What history says about growth and why Halma gets it right

Given the accelerating pace of investment in AI-related infrastructure this month we reflect on the relationship between corporate asset growth and long-term stock outperformance. Investors may be surprised to learn that academic research finds a strong negative relationship between a company's total asset growth and its subsequent stock returns. Below we discuss the important implications of this evidence as well as key portfolio holding Halma, providing a case study of how to manage supernormal growth whilst trying to maintain high returns on capital.

Beware the fastest growers

In 2007, three finance professors – Michael Cooper, Huseyin Gulen, and Michael Schill –published "Asset Growth and the Cross-Section of Stock Returns". They studied 35 years of US stock market data up to 2023, and asked: Does the rate at which a company grows its total assets predict its stock performance?

The answer was yes – and in precisely the opposite direction to what intuition might suggest.

Surprisingly, companies in the top decile of asset growth, delivered stock returns of 5% per annum in the years following their expansion. Conversely, companies in the bottom decile, growing slowly or not growing at all, delivered returns of 18% per annum.

The gap, after adjusting for standard risk factors, remained at around 8% per annum for large-cap stocks and 20% for smaller ones.

The results were consistent through time. Over a five-year period, the cumulative spread between slow and fast growers exceeded 50% on a value-weighted basis. The result held in 91% of individual calendar years for equal-weighted portfolios, and 71% for value-weighted ones.

The reason, the authors concluded, is largely behavioural. Companies expand aggressively on high confidence and recent performance, for example, investing in acquisitions and capacity builds. Investors, swept along by that momentum, bid shares to prices that anticipate a continuation of good times when, in reality, new assets rarely earn what was hoped, and therefore earnings often disappoint high expectations.

The practical implication for investors is sobering: be wary of companies that are growing their asset base rapidly, regardless of how compelling the story sounds at the time. The market has a long history of overpaying for growth – and of taking years to notice the mistake.

A different kind of growth story

It is against this backdrop that we want to discuss key portfolio holding, Halma.

Halma owns over 50 specialised manufacturers operating in global niches within the safety, environmental and healthcare sectors. The group has compounded EPS at 15% annually for over four decades with low variability due to three key elements:

1. Exposure to structurally growing markets combined with a relentless focus on only differentiated products;

2. A repeatable low-risk M&A strategy guided by strict returns on capital hurdles; and

3. A sustainable approach to financing growth, with minimal debt and no reliance on new equity.

One of Halma’s many businesses is Avo Photonics, which contributes to the great majority of the group’s photonics revenues. Avo has built a relationship of more than a decade with a large hyperscale technology customer, co-designing and manufacturing optical switches critical to data centre infrastructure. In the financial year ended March 2026, Halma’s photonics business grew 52%, contributing half of the group’s exceptional 16% organic revenue growth. The photonics business now accounts for 20% of group sales, up from 15% last year and 12% the year before.

As discussed earlier, academic research points to a clear risk here: sudden windfalls can distort how management behaves. Companies that suddenly gain a lot of cash and momentum tend to overinvest – bigger and more expensive acquisitions, often in less familiar areas, expanded capacity ahead of actual demand, and growing organisational complexity that can quietly erode the culture that made them successful in the first place.

It is worth asking, therefore, what Halma's management team has chosen to do with this extraordinary tailwind. The answer, drawn from the company's comments at its June 2026 results presentation, is instructive.

Strengthening the core

CEO Marc Ronchetti made it clear that Halma is not treating the photonics windfall as a signal to accelerate expansion within this fast-growing but narrow market. Instead, the cash flows are being used to strengthen the whole group.

Management has been candid about the limits of this growth. They've been explicit that photonics' growth profile "differs from that of the wider group in pace, scale, and longevity," and may cause group-level growth to become "more front-end loaded".¹ In other words, the team is distinguishing clearly between a structural tailwind and a cyclical one and is managing it accordingly – telling investors plainly that photonics growth is not the new normal for the group, while reaffirming that the long-term compounding ambition is unchanged.

This shows up in how the cash is actually being spent: the premium cash flows from photonics are being directed primarily into R&D and acquisitions in sectors that are currently out of the spotlight, where valuations remain reasonable.

The Fairlight View

Halma has been appropriately cautious about guiding for 30% photonics growth in the coming year, well below the 52% delivered in 2026, and consciously based on near-term order visibility rather than extrapolation of hyperscaler capex announcements. On the central question of whether management is behaving in the way that the evidence suggests preserves long-run value, resisting the empire-building temptation, maintaining capital discipline, and refusing to mistake a cyclical tailwind for a structural shift in the group's ambitions, our judgement is that they are passing the test, and the company remains a key holding in the Fund.

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^{1. Date of reporting: 11th June 2026
Source: https://www.halma.com/investors/results-reports-presentations/2026}