How does Andrew Acheson invest in the Amundi US Eq Fundamental Growth fund?

The fund Amundi US Eq Fundamental Growth invests in large-cap US equities with a growth focus.

Hand in hand with its manager, Andrew Acheson, Managing Director, Director of Growth, US, and Portfolio Manager, we discover the philosophy and investment strategy of the fund, what is its current portfolio positioning and the aspects that he considers make this product different from the rest of its category, among other topics.

What characteristics do you look for in a company to identify it as a good investment opportunity in your Amundi US Eq Fundamental Growth fund?

There are 4 characteristics we look for in a company: a high level of profitability, a sustainable competitive advantage, a potential for secular growth and an attractive valuation. When evaluating profitability, we focus on the financial returns generated by recent capital allocation decisions, such as spending on artificial intelligence. We do this because our analysis suggests that companies that invest capital wisely generate superior stock price returns over time. A sustainable competitive advantage, such as brand or scalability, helps companies maintain high levels of profitability by inhibiting competition. Secular growth, such as the growth of cloud computing, provides a boost to revenues that is less vulnerable to economic slowdowns. Finally, strict valuation discipline helps limit downside risk when a company fails to meet financial expectations, which is inevitable since no company executes perfectly.

How do you determine if a company has potential for sustainable long-term growth?

We analyze two factors: the drivers of secular growth and the competitive position of the company in relation to the drivers of secular growth. For example, a driver of secular growth is the shift towards digital payments, away from cash and checks. This shift has occurred over the last decade or more, and accelerated during the pandemic in a "stay at home" environment. Our forecast is that this will continue in the future.

With this in mind, we have carried out fundamental analysis of digital payment companies to see which ones best fit the four characteristics we mentioned earlier. We only invest when we identify companies that are dominant in their industry, such as digital payments might be, and that do not face imminent risks of new competitors entering.

In the current economic context, which sectors of the growth universe do you consider more resilient or promising?

Our position in growth is very different from many of our competitors and the Russell 1000 Growth index. While our competitors have bet on the so-called 7 Magnificent, the stocks that have led the US markets in the last two years, we have found more attractive opportunities in other sectors. In the financial sector, for example, we have a property and casualty insurance company that is benefiting from the increase in insurance premiums and the fall in claim costs, as well as the decline in used car prices in the US. The result is that earnings per share are likely to double over a two-year period, according to our forecasts. This is a rate of earnings growth higher than virtually all of the 7 Magnificent stocks, with a lower valuation. In addition, the earnings are resilient, which means they are not vulnerable to the slowdown in the economy, Federal Reserve policy, geopolitical tensions, tariffs or other unpredictable macroeconomic events.

In addition to the financial sector, we also see opportunities in the healthcare sector. More specifically, we have shares in a leading company in assisted robotic surgery. The company has recently integrated AI into its product range, which we believe will accelerate the company's growth rate.

In a context of global volatility, how do you manage risk in your portfolio?

We manage risk in three ways:

• The first is sticking to our investment criteria. Highly profitable companies with sustainable competitive advantages that benefit from tailwinds of secular growth tend to perform better in periods of market stress. Investors tend to reward these types of companies during periods of uncertainty, while selling others that are more speculative and less financially stable.

• The second way to manage risk is to limit the size of positions. The U.S. equity markets have become highly concentrated in recent years. The three largest values of the Russell 1000 Growth Index, for example, represented almost 35% of the index at the end of October 2024. We believe that this level of concentration is inherently risky. If any of these 3 values did not achieve quarterly results, the entire Index could plummet. In comparison, we limit the size of positions to 6% for most values and 8% for the largest values of the Index.

• The last way we manage risk is with portfolio-level risk tools, such as Barra Analytics and Citi RAM. These tools allow us to assess and manage exposure to factors such as exposure to changes in interest rates at the portfolio level. The use of these tools helps us ensure that we do not take on unwanted risks (exposure to oil price crises, for example).

What sets you apart from other growth fund managers in terms of your approach or company selection methodology?

The main difference is that we focus on the profitability of recent capital expenditures. We use the term growth capital return, which is the capital that a company invests to grow its business rather than simply maintain it. The problem with traditional profitability metrics is that they include capital allocation decisions that were made years ago, often by previous management teams. Those capital allocation decisions are history and are not necessarily indicative of a company's capital discipline today. To thrive in the future, a company must invest in profitable growth rather than investing in growth for growth's sake. Our calculation of growth capital return allows us to measure the performance of the most recent capital allocation decisions to assess the capital discipline of the current management team. If the management team invests in profitable growth, like a new high-margin diabetes drug, future profits will be high. If, on the other hand, management sacrifices profitability for the sake of growth by overpaying for an acquisition, for example, then future profits may be diminished by the high costs associated with the acquisition. We consider growth capital return to be an early warning indicator regarding a company's long-term growth and profitability prospects.

What role do you think technologies such as artificial intelligence and data analysis will play in portfolio management in the coming years?

We already use data analytics to help us assess exposure to factors in our portfolio and the potential impact of macroeconomic changes such as a recession or an oil price crisis. In addition, we use generative AI to identify information relevant to our investment analysis process. We anticipate that generative AI will at some point learn from our investment style and generate investment ideas that fit our investment criteria. It may also be able to generate warning signals from public data of possible erosion in one or more of our investment criteria.

At this time, it is difficult to predict when this evolution will occur, but we believe that AI will increasingly be part of our investment process.

How could the results of the US elections affect the fund's profitability?

At the time of writing, candidate Trump is the presumed winner of the presidential election, and the Republicans have also taken majority control of the Senate. However, the outcome of the House of Representatives remains unknown, so it is not yet certain that the Republicans have the ability to enact major laws. A broad Republican victory could benefit the fund's relative benchmark profitability, as it has greater exposure to US income than the Russell 1000 Growth index. US companies will benefit from a lower corporate tax rate if the Republicans go ahead with their tax proposals. On the other hand, higher tariffs would also likely favor companies that derive most of their income from the US. We believe that US equity markets are not currently pricing in the potential impact of tariffs.

If the Democrats manage to maintain majority control of the House of Representatives, the result would be a divided Congress. In this scenario, we anticipate a legislative deadlock, which we believe would be positive for the fund, as it would prevent the enactment of extreme policies by either party.