Renaissance - Redefining Research

Compound interest has been called the 8th wonder of the world, but its capacity goes beyond financial interest. Explore the power of compounding to benefit your legacy.

The incredible power of compounding

As Benjamin Franklin simply described it: “Money makes money. And the money that money makes, makes money.”

Many refer to compounding as a miracle or even magical way to reach their goals as it grows your investment base exponentially, since markets tend to follow an upward trend. Nevertheless, it does require patience and a long-term view. As recent years have shown us, the financial markets upward trend is not always smooth; markets go through cycles of ups and downs. Most investors tend to overlook compounding, as they focus on short-term goals and earning tangible returns faster. Burton Malkiel, American economist said: “The majority of investors fail to take full advantage of the incredible power of compounding – the multiplying power of growth times growth."

Source: Camignac

However, without help and financial advice, compounding can be discouraging. Indeed, negative compounded interest can lead to accrued losses: being patient does not mean sticking blindly to your losers, it requires a sound investment strategy, managing risk actively and knowing when to cut losses on a downward trend. The key is to maintain a diversified portfolio of long-term beliefs, whilst adjusting positions according to the market cycle.

The reality is, the effect of compounding, like a snowball, takes time to achieve its full potential. If practiced diligently, it will over time contribute to your financial freedom, which is the main goal for most people.

After the last couple of years, we feel the 8th wonder of the world deserves some renewed interest.

Indeed, Maxime Carmignac, Managing Director of Carmignac’s UK branch, recently testified: “Investors are reevaluating the way they invest, shifting towards strategies that are geared to the long- term and mindful of the impact on the planet. The pandemic has brought people to recenter towards living essentials – family, healthcare and environmental issues – thinking more about the future and their legacy, not only for their loved ones but also for future generations and the planet.”

Beyond financial interest, how can we help benefit your future?

At Carmignac, we strongly believe in the power of compounding, and the good news is that more than interest can be compounded: profitable companies choosing to reinvest their earnings sustainably for future growth can have an equally powerful long-term effect. We call them Compounders.

Compounders are high quality companies that exhibit the characteristics that are needed to successfully grow over the long-term: profitability, a long-term focus and sustainability.

Source: Camignac

Our FP Carmignac Global Equity Compounders Fund seeks to take advantage of these Compounders’ long-term effect to achieve steady capital growth for UK investors. We invest in companies which demonstrate elevated sustainable profitability and strong environmental, social and governance (ESG) credentials, while mitigating the effects of changing economic cycles. In following these long-term goals, our Fund Managers always keep an eye on the road. In addition to a rigorous stock selection, they optimise the portfolio by adjusting the sizing of their positions in cyclical and defensive stocks, increasing or decreasing the sensitivity depending on where we currently are in the cycle, and also on where we are heading next.

Source: Camignac

In conclusion, the Fund exerts a robust socially responsible investment approach and rigorous investment process to allow investors to access the power of compounding – even for a lifetime.

Carmignac is a family-owned, independent asset management firm established in 1989 and operating in the UK since 2012, with over €40 Billion in assets under management. The firm applies ESG principles to its own company’s operations and benchmarks its funds’ analysis through an ESG lens too. Carmignac was founded on three core principles that still stand true today: entrepreneurial spirit, human-driven insight and active commitment.

Main risks - FP Carmignac Global Equity Compounders:

Equity: The Fund may be affected by stock price variations, the scale of which is dependent on external factors, stock trading volumes or market capitalisation.

Currency: Currency risk is linked to exposure to a currency other than the Fund’s valuation currency, either through direct investment or the use of forward financial instruments.

Discretionary management: Anticipations of financial market changes made by the management Company have a direct effect on the Fund's performance, which depends on the stocks selected.

The Fund presents a risk of loss of capital.

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For further information on understanding why Reinvest is Best, please contact Edward Aram-Dixon at Edward.aramdixon@carmignac.com or your usual Carmignac representative.