When a falling apple conked Sir Isaac Newton on the head, the law of gravity made itself abundantly clear to the great English scientist and thinker. Newton’s epiphany altered the trajectory of human discovery forevermore. But for investors, the markets can sometimes feel impervious to fundamental realities, the financial equivalent of the animated predator Wile E. Coyote running off a cliff only to plummet once he has realized his terrible mistake.
While Newton Investment Management shares no known lineage with its illustrious scientific namesake, we do share in his belief in gravitational pull, and ultimately, the underlying reality of a given company’s competitive positioning, leadership quality, and profit drivers should reveal a firm’s true value in the markets.
To that end, we at Newton have invested significant time, effort and resources into a “specialist investment research” team that has professionalized the search for reality-based qualitative inputs that drive our investment models and actions. The specialist group is comprised of, first and foremost, an investigative team driven by old-school journalistic means and methods, including an analyst dedicated to separating fact from fiction when it comes to Environmental, Social, and Governance (ESG) inquiries. The group also boasts a forensic accounting unit that works hand-in-hand with our quantitative investment analyticsteams to build proprietary valuation screens. Additionally, we utilize a private markets group that not only seeks late-stage venture opportunities but also scours the world of start-ups for nascent competition and disruption in the public markets. Lastly, the team incorporates a thematic strategist who works across disciplines to highlight opportunities embedded in sometimes opaque economic trends.
Taken together, this specialist research group gives Newton investors a dedicated, multidisciplinary view of companies that can often present a significantly different outcome than more traditional investment research methodologies.
The use of former journalists as investment researchers is nothing new on Wall Street. After all, many hedge funds have contracted with freelance reporter-types for nearly two decades now. But speaking as one who spent seven years at a hedge fund and has built a network of relationships among my fellow former reporters, I can state with confidence that most hedge funds deploy such resources to make near-horizon calls on their short-selling bets. While certainly useful, such an approach may raise important compliance risks and sometimes fails to maximize the true value of journalistic-style investment research.
At Newton, we believe we stand out for our investment in a dedicated, in-house investigative team and overwhelmingly build projects to make long-lived forecasts that seek to answer the most difficult and challenging questions brought up by any given investment thesis. A veritable last-mile of research, investigative projects at Newton aim to bring additional clarity to certain existential questions, such as the true sustainable competitive advantage (or lack thereof) a company may enjoy, or the real risks and opportunities a new regulation may present to a company or industry.
“The idea is not to hear whether company A will acquire company B. Our goal is to be in the right place two years down the road, when the rest of the buyside is just awakening to the realities we discovered today”
Whereas many firms claim to possess deep, fundamental research, their processes can frequently and exclusively utilize expert networks. We believe these services can be helpful in an overall mosaic, but true, differentiated insights must be gained from a multi-dimensional research process, of which investigative research isa key part. In other words, it’s hard to have a different view when you are talking to the same experts as everyone else in the markets. That, in essence, is an echo chamber.
Another key differentiator in our approach is this: we very much like to use the investigative team as a second set of eyes and ears on a key investment question. Our investigative team is not compensated on stock performance; rather, our remit is to produce both quality and quantity of insightful analysis. If we end up undermining an investment thesis, so be it. Are we killjoys? Not exactly. But we wake up and go to sleep each day driven by the mission of opening our investment team’s eyes to previously murky truths – all, I should note, in a highly compliant way that is purpose-built to avoid material non-public information. The idea is not to hear how the quarter is going, or whether company A will acquire company B. Rather, our goal is to be in the right place one to two years down the road, when the rest of the buyside is just awakening to the realities we discovered today.
Such an approach is not only important to our analysts and portfolio managers; it is increasingly appreciated by the management teams with which we engage. With a true owner’s mindset, and a set of unique revelations that can often be helpful to the C-suite, we become helpful partners of the companies we invest in, and hopefully, beneficiaries when the apple of reality finally falls from the investment tree.
