Excerpted from our 2021 Semi-Annual Shareholder Letter
The beginning of 2021 was marked by some of the deadliest months in the history of our country and a general unrest across society, yet even in this ominous atmosphere the financial markets continued to push higher as money poured into equities resulting in the S&P 500 reaching 70 all-time highs in 2021, the second most of any year in history.
There was a sense that these market gains felt disconnected from reality, but certain economic data seemed to support the market’s optimism as key metrics like the strengthening labor force and increased consumer spending reinforced the notion that the market was sanely driven by real economic fundamentals.
Though the market’s actions primarily reflected optimism, there was also a real looming fear of inflation as the year ended with the CPI (Consumer Price Index) rising at its fastest annual basis since the early 1980s.
How Eventide’s strategy works in such market conditions
In order to understand how our strategy at Eventide works in light of economic shifts and market events to position ourselves for the future, it is important to understand how our perspective differs significantly from the general consensus of other investors or “the market” in any environment. Our perspective is different in many ways, but there are three differences that are particularly important in the context of our current environment:
- our perspective of time horizon,
- our view on imprecise market reactions, and
- the intangible qualities that we look for in companies.
These three differences help shed light on the disparities between how the broader market has responded in the past twelve months—shifting its focus to adapt to immediate circumstances—and how Eventide has responded—sticking with a strategy that is in line with what we believe will produce long-term, risk-adjusted returns for our shareholders.
Our perspective of time horizon
First, we find that there is often a difference in the scope of time horizon that we use versus that of the market. The market tends to prioritize short-term returns, limiting its scope to stocks that it believes have immediate upside and abandoning stocks with an immediate perceived downside. At Eventide, we take a longer-term approach to investing in companies, enabling us to seek companies that we believe will be successful in the long run. This difference in the scope of time horizon can lead to great opportunities for patient investors.
Our view on imprecise market reactions
Second, we believe that there are times when the market reacts emotionally and irrationally, using imprecise measurements of risk to punish companies that we deem to be high-quality companies. An example of this is when investors abandon the companies of an entire sector when a market factor changes. For fundamental asset managers like Eventide, this can provide an opportunity to invest at a discount in companies that we have a high conviction in because other investors have indiscriminately avoided them for what we believe to be invalid reasons. Recently, the biotechnology industry has been the subject of such indiscriminate bias, which may present opportunities to invest in attractive companies at a reduced price.
The intangible qualities that we look for
Finally, Eventide distinguishes itself by using what we believe to be a more holistic approach to evaluating a company’s intrinsic value. Put simply, there are a host of both tangible and intangible qualities of a company that investors consider when valuing a company. Investors often differ in how they value a company’s intangible qualities since these qualities tend to be more subjective. Eventide places a high priority on evaluating these intangible qualities like a company’s management team, its operational execution, and its competitive advantages.
Most importantly, we believe that a company’s tangible and intangible qualities should demonstrate its ability to create value for others, both in what the company does and how it does it. Many of these intangible qualities lead us to a different definition of the term “high-quality company,” as the market’s definition of “quality” largely depends on tangible qualities that can be quantified.
Historically, the financial markets have powerfully enabled investors to participate in the success of businesses that are meeting important human needs by providing them with the capital they need. Remarkable innovation in areas like transportation, energy, and communication has provided the supporting infrastructure needed for our growing society to flourish over the past century, each of which was made possible by extraordinary businesses and catalyzed by the capital provided by investors. Businesses, investors, and broader society have all benefited.
At Eventide, we believe that the financial markets should and will continue to serve as powerful conduits for investors to allocate capital to businesses that will in turn help meet our important human needs. It is our estimation that the next decade will be marked by companies participating in themes characterized by incredible innovations that among other things, will change how we treat life-altering diseases, how we use technology to complement and extend human work, how we develop communication platforms that strengthen our relational networks, and how we improve and expand our energy resources so that they remain abundant with less negative consequences.
The recent volatility in the markets has illuminated the differences in perspectives as many investors seek to prioritize shorter time horizons, imprecisely react to external stimuli, and overlook important intangible qualities of companies. We remain committed to our strategy of investing in companies that meet our definition of high-quality—those companies with tangible and intangible qualities that seek to demonstrate great potential to create value for society—a strategy that we believe will lead to long-term, risk-adjusted returns for our shareholders. Our conviction is that your life and the lives of your neighbors will be greatly impacted by these companies, which means our roles as investors are far more important than most people realize.
Thank you for your trust and partnership in investing that makes the world rejoice®.
Founding Member & CEO, Eventide Asset Management