29
May
2020

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The power of owning long-term winners

The power of compounding, or the “eighth wonder of the world” as Albert Einstein called it, can be counterintuitive sometimes. Small increases in annual returns, when compounded over long periods of time, result in very large increases in one’s investment.

See the table below, for example. Compounding at 8 per cent per annum for 30 years will give you 10x your original investment. Whereas compounding at 12 per cent over the same period will give you 30x your original investment – three times better than in the 8 per cent scenario.

Screen Shot 2020-05-29 at 1.37.45 pm

We decided to take a look at the 10YR annualised shareholder returns of US stocks (we limited to those which have more than US$5 million in daily liquidity today in order to keep the list manageable).

Shown below is a histogram of the number of US stocks (vertical axis) for each level of 10YR annualised return (horizontal axis). As you can see, there is a reasonable bell curve around the median return of 7.7 per cent per annum, over the last 10 years.

Screen Shot 2020-05-29 at 1.38.07 pm

Source: Bloomberg; MGI

What is particularly interesting, however, is looking at what the differences in the range of returns means for investor outcomes over 10 years. Shown below is the above histogram, but this time the horizontal axis represents the dollar amount after 10 years to which a $1 initial investment will grow.


Screen Shot 2020-05-29 at 1.38.40 pm

Source: Bloomberg; MGI

Straight away you can see that most stocks don’t grow much above $2 or $3 over 10 years. Indeed, the median stock would have converted $1 into $2 over the period. The Russell 3000 Index – which is a collection of the 3000 largest US businesses – would have converted $1 into $2.90 over the period.

But there is a very long tail to the right-hand side of the chart. This tail reflects a handful of stocks – 79 to be precise – which resulted in 10x or more enlargement of one’s original investment 10 years prior.

This disproportionality of investing in long-term winners is one of the reasons we believe in owning high-quality businesses in our portfolios. If we can own the businesses which are going to win over the next 10 years and beyond, we believe we give ourselves a good chance of picking up some of these stocks in the right-hand tail.

 

Our Funds

The Montgomery Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Montgomery Global Fund

  • GLOBAL
  • Concentrated high conviction equities
  • From $25,000
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Montaka Global Access Fund

  • GLOBAL
  • Access long/short global equity portfolio
  • From $50,000
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Montgomery Global Equities Fund (ASX:MOGL)

  • GLOBAL
  • Concentrated high conviction equities
  • No minimum investment - see your broker limits
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Montgomery Small Companies Fund

  • AUSTRALIA/NZ
  • Concentrated high conviction equities
  • From $25,000
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Our Funds

Concentrated High Conviction Equities

Listed

Montgomery Global Equities Fund (ASX:MOGL)

Global
Available on the ASX as an Exchange Traded Managed Fund, invests in 15 to 30 quality global businesses for long-term capital growth with a target distribution yield of 4.5% per annum. Mirrors the strategy of the Montgomery Global Fund.
Unlisted From $25,000

Montgomery Global Fund

Global
Invests in 15 to 30 quality global businesses for long-term capital growth. Priced daily. Mirrors the strategy of the Montgomery Global Equities Fund (ASX:MOGL).
Unlisted from $25,000

The Montgomery Fund

Australia/NZ
Aims to provide long-term growth and income by investing in 20 to 40 high-quality Australian and New Zealand businesses trading at attractive valuations. Priced daily.
New Fund

Montgomery Small Companies Fund

Australia/NZ
Aims to provide long-term growth by investing in 30 to 50 high quality, undervalued, Australian and NZ small and emerging companies with strong growth potential. Priced daily.
Unlisted from $1 Million

The Montgomery [Private] Fund

Australia/NZ
Seeks to deliver absolute returns from a portfolio of high-quality Australian and New Zealand businesses. Capital preservation is paramount. By invitation only.

Alternate Equity Strategies

Unlisted from $50,000

Montaka Global Access Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. Priced monthly. Provides retail investors access to the Montaka Global Fund.
Unlisted from $1million

Montaka Global 130/30 Fund

Global
Provides the opportunity to benefit from both the gains of extraordinary businesses and the declines of deteriorating businesses through a global equity active extension strategy, which has the potential to significantly outperform the broader equities market over time. Seeks to generate double-digit annual average returns, net of fees. Daily priced.
Unlisted From $1 Million

Montaka Global Fund

Global
Aims to generate materially higher risk-adjusted returns, net of fees, than is generally available in the equities market over the medium term. By invitation only.