Modern Value Investing
It was a clean sweep in 2024!
Havelock London, and the WS Havelock Global Select Fund, were the ‘Most Searched Fund Groups’ and ‘Most Viewed Active Funds’ in every Quarter of 2024.
We believe that we offer a ‘different and useful’ exposure from a market-cap, geographic and company specific perspective, and please don’t hesitate to get in touch if you require more information.
We were delighted to see Havelock London claim the Square Mile “most searched for Fund Group”, and the WS Havelock Global Select Fund claim top spot as the “most searched for active fund” for the third quarter in a row.
As a boutique asset manager, it’s very encouraging to see Fund Buyers looking beyond the larger and better known groups, and if you haven’t done so already, please get in touch.
With summer fast approaching, it rekindles memories of perusing the wine list on holiday and being confronted with many unfamiliar names, producers, and grape varieties, with the occasional familiar ‘brand’. The latter is often accompanied by a price-tag several multiples higher than the cost of buying the same bottle at home, and we are left with a quandary. Are we prepared to pay more for familiarity, and if so, how much? Or do we trust the experience and recommendation of an expert (in this case, a sommelier), in the hope of enjoying a superior wine, at a much more reasonable price?
We have written previously that, after a decade of delivering incredible returns, the US (which remains 68% of the MSCI World Index*), ‘growth’ as an investment style, and the 10 largest companies, all dominate many investment portfolios. However, the first 4 months of 2022 have shown that perhaps some of the price premium paid for familiarity by ‘price insensitive’ buyers (typically retail investors or passive index trackers), hasn’t resulted in the enjoyable experience they were hoping for. Now that the share prices of some of these companies have fallen, there may be an opportunity to buy them for less of a premium, but what about trying something new, which could also be high-quality, but less familiar?
Just as with labelling all wine simply ‘red’ or ‘white’, labelling over 40,000 listed securities as either ‘growth’ or ‘value’ is overly simplistic. As part of our ‘quality value’ approach to investing, we look to identify companies that have a long track-record of operating success, conservative balance sheets and that appear attractively priced. Every candidate investment is evaluated against a quality ‘scorecard’, which features 14 different factors, using a combined quantitative and qualitative approach. This is very different from many traditional deep-value funds that tend to use only simple valuation metrics to identify opportunities, and perhaps pay less attention to the quality of what they are buying.
As a boutique asset manager, our company may be less familiar to you than some of the industry heavyweights. It’s also likely that there are company names in our fund’s top 10 holdings which will be less familiar too. By thinking outside the (wine) box, you may just uncover a boutique, with a rigorous and disciplined investment processes, which invests in quality companies without necessarily paying a ‘familiarity premium’.
*Source: MSCI
As the pandemic continues into its third year, many of us had to put our overseas holiday plans on hold again in 2021. Whilst it is sensible to hold off checking whether our swimming costumes still fit until after a January detox, there is no better time to check our investment exposures.
‘Only when the tide goes out do you discover who’s been swimming naked.’
Warren Buffett
The above quote from Warren Buffett could apply to when the tidal wave of liquidity provided by the World’s Central Banks recedes, showing which investors were too reliant on it continuing. We believe that many investors could be found to have been consciously, or otherwise, overly exposed to three specific themes within equity markets; the US, the ‘growth’ style and a small number of large companies.
The US
Without doubt, the US is home to many of the highest quality, most innovative and world-leading companies. The US weighting within the MSCI World Index stands as an eye-watering 69% as of 30th November 2021, but only represents circa 25% of 2020 World GDP as the chart below illustrates.
Anecdotally, Japan peaked at 44% of the MSCI World Index in the 1990s and sits at a paltry 6.5% as of the end of October 2021.
Is it the case therefore, that investors in the MSCI World Index, or global funds with a keen eye on their benchmark, are placing disproportionally high bets on the US continuing to outperform all other markets?
The ‘growth’ style
The top 10 company weights by market capitalisation of the MSCI World Index are shown in the table below:
They are all US listed companies, and the top 8 would be categorised as ‘growth’ stocks in the truest sense. We believe it is overly simplistic to categorise over 40,000 listed securities as either ‘growth’ or ‘value’, and to then assign specific characteristics to each category, such as ‘high-quality growth’ companies and ‘low-quality, zombie value’ companies. It is beyond doubt that ‘growth’ has significantly’ outperformed ‘value’ over the last ‘tech-ade’, but as shown in previous articles, the bulk of this outperformance has come from earnings multiple expansion. After a decade of outperformance, is it the case that investors are over-exposed to ‘growth’ relative to ‘value’, at the exact moment when it appears most expensive?
The same companies
The top 10 constituents of the MSCI World Index (shown above) not only represent almost a fifth of this 1,555-stock index, they also represent circa 30% of the S&P 500 and frequently feature in top 10s of ‘growth’, ‘value’, global and regional funds alike. Increasingly, many of these companies have also been mainstays of active and passive funds branded ESG or Sustainable, as the table below illustrates:
Is it possible that investors’ portfolios aren’t as diversified as they may believe, as the same dominant, multi-trillion dollar mega-caps are appearing in an increasing number of products?
In summary, after the last ‘tech-ade’, would it be prudent for investors to consider if their portfolios are adequately diversified across regions, styles and companies, so that they won’t risk embarrassment should the tide go out?
We are delighted to announce that we have chosen to work with Link Asset Services as our Authorised Fund Manager, see press release below for more details.
New UK market entrant Havelock London has appointed Link Asset Services as the Authorised Fund Manager (AFM) for the launch of its inaugural fund later this year.
Havelock London intends to combine traditional investment management with modern data science and technology. It will focus on a small number of well-understood investments, and identify long-term value opportunities as a result of extensive data analysis and a disciplined investment selection process.
Link’s appointment as AFM to Havelock London follows a series of new wins for Link’s fund solutions team following its sale to Australia’s Link Group in November 2017 and cements its position as the UK’s leading independent Authorised Fund Manager and European fund Management Company.
Peter Hugh-Smith, Managing Director, fund solutions at Link Asset Services, said: “We are delighted to be appointed as AFM to Havelock London — an appointment that recognises our market leading expertise in supporting innovative market entrants. Havelock London brings an exciting investment approach to the market and we look forward to supporting, and assisting Havelock London in achieving their goals.”
Matthew Beddall, CEO and founder of Havelock London added:
“The explosion in the amount of data available to investment managers has the potential, when used properly, to revolutionise the way we analyse companies, invest money and report to customers. We are excited to be working with Link Asset Services as a key partner in our efforts to achieve this.”