when the plants bloom later in the summer. Make the wrong choice, and all the time and money you spent goes to waste.
Investing – Similar to gardening, smart investing begins with careful positioning. This can be done via different asset classes, market cap ranges, fundamental or quant-based approaches, etc.
At Global Alpha, we are fundamental managers focused on global small cap. That’s our “fertile ground”. As stock pickers, this strategy gives us an opportunity to identify the best companies out of an available of 11,000 names. By carving out this particular garden patch of the investible universe, we lay the groundwork for fruitful returns for our clients.
Step 2 – Choosing the right plants
Gardening – After preparing the garden bed, you need to decide which plants to grow and where to place them. Each plant needs a specific amount of sun and water to optimize the yield. I learned this firsthand last summer, when I mistakenly placed my pepper plants in the shade and ended the season with only two tiny green peppers (one of which was eaten by a squirrel).
Investing – Just like a garden needs adequate sunlight and water, your portfolio needs companies that can grow revenues and profits much faster than the industry. We achieve this objective by understanding the addressable markets in which our companies operate – and identifying names that are well-positioned to flourish in that environment.
As our companies grow their revenues and earnings, investors can expect healthy out-performance over the long term. On the flip side, if the end market is shrinking, even the most promising company cannot grow. It simply won’t get the nourishment and support needed to thrive.
Step 3 – Care and attention
Gardening – An outdoor garden needs your constant attention. Besides regular watering, you must be on guard against the continuous onslaught of insects and animals that want to gobble up your harvest. Weeding and pruning are also key to optimizing the health and output of your plants. It’s all about staying vigilant.
Investing – At Global Alpha, we are constantly re-evaluating every holding in the portfolio. Our on-the-ground research helps us identify threats our companies may face. By meeting competitors, we get an understanding of the market dynamics and challenges our companies may face in the future. Based on the intel we gather, we prune the portfolio by managing the weights of individual companies. This is how we create a diversified portfolio that adds value in up markets and has superior down market protection. In other words, we know how to weather the storm.
Step 4 – Reaping your rewards
Gardening – All the hard work has paid off, and it’s time to reap your rewards. Nothing compares to the taste of vegetables you grew yourself. And, it’s also the perfect time to reflect on how you’ll optimize your growing process for next year to get an even better harvest.
Investing – Our team spends a lot of time reflecting on what we got right and what could have been improved in the portfolio management process. We are constantly evaluating which other companies and industries we could invest in. It’s all about continuous improvement to deliver the best possible results.
As I write this, the garden I planted in the spring has begun to flourish with kale, spinach, peppers, tomatoes, cucumbers, and herbs. Each year it gets better as I refine my growing process and figure out which pitfalls to avoid (like those sneaky squirrels).
It brings to mind the Global Alpha journey, which began with three founders and has expanded to 14 team members over the past 14 years. Since inception, our continuous refinement of our portfolio management process has helped us consistently outperform the benchmark.
Despite the inevitable changes in the weather, our team continues to learn, adapt, and identify flourishing businesses around the world. Here’s to another 14 years of growth!