Interview with Petra Hoefer

Petra is a passionate fundamental investor, with over 20 years of track record as fund manager of global growth funds. She started her international career as a scientist with a PhD in biochemistry from the University of Vienna in 1997, and thereafter worked internationally in various functions at the German chemical company BASF and the US consumer giant Procter & Gamble. Intrigued by her personal investments in the stock market, she switched gears and managed sectoral, thematic, and regional funds for Deka Investment (Frankfurt) and Lombard Odier (Geneva) since early 2000. For over 10 years Petra has been leading the mutual fund unit of the sustainable investment boutique IFP Investment Management SA (Luxembourg), focusing on the conception and management of award-winning thematic funds classified as SFDR Art 9.

What specific aspects of your personal investments in the stock market motivated you to switch from a scientific career to portfolio management? 

I was intrigued by the immediate feedback of an investment decision by the market through the changes in the share price, and the possibility to apply my scientific knowledge to positive and measurable returns. I also liked to have the bird's eye view as an investor, instead of working on tiny details of the technologies and products.

How did your background in biochemistry contribute to your transition into the world of finance and investment management? 

As a scientist I was used to systematic analysis to solve complex questions, and those analytical skills were very helpful for analyzing investments and markets. Initially I started to manage biotech funds, where I had a competitive edge understanding the science behind the products and technologies. This means I could better anticipate the risks and probabilities for the success of a company and the impact on the share price. I quickly discovered that my scientific skills, my curiosity, and my drive to understand the big picture also came in handy for other market sectors.

Can you share with us your track record? What were the toughest and the best times in its history and why? 

In the last decades I have built a strong track record with our funds winning several awards, e.g., the 3 and 10y absolute Return award by Lipper Europe. I am proud of the funds' positive Sharpe Ratio while being less volatile than the markets. It is tough when the funds correct due to external macro shocks like Covid or the Ukraine war, but usually those are the best time to pick up high-quality stocks at attractive prices.

What is your investment strategy? And has your investment strategy significantly changed over the years? 

I am a disciplined bottom-up investor, focusing on well-managed growth companies with a competitive edge. The backbone of my investment process is still the same as it was since I started, but I finetuned and complemented it over the years.

How concentrated is your portfolio? How many companies are currently in your portfolio? 

My portfolios are all high-conviction portfolios, with 25-40 holdings.

How diversified is your portfolio? And can you describe how you diversify your portfolio? 

Diversification is important, I don't want to have lump risks in the portfolios. I have strict criteria in place for max investments so that my portfolios are all well-diversified across sectors, subthemes, and countries.

How long do you usually hold a stock for? And what stock do you hold the longest? 

I hold stocks as long as the investment case is intact and as long as they perform. Some stocks I hold since inception of the portfolios, like UnitedHealth Group, a well-managed US HC insurer.

What is your approach to managing cash? Do you always have some cash available in your portfolio to use right away for a "quick action"? 

I usually try to be fully invested but keep a war chest to exploit buying opportunities and to accommodate asset swings.

How do you deal with losses? Do you have any maximum drawdown that you can handle?

For me, discipline is very important to the performance of a fund. I have a strict stop loss rule in place, which is based on absolute loss since purchase and performance against the markets.

With your extensive experience as a fund manager, what factors do you consider when evaluating potential investment opportunities? 

High quality of an investment is key for me, and for this I need to fully understand what I am investing in. Each potential investment is fundamentally analyzed in a systematic and structured way, to ensure a minimum quality of the investments across the portfolio. I aim to identify the driver/s of the share price to ensure a positive share price momentum of single investments. The management team for me is key for the success of each company, so I regularly have meetings with the companies I consider for investment.

When investing in a company what are you mainly looking for? 

Sustainable growth, competitive edge and management quality is what I am looking for, with a long-term perspective.

Could you share some insights into the sectoral, thematic, and regional funds you have managed throughout your career? 

I started managing sectoral funds in healthcare and moved on to regional funds across all sectors. This segment has now become very competitive, with a wide range of ETFs available at low costs. For over a decade I have added value for clients through a focus on thematic, absolute return funds. My deep technological and market knowledge enables me to cherry-pick for investors the most attractive investments in long term megatrends. Investors rightly expect good returns, and at the same time they can make an impact, be it caring for an aging society, providing environmental solutions, or addressing poverty.

