An HL fund manager’s view – how to find reliable growth

We live in uncertain times. Both interest rates and inflation are far higher than seemed likely just a few years ago. Despite this, so far economies have held up better than many expected.

In my career, I’ve seen far more predicted recessions than actual ones. I’ve seen more than a few false dawns too.

What is clear though, recession or no recession, the UK economy has struggled to maintain any sort of momentum for many years now. We can argue all sorts of reasons for why. But when growth seems to be sluggish at the best of times, it’s probably unwise to expect a boom any time soon.

So, what should investors be looking for?

In times like these, dependable growth is more important than ever.

One way I try to find this is to look for businesses with recurring revenues. Those who have customers buying their products and services again and again typically have more reliable revenue streams than those who don’t.

Let’s dig deeper into how companies do this, and examples of who I think does this well.

This article isn’t personal advice. If you’re not sure what to do, ask for financial advice. All investments fall as well as rise in value, so you could get back less than you invest.

The information provided is the fund manager’s view and not individual stock recommendations.

Keep them coming back for more

Companies with recurring revenues have the luxury of knowing that much of the money they made last month, they’ll make again next month. This is because of the nature of their relationship with their clients.

When economies are uncertain, that’s a much better place to be. Businesses that have to go out and win new clients just to stand still are much more exposed to the state of the economy.

Take Relx plc for example. A huge swathe of their revenues come from supplying professional information and data, often via subscriptions to customers who stay with the group for decades.

Universities buy the academic journals, which Elsevier, (part of Relx) publishes year in, year out. Insurers buy the risk data that Relx gathers, because it allows them to price the cover they sell to customers. Legal firms subscribe to Relx’s vast LexisNexis database of case data and analysis.

Even in tough years, Relx has a strong core of recurring revenues to rely on, even if its events business is more cyclical.

Microsoft has built some extraordinary franchises over the years. Windows has dominated the PC operating system market for the entirety of my career and I don’t see that changing. Their Office suite of software is sold as a subscription that pretty much every significant business in the world has to buy monthly.

Their web services division, Azure, also seems to be building its own base of recurring revenues. This is by becoming an indispensable provider of core support services to their corporate clients.

At the heart of Microsoft’s success is their strategy of building software-based solutions where each additional sale generates a very high margin. That makes the business highly cash generative, giving them the power to keep investing into growth.

Intuit and Sage both produce software to help them automate billing and payroll. For the small business owner, these products can be godsends, easing their administrative burden.

Once a business’ records are loaded up onto an accounting system, switching away can be difficult and time-consuming which helps keep customers around. These relationships can often last as long as the business itself does.

Staying ahead of the competition

Of course, recurring revenues themselves aren’t enough to ensure success. Companies have to invest to keep their products and services best-in-class. Debts must be kept tightly controlled and management need to be alert for where the next competitive threat will come from.

But if they can do all these things while focusing on growing their customer base, while others are simply trying to reconnect with the customers they once had, they’re on the right track.

By building portfolios that feature recurring revenue generators, I believe that investors can give themselves a head start on navigating through uncertain times.