Here's what Ozempic, ASML and India's fintech industry all have in common — and how one ETF takes advantage of all three

By Philip van Doorn

C Worldwide Thematic Specialist Morten Springborg explains how his firm has outperformed by taking a much longer-term approach than is usual for money managers

C Worldwide Thematic Specialist Morten Springborg believes stock-market analysts are likely to miss out on important investment themes -- including the growth potential for makers of innovative weight-loss medications -- because they don't look out far enough.

Or maybe the analysts cannot believe what their own models are telling them.

In an interview with MarketWatch, Springborg spoke against what he called a "conviction in markets around reversion to the mean" -- the idea that even the best-run companies will eventually lose their competitive advantages and "revert to something average."

In other words, analysts will discount their own analysis of a successful company's long-term growth potential "so they will not look ridiculous," Springborg said.

The assumption that a rapid growth pace is too good to last makes it possible to buy shares of "fantastic compounders" at low prices because growth potential "fades" in analysts' discounted cash models, he said

Springborg said analysts and money managers typically look less than five years out when developing sales and earnings-growth models. He said C Worldwide's advantage is an ability to predict "what will happen with your invested companies from five to 10 years."

C Worldwide is based in Copenhagen and manages about $18 billion, mainly in international strategies. It manages the Harbor International Compounders ETF OSEA, taking an active concentrated approach with 28 holdings.

The fund is designed to help U.S. investors diversify by providing an easy way to hold stocks of high-quality companies outside the U.S. that are expected to grow rapidly, according to themes identified by the C Worldwide team.

Springborg said he also believes that investors in the U.S. cannot really be diversified if they don't have any exposure overseas. The U.S. gross domestic product made up 25% of global GDP in 2022, according to the World Bank. But the U.S. equity market made up 42.5% of the global total as of June 30, according to this estimate from the Securities Industry and Financial Markets Association.

In addition to that "imbalance," there are "many sectors where you have a bigger opportunity set by going global," Springborg said, naming healthcare and automation as centers for innovation outside the U.S. He called Siemens AG (DE:SIEB) (DE:SIEB) -- among the fund's top 10 holdings -- "the largest industrial automation company in the world." He said the company would "benefit from manufacturing expansion in the West over the next decade," as manufacturers in the U.S. and Europe seek to become less reliant on China.

Top holdings of OSEA

Here are the largest 10 holdings of the Harbor International Compounders ETF. We have included two-year expected compound annual growth rates (CAGR) for sales and earnings per share for the companies, based on consensus estimates among analysts working for brokerage firms polled by FactSet. Also included are projected weighted CAGR for companies held by the iShares MSCI ACWI ex U.S. ETF ACWX, which tracks the MSCI AC ex U.S.A. Index XX:899901 (the fund's performance benchmark), and for the SPDR S&P 500 ETF Trust SPY.

   Company or ETF                   Ticker   Country        % of OSEA  Two-year estimated sales CAGR through 2025  Two-year estimated EPS CAGR through 2025 
   Novo Nordisk A/S Class B        DK:NOVO.B Denmark             9.1%                                       18.4%                                     19.8% 
   HDFC Bank Ltd. ADR                 HDB    India               5.8%                                       21.4%                                     17.3% 
   Ferguson PLC                      FERG    U.K.                5.4%                                        4.6%                                      7.3% 
   ASML Holding NV                  NL:ASML  Netherlands         5.3%                                       11.9%                                     20.5% 
   Linde PLC                          LIN    U.K.                4.7%                                        5.5%                                      9.6% 
   Nestlé S.A.                      CH:NESN  Switzerland         4.3%                                        4.1%                                      7.4% 
   AstraZeneca PLC                  UK:AZN   U.K.                4.1%                                        9.1%                                     12.9% 
   Sony Group Corp.                 JP:6758  Japan               3.8%                                        2.9%                                      9.0% 
   Siemens AG                       XE:SIE   Germany             3.7%                                        4.7%                                      8.8% 
   Hoya Corp.                       JP:7741  Japan               3.6%                                        7.5%                                     14.5% 
   iShares MSCI ACWI ex U.S. ETF     ACWX                                            4.9%                                      9.9% 
   SPDR S&P 500 ETF Trust             SPY                                            5.1%                                     11.8% 
                                                                                                                                            Source: FactSet 

