Disruption, Change and the Future

Last week, we hosted an exclusive event at our office with Jolon Knight, Investment Specialist at Hyperion Asset Management. Jolon fielded a range of questions during the evening and discussed the fear dominating current market pricing, Hyperion’s long-term view of inflation and interest rates and key long-term structural themes and the companies they expect will be winners in the future.

Some of the key points highlighted by Jolon are outlined below.


Volatility in markets for the first half of 2022

  • This year has proven to be very difficult for equity markets and particularly brutal for growth investors and long duration businesses. The rapid increase in interest rates has depressed the valuation of long duration equities by a huge magnitude.
  • However, there is a significant dislocation between share prices and company’s underlying fundamentals – the largest dislocation they’ve seen in over 20 years. The companies they invest in have continued to report strong revenue and earnings growth throughout 2022 and while the equity sell off has been broad, the market is now beginning to gain comfort that not all growth companies are impacted equally. It is during periods of fear and volatility that a rare opportunity to invest in quality structural growth at attractive valuations can present.
  • The fund has taken this opportunity to deploy cash and continue to invest into companies they have high conviction in. At the end of 2021, the portfolio held around 8%-9% in cash. This has since reduced to around 2% today – a portfolio allocation they consider to be fully invested.


On the future of inflation, interest rates and long-term structural winners

  • Hyperion forecast that inflation will likely return to lower levels over the next 12 months.
  • Inflation initially increased due to a huge amount of stimulus added during the Covid 19 pandemic, a shift in consumption away from travel and services towards goods and the significant increase in the cost of energy, largely driven by the effect of the war in Ukraine. Hyperion see these three inflationary drivers reversing. The key driver of inflation – the cost of oil, gas and energy – is expected to stabilise, which will dampen CPI growth.
  • With inflation dictating interest rates and inflation expected to dissipate, they expect rate rises will begin to slow. A stabilising of interest rates will likely see equity markets also stabilise and revert.
  • Investors should expect the next 10 years to look very different to the past 10 years. The past decade has contained tailwinds driving strong equity performance, including strong population growth, a growing middle class, falling rates, ease of investment and business growth, increased globalisation and lower levels of corporate competition and disruption. These tailwinds may be reducing or approaching an end, as we enter into a period of lower growth, low inflation and low rates. Macro headwinds ahead include greater debt levels and an absence of large government spending programs common during the Covid crisis. Technology will also continue to play a deflationary role for economies.


How Hyperion select companies that will be long-term structural winners

  • Hyperion look to invest in modern, new-world businesses that they expect will be the long-term structural winners of the future. That is, companies with disruptive strategies, structural tailwinds, creative and innovative cultures, large addressable markets, are capital light and carry low levels of debt. Importantly, they need to hold a sustainable competitive advantage in their market.
  • Hyperion like to identify companies that fall within long-term structural themes, which will drive the next generation of revenue forward. Some of these themes are more obvious, like the shift from retail to e-commerce, the move to gig economy, the modernisation of banking and payments and the shift to AI software platforms. Other themes include the modernisation of healthcare, digital transformation of the workplace, innovation and robotics.
  • Given competition is so fierce within markets, the fund is not interested in investing in the second or third player in a market – they only consider who will dominate over the long-term. In markets where they can’t identify who that will be, they won’t invest.
  • Tesla is the fund’s largest allocation. Compared to other auto makers, Tesla is light years ahead, and they are disrupting two of the largest markets in the world – transport and energy. They are a highly profitable business with significant pricing power, having raised their prices three times this year.
  • In terms of ESG investing, it can be difficult to find sustainable companies from both an ESG and earnings perspective. However, the fund spends a lot of time on ESG and allocates a large part of their research process to it. In valuing businesses on a long-term basis, sustainability is crucial. Companies need to treat their employees, supply chain and the environment around them well, otherwise externalised costs will later become internalised. The impact of this will only be value and capital destructive over time.
  • In periods of rising inflation and interest rates, it is important to invest in companies that can pass cost increases on to customers and protect their margins. Many of the companies Hyperion invest in have significant pricing power due to the high utility of their value propositions. As economies slow, businesses more cyclical in nature are more likely to see consumers switch to lower cost products.
  • All the companies which Hyperion own within the fund have operational free cash flow, and only two companies don’t generate net profits. This is by design, as all operational free cash flow that is generated is reinvested back into the business for growth. This allows companies to win, not by growing alongside the economy, but reinvesting and stealing market share from competitors.


It was a thought-provoking and informative evening and provided plenty for investors to consider given the current market volatility. If you would like any further information on Hyperion, the fund or Pāua Wealth, please do get in touch with us.


Speaker Bio

Jolon Knight is an Investment Specialist at Hyperion. He is a CFA Charterholder and has over 20 years of experience in financial markets working in both domestic and international investment banks and brokerage firms as an analyst, institutional sales, and trader. Jolon is an integral member of the Hyperion investment team and works closely with Hyperion’s CIO Mark Arnold and Deputy CIO Jason Orthman to provide investment and portfolio insights to investors.


Important Information

The information above is for general information only. It does not take into account your investment needs or personal circumstances and should not be viewed as investment or financial advice. We recommend you seek independent financial advice before making any financial decisions. There are no warranties, expressed or implied, as to accuracy, completeness or results that may be obtained from any information provided herein. Any statements regarding market or other financial information are obtained from sources which we and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause.