Insights from SWS Partners

The prior-year period, along with persistent volatility into 2022, reinforces our premise on relative return opportunities (aka alpha) in public markets. Outperformance opportunities are becoming increasingly less uniform, rarely available in even quarterly increments or succinct calendar years. There’s a silver lining to this though, one that also speaks to a core tenet: we see encouraging evidence of favorable conditions for value creation over longer-term periods. It requires a lens that an emotionally-driven equity market is incapable of identifying as necessary. It also entails rampant mispricings in the short term.

We can see how disproportionate the opportunity set for alpha is via our growth portfolio’s 2020 vs 2021 performance. SWS Growth Equity delivered 4-5x its typical base case excess return in 2020, fueled by a massive demand acceleration towards all-things-digital in the global pivot around the pandemic. The following period has given back some of this, yet we see zero change to the fundamental mechanics behind the ultimate exercise of the public marketplace: pricing future cash flows of its issuers. The weighing machine can and does get thrown out-of-whack, especially by outsized capital flow impacts by its participants.

The following is an excerpt from our recently published SWS Growth Equity 3Q2021 strategy update, which is available in its entirety via pdf or audio stream. In the full piece, we provide our take on sifting through an increasingly volatile equity market backdrop, while assessing the strategic merits of our internally managed strategy for public growth-style equity.

Our read of the current fundamental signals continues to support that 2021 will be a grind-out period for active return generation. This in large part is due to a global macro dislocation that caused the most dramatic acceleration of digital transformations across all industries. The market is still undergoing a massive sortation of flash-in-the-pans from sustainable share-gainers as we edge closer to a post-pandemic environment. As active equity managers tasked with relative value creation, we remain optimistic on how our investment process is calibrated to generate attractive risk-adjusted outcomes in this backdrop.

The following is an excerpt from our recently published SWS Growth Equity 2Q2021 strategy update, which is available in its entirety via pdf or audio stream. In the full piece, we provide our take on sifting through an increasingly volatile equity market backdrop, while assessing the strategic merits of our internally managed strategy for public growth-style equity.

In this latest installment of our quarterly accountability check-in, we assess an important milestone that gets to the core justification for launching SWS Growth Equity. Having honed an investment process inside a $100 billion dollar pension, we identified the opportunity to combine stock-picking acumen with risk-minded portfolio construction, then unveiling this to a much wider audience. This past May marked three years since we planted our flag with investment capital, including our own alongside external investors. We dive into the output of our efforts below, but our focus will always be on a universal goal of every public equity investor. Despite various ways it’s articulated, consistent risk-adjusted returns are at the core of every investor’s pursuit.

As we continue to emerge from the pandemic we are again provided with an opportunity to revisit existing ideas in a new and fresh way.  The most recent stress test of the economy, markets, and ourselves delivered by the pandemic of the past 15 months shouldn’t be wasted, particularly when it comes to equity investing.

With the “recovery shape” guessing game firmly in the rearview (happy to say goodbye to whether “K-shaped” should join ranks of “V-” and “L-shaped” in the economist vernacular), the YTD period is evidence of the difficulty in pricing future outcomes at this particular market juncture. Companies lifting the hood to their recent quarter’s results are doing so at a time when the year-ago snapshot captures one of the most precipitous drops in public markets history. Trying to level-set our true run-rate, while simultaneously deciphering what’s next for equity investors, seems to be an effort stuck in “work-in-progress” mode. As we head into the holiday weekend, we saw the opportunity to offer some food for thought to accompany that which is earmarked for the grill or cooler, all in the effort to help illuminate our path forward as equity investors.