What led you to focus on sustainable investment and specifically on managing thematic funds classified as SFDR Art 9? 

The thematic SFDR Art 9 funds I manage allocate capital to innovative companies that address the challenges our planet faces, like global warming or access to healthcare. Sustainable investment for me is to fully understand an investment with all its risks and opportunities, beyond the financial aspects, to deliver a superior risk-adjusted return for the client while making a measurable positive impact for a better world.

Can you explain the concept behind SFDR Art 9 and its significance in the world of sustainable investing? 

SFDR is the Sustainable Finance Disclosure Regulation of the European Union, requiring financial institutions to report on if and how they incorporate ESG aspects. It is an important step against greenwashing and to help capital allocation into green companies. Standardizing the definition of sustainable investing and pushing corporations to report on ESG factors provides higher transparency for investors. SFDR Art 9 funds are classified as "dark-green", not only integrating ESG factors in the investment decision but also with a sustainable investment objective, e.g. carbon emission reduction.

Given the current market conditions, what are the key trends or opportunities that you believe investors should be aware of? 

Our rapidly changing world is shaped by technological advancements that provide a plethora of investment opportunities, be it in the field of AI, medicine, or resource scarcity. It is key to identify the winners of these development, and to avoid the stranded or flawed business models, which often needs expert knowledge and experience.

How do you approach risk management in your investment strategies, particularly in the context of thematic funds? 

We have a proven risk budgeting approach in place, which helps us to mitigate risks. Integrating both financial as well as ESG aspects into investment decisions is an important aspect of risk management within investment themes.

In the current market environment, where do you see the most promising investment opportunities? Which sectors or industries do you believe have strong growth potential? 

I see good growth potential in healthcare. The sector has been neglected by generalists lately as they flocked into energy and IT.

What specific factors or trends make these investment opportunities attractive to you? Are there any particular catalysts or events that you believe will drive their success? 

Many healthcare companies are well financed and have stable growth characteristics with attractive pipelines. The sector is supported by long-term demographic developments and is innovative enough to tackle the cost pressure. Valuation is generally attractive, with some biotechs even trading below cash.

Can you provide some examples of recent investment opportunities you have identified and taken advantage of? What was the rationale behind those decisions? 

One of our recent investments was in the Danish company Novo Nordisk, a leader in diabetes drugs. Diabetes is a challenge for our society, as eating habits change around the globe. I invest in companies that help patients to control or even better avoid the disease. Recently the drug class GLP-1, a hormone involved in regulating appetite, proved to be not only helpful for keeping blood sugar levels in check, but also helping patients to battle associated effects like obesity and cardiovascular events. I early realized the potential of this drug class and invested in the Danish company Novo Nordisk with its best-in-class GLP-1 drug in 2021. This was at a time when the drug's potential was not fully understood by most investors and valuation appeared on surface already full, but in our proprietary analysis the company shined not only for our financials indicators like strong future growth, but also stood out in terms of ESG performance and positive impact on the UN's sustainable development goals (SDGs). Since the initial investment, the stock price has more than doubled. Another investment opportunity I took advantage of was in the field of renewable energy, notably in the solar space, with the US company First Solar, a leading solar module manufacturer. We see it as a is a strong beneficiary of the US Inflation Reduction Act, which should stimulate local clean energy production in the US. The company came out strongly in our internal analysis for both financial and non-financial indicators, as supply chain issues started to ease and the company timely expanded capacity. We invested in the stock last year, and it is up over 150% in the meantime.

How do you manage the balance between seeking out new investment opportunities and maintaining a well-diversified portfolio?

It is crucial for performance to have a strong watch list of potential new investment ideas, and to constantly challenge yourself if the current portfolio composition is the best, both in terms of upside and diversification.

What was your biggest investment mistake? And what did you learn from it? 

Wrong investment decisions happen, the most important is to correct them and to learn from them. In my view the biggest mistake is to be arrogant against the market and to hold on to underperforming investments for too long. I learned very quickly that a strict investment approach and a stop loss generally protects the portfolio from big investment mistakes.

What would you consider to be a golden rule or timeless principle in investing that every investor should be aware of and follow?

 Actually I have three key principles I think that are essential:

  1. Invest only in what you understand and what makes sense for you.

  2. Avoiding the "bombs" is more important than finding the "highflyer".

  3. Don't fall in love with (underperforming) stocks.