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Seven magnificent years have now passed since the launch of the WS Havelock Global Select Fund. In that time, investors in the fund received a compound average annual return of 8.4%. This means that we have “beaten” both the average fund in the Investment Association Global Sector, and the largest available passive “value” ETF for UK investors. The fund was also “up” in each full calendar year since inception.

Whoop!

However, and there is a however, it has not been sufficient to outperform the MSCI World index. Our “value” style of investing, our greater focus on mid and small-capitalisation companies, and our lower weight to the US markets have all created a headwind in this regard. We have never owned any of the “Magnificent Seven” companies in the fund, and they have been the driving force behind much of the MSCI World’s strong performance.

The chart below displays the total market capitalisation and earnings (or profits) of the Magnificent Seven as a percentage of the MSCI World. This shows how these seven companies now make up around 24% of the index by weight (blue), despite their share of company earnings only being around 15% (black).

The chart also shows the seven companies’ share of free cashflows, which is defined as the cash that a business generates less its capital expenditures. For those readers who are not accounting “wonks”, you can think of this as an alternative measure of the “spoils” that a company generates for its shareholders.

What we would really like to know is if these seven companies will “grow into” their valuations, as they have done in the past. They are mighty businesses, and their outsized weights in the index would be justified by them continuing to grow earnings and cashflows at a faster pace than other companies.

The catch is that as the seven get larger, further growth becomes harder to come by. Much hope is now placed on “Artificial Intelligence” as their next frontier for growth, and the investments that they are making in it are causing large increases in capital expenditure in what have historically been “capital light” businesses.

The chart above shows how these companies historically represented a much higher share of free cashflows, than earnings, in the index. As they have increased their capital expenditures in recent years this gap has narrowed. Put differently the cash they generate for shareholders appears to be increasing more slowly than their profits as calculated by the rules of accounting.

Opinions on if we are in the midst of an “AI bubble” are divided. Even if we take an AI productivity boom as certain, it remains unclear if the Magnificent Seven will be the main beneficiaries. I do not have the answers to these questions, but I do know that many investors are heavily exposed to them.

These companies feature heavily in many investors’ portfolios. For them to provide above average investment returns it needs the companies’ earnings to not just grow, but to grow at a rate above what is already “reflected in the price”. If growth undershoots these expectations, it will be likely that their share prices will fall. I cannot know if this will happen but see it as more likely than not.

I suspect that the extent to which these companies are owned by investors is at this stage more a product of a “safety in numbers” mentality, than strong convictions on their future growth rates. This is precisely the situation that investors in passive indices find themselves in. However, the lower your confidence that they can grow above the high rates already “priced in”, the less your portfolio should be exposed to them. This is where we come in!

In the lifetime of the fund, it has increasingly been seen as “different and useful”. Different, because it is investing in corners of the market that are not well represented in the large indices or many (most?) other global funds. Useful, because we have demonstrated an ability to generate “better than average” results.

Whilst I cannot make any promises about future performance, we are committed to owning a portfolio that is “different”. I believe that this means we offer something of a “hedge” to our clients’ portfolios if the Magnificent Seven fall short of current high expectations.

Before signing off it just remains for me to say thank you to our clients for the confidence that they have shown in us. In the years ahead we will continue to work hard to justify it. Although I can make no promises about performance, most of my net wealth is invested in the fund, and so we shall experience the highs and lows together.

Matthew Beddall

CEO & Fund Manager, Havelock London Ltd

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.

Academy of Funds analytics: Q3 2024 – Square Mile – Investment Consulting & Research > Insights & Resources > Articles

It has been five years since the Havelock Global Select fund launched in August 2018. I will stop short of saying what “uncertain times” they were, as to my reckoning the future always was, is currently, and will continue to be, largely unknowable. With that said, we really have seen a series of very extreme events. A pandemic that caused the world economy to shutdown, a major war in Europe, zero interest rates, negative oil prices, never before seen amounts of central bank money creation, and double-digit inflation (to name but a few).

Our philosophy as long-term investors is not to think we can anticipate these events, or even that we will have much ability to accurately forecast their consequences once they are known. Rather, we wish to own a portfolio of companies that we think will be robust to whatever the future may hold. Our particular focus on “value” means that we look for opportunities where we think a favourable purchase price will provide a “margin of safety” against the unforeseen.

Being a patient, long-term investor allows us to legitimately not get drawn into the vagaries of short-term performance.  It is from this vantage point that we move forward steadfast, with our investment philosophy unchanged. What has changed is that we have a stronger and more experienced team, overseeing a level of assets that means our business is profitable.

I am delighted to have welcomed Gregor into the investment team last month, whose existing experience as an analyst has meant that he “hit the ground running”. Together with Matt, who has been working for us for four years, and myself, this means we have three full time investors contributing to the fund. We are supported in this regard by Russ, who is our Head of Operations and Compliance. My co-Director Neil, together with Rushil, then form the client facing part of our team. Neil, and I, also jointly take care of all other matters to ensure that our company runs smoothly.

On behalf of both Neil, and I, I wish to thank our clients for the support they have given us. We are delighted with how the business has progressed since we founded it, and have high expectations for the future, as we see no shortage of interesting investment opportunities. Whilst we cannot make any promises about the performance that we will deliver, we believe that we are operating in an unloved corner of the market, which means that we are doing something genuinely different to most other global funds.

Three years have now passed since Neil and I launched the Havelock Global Select Fund. In this time the fund has returned 29.9% and is ranked in the top quartile of its sector. As a value-orientated global fund it has outperformed the MSCI World Value index* by 12.4% and outperformed the largest UK listed MSCI World Value ETF** by 21.4%. It has achieved this without investing in any of the large tech companies that have dominated the performance of many market indices and funds, and despite having never been fully invested in equity securities.

We founded Havelock in the belief that a long-term objective focus on a small number of well understood businesses was an increasingly rare investment approach and so offered an advantage. Despite this, even I could not have predicted seeing such folly as investors clamouring to buy shares in a bankrupt company or being induced to invest in a cinema chain with an offer of free popcorn!

Although the last three years has seen several “bumps in the road”, financial markets have been kind to investors. The rising prices of almost all assets have left many either consciously, or sub-consciously, believing that markets only ever go up, with the importance of exercising judgement looking like a quaint relic of the past. History suggests that such complacency is dangerous.

I remain resolute that patiently studying companies, trying to be objective and having a healthy disregard for share price movements increases the chances of superior investment results – even more so if we see an environment where markets are more discriminating. In the long run, better than average performance cannot come from average behaviour, and right now, our approach feels like a road less well travelled.

A further key aspect of our philosophy is the importance of having skin-in-the-game, and to this end most of my own wealth is invested in the fund on the same terms as every other client. If the current euphoric market environment subsides, I suspect that this will look increasingly appealing since all too often the interests of those entrusted with other people’s money are aligned with the gains but not the losses.

I believe that our approach has been validated by the strength of our track-record. The three-year anniversary serves as a widely recognised milestone in the life of a fund, and one that we are now only too happy to be judged against.

Alongside the third anniversary of the fund, I am celebrating my own 21st anniversary of working in the investment management industry. Despite this I did not anticipate just how big a challenge we had set ourselves and it is against this backdrop that I am deeply proud of what we have achieved.

We have been fortunate to have had many supporters along our way and I would like to finish by thanking our staff, clients, friends, and family for all that you have done. The experience of the last three years has taught me to value these relationships even more and I look forward to continuing to find ways to repay the displays of belief that you have shown us.

Matthew Beddall
CEO Havelock London

*The MSCI World Value index net total return expressed in British Pounds.
**The iShares MSCI World Value Factor ETF which tracks the “enhanced” MSCI World Value index.

INVESTMENT RISKS

The value of investments in LF Havelock Global Select (the fund) may fall as well as rise. Investors may not get back the amount they originally invested. Investments will also be affected by currency fluctuations if made from a currency other than the fund’s base currency. Past performance is not a reliable indicator of future results. Potential investors should not use this document as the basis of an investment decision. Decisions to invest in the fund should be informed only by the fund’s Key Investor Information Document (KIID) and prospectus. Potential investors should carefully consider the risks described in those documents and, if required, consult a financial adviser before deciding to invest. The fund can invest more than 35% of its value in securities issued or guaranteed by an EEA state listed in the prospectus.

IMPORTANT INFORMATION

This document has been issued by Havelock London Ltd, which is authorised and regulated by the Financial Conduct Authority (FCA reference number: 799920). It is confidential and must not be distributed or copied – either in whole or in part – without our consent. This material is provided for information only and is not intended to offer, solicit, recommend or advise on the purchase or sale of any investment. It should not be used to make investment decisions. This material is not intended for any person in the United States. None of Havelock London’s services or related funds is registered under the US Investment Company Act of 1940 or the US Securities Act of 1933. This material is not an offer to sell or solicitation of offers to buy securities or investment services to or from any US person. The data for the LF Havelock Global Select Fund was sourced from the fund accountants. The data used for the MSCI Global Value Index and iShares MSCI World Value ETF was sourced from Bloomberg. The data used to judge the funds ranking in the IA Flexible Investment Sector was sourced from FE Trustnet.