The funds underperformed the benchmark for the 4 weeks of February that in turn impacted the figures of the shorter term periods ending in February. This was primarily driven by the largest swing towards value style stocks in over 20 years. As stated last month these big initial swings are a typical reaction to a change in the macro-economic outlook, and is not cause for us to react.
The ‘value’ style category fell -2.8% CYTