The power of compounding – the duration effect

31 May 2021

A company which possesses the ‘duration effect’ is able to build value over time through compounding its free cashflows.

A portfolio of companies possessing this duration effect creates multiple sources of alpha generation, enabling a fund manager to look through short-term market noise to focus on a company’s long-term value creation potential.

It also enables a fund manager to capture upside as well as protect on the downside.

The duration effect is one of the market inefficiencies targeted by the Loomis Sayles Global Equity Fund.

Investment Specialist Peter McPhee discussed this recently with Co-Portfolio Manager Eileen Riley.

Peter McPheePeter McPhee:

What is the ‘duration effect’, and why does it matter?





Eileen RileyEileen Riley:

The duration effect is one of the market inefficiencies that we target in our investment approach. Specifically, it is a company’s ability to add value over time through the compounding of its free cashflow. We select high quality companies with competitive advantages we believe can be sustained over multiple years, which gives them the ability to compound their free cashflow over time, and these are the companies which offer the greatest duration effect. This means that financial advisers and investors are therefore buying a portfolio of companies selected on the basis of what we believe should be able to perform well over the long term.

In the full interview [11min], Boston-based Eileen discusses how Loomis Sayles is able to take advantage of the duration effect to add value for investors, and provides examples of companies which Loomis Sayles believes possess the duration effect.

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