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See What Drives Corporate Performance

April 11, 2018 | News


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Identifying companies that can generate and sustain strong value creation for their investors provides the opportunity to outperform the markets, said Andy Flynn, co-portfolio manager on the William Blair Global Leaders strategy, in a recent Forbes interview with Wally Forbes.

The ability to differentiate corporate performance through an investment concept that the William Blair Global Equity team calls Sustainable Value Creation is especially important in the current environment, Flynn told Forbes. While the current backdrop remains constructive for global equities, it is now more balanced, given rising interest rates and less monetary stimulus.

“We believe sustainable value creation drives superior investment returns.”
– Andy Flynn, portfolio manager, William Blair

Flynn explained that William Blair's Global Equity team seeks to invest in companies that can “generate and reinvest profits at a higher return than their cost of capital.” These are the companies that the team believes create the greatest value for investors over a business cycle.

“We believe sustainable value creation drives superior investment returns,” Flynn said. He highlighted in the Forbes interview that the William Blair team thinks the best way to measure sustainable value creation (or the quality of a company) is by using cash flow return on invested capital.

That's because other quality measures such as revenue growth and earnings growth can be influenced by currency movements, merger activity, and other factors. “What we think really drives corporate success and value creation for investors is the ability to generate and sustain a high level of cash flow,” said Flynn in the interview.

He added that there's an opportunity to identify quality growth companies across the three stages of the corporate life cycle:

  • Emergent growth
  • Expanding growth
  • Sustained growth

Flynn went on to discuss the characteristics of companies that fall within each of these growth stages and provided examples of several global companies.

Emergent Growth Companies

These are companies that often:

  • Have a single product or service and operate in rapidly growing markets
  • Are very strong in one country or market and in markets that offer strong growth potential
  • Don't generate substantial dividends—they're reinvesting back into the business

“Using a baseball analogy, these are companies that are in the second, third, or fourth inning of their value creation cycle,” Flynn told Forbes.

Expanding Growth Companies

These are companies that:

  • Have matured past the original point of heavy investment
  • May be generating and sustaining a dividend or reinvesting aggressively into the business
  • Are expanding beyond their original country or market, or expanding into different business lines
  • Often are generating strong free cash flow
  • Are in the fourth, fifth, or six inning of their value creation cycle

Sustained Growth Companies

These are companies that:

  • In many cases, are household names that many people no longer think are growing rapidly
  • William Blair's Global Equity team thinks will continue to grow faster than the market based on the competitive strength of their products and services

Read Andy Flynn's complete Forbes interview

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References to specific securities and their issuers are for illustrative purposes only and are not intended as recommendations to purchase or sell such securities. Specific securities described do not represent all of the securities purchased, sold, or recommended for advisory clients. It should not be assumed that any investment in the securities referenced was or will be profitable.