The estimates for the companies on the table only go out two years because that is as far out as FactSet provides estimates of the indexes or the ETFs that track them. But the table shows that expectations for near-term growth are very high for Novo Nordisk A/S (DK:NOVO.B) (NVO), HDFC Bank Ltd. (HDB) and ASML Holding NV. (NL:ASML) (ASML).

Two years isn't a very long period for the C Worldwide team, which has a 10-year focus. But keep in mind that the tradition among analysts working for brokerage firms (known as the "sell side") has been to base their recommendations on one-year price targets and estimates.

Themes for long-term investing and compounding

Springborg said those three companies provided examples of themes that can drive high compounded growth over the next decade.

Novo Nordisk

Springborg said investors and analysts were underestimating the potential for the use of Novo Nordisk's Wegovy and Eli Lilly & Co.'s (LLY) competing Ozempic medication. The drugs are being used currently to treat obesity and Type 2 diabetes.

Springborg said he expects this type of medication -- currently expensive, taken in injectable form and not yet widely covered by U.S. health insurers -- will not only be made more readily available in pill form, but will be "expanded to a host of other conditions, which in totality will lower the total cost of healthcare dramatically globally" within a few years.

There will be far-ranging implications if this comes to fruition.

John Furner, the CEO of Walmart Inc.'s (WMT) U.S. operations, said that the two medications had already led to "slight pullback in overall basket" for its grocery customers, along with "slightly less calories."

Read more: Coca-Cola and PepsiCo's stocks fall after Walmart says weight-loss drugs have customers cutting back on calories

We are still at an early point in this trend, and the medications are expensive, aren't covered by Medicare and aren't widely covered by private health insurers. But as Josh Nathan-Kazis pointed out in Barron's, the new medicines are "cultural phenomena." Over time, costs will come down, administering the drugs will be easier and pressure for Medicare and insurers to cover their reduced costs will mount.

This fits into one of C Worldwide's long-term themes -- "lifestyle diseases." Springborg said he expected the medications to be used to treat kidney disease as well.

A new version of Wegovy to be brought to market in 2025, "will promise weight loss of around 25%" and have "patent protection into the early 2040s," he said

HDFC Bank

"I think everyone and his grandmother should have exposure to India," Springborg said. "This is tracking China with approximately a 25-year delay."

HDFC Bank Ltd. (HDB) is India's largest private bank. It has been C Worldwide's "top pick in the Indian economy since 2005," Springborg said, with a very long growth runway as consumers and businesses continue to shift away from inefficient state-run banks.

Springborg referred to the India Stack, a name for the digital-ID systems that are now in place to facilitate deposit and credit arrangements for businesses and consumers at no cost. "The acceleration of digital payments in India dwarfs anything else in the word," he said.

ASML, Hoya and Atlas Copco

Springborg described ASML as "the only company capable of producing the lithography machines for leading-edge semiconductor manufacturing," and an obvious long-term play on the expansion of chip manufacturing in Europe and the U.S.

Within the ASML lithography machines are mask blanks, upon which semiconductor designs are imprinted to prepare for fabrication. Hoya is the only company producing the mask blanks, according to Springborg, because "manufacturing on the atomic level" is so specialized.

Such manufacturing requires clean rooms because dust particles can be larger than the semiconductors' resistors. This is where Atlas Copco AB (SE:ATCO.B), another holding of the fund, fits in, providing vacuum technology.

The trend for expanding semiconductor manufacturing to reduce reliance on Taiwan "is a decade or longer theme" Springborg said, pointing to the tremendous investment required.

Strategy performance

(MORE TO FOLLOW) Dow Jones Newswires

10-17-23 0855ET

Copyright (c) 2023 Dow Jones & Company, Inc.