Insync funds dipped slightly over the month following a strong monthly performance for most of the past year. Importantly, they continue to perform against their formal investment objectives; the more appropriate rolling 5-year average. Last month’s dip emanated from the portfolio’s deliberate divergence from certain market segments that performed well, such as value stocks, China and the energy and utility sectors. These segments historically deliver lower returns on capital with higher levels of price volatility. Given our focus on investing in companies producing sustainable high returns that benefit from enduring megatrends, these sectors do not meet our criteria.
The Fed's recent shift to a "higher for longer" rate outlook has increased market volatility. We hold the strong view that investing on the basis of forecasting economic cycles, or the next interest rate move, has a poor record of success. In the past year economic narratives have changed frequently from a hard economic landing to a no landing and now, a soft landing. In today’s volatile economic environment sustained earnings growth is crucial for delivering investment returns. This is especially so given high stock valuations. Our focus on highly profitable companies delivering sustainable earnings growth driven by enduring megatrends, provide a greater level of certainty in an uncertain and constantly changing economic environment.
US Housing Megatrend - shaped by Demographic Shifts
Understanding changes occurring within different demographic cohorts globally, and by region, leads to many of the megatrends within the Insync portfolio. The powerful influence of Gen-Zers on the pet humanisation megatrend is a prime example; one we have covered previously. Being presently in the midst of one of the greatest global demographic shifts, let’s now examine the millennials influence on another Insync megatrend – U.S. housing.
Millennials (early 80s to mid-90s) account for around 23% of the U.S. population, making them the largest adult generation. They are now entering their prime home buying years which is driving demand for starter homes. The median age of first-time homebuyers is 35, up from 29 in 1981.
Traditional wisdom is that the real estate market requires 5 - 6 months of housing supply to be balanced. As of March 2024, the National Association of Realtors ‘existing-home-sales’ data shows that America is short around 3.2 million homes for a balanced market, underscoring the severity of the housing shortage. |
 The supply challenge is an investment opportunity. Rising materials costs, supply chain issues, and labour shortages stemming from COVID-19 negatively impacted housing inventory. However, the problem existed long before this. The U.S. has consistently failed to keep up with housing demand of its increasing population and is now particularly acute with millennials entering their prime home buying age.
We recently invested in a highly profitable company, with very low levels of debt, that’s well positioned to help close the housing supply demand gap and grow earnings on a sustainable basis. |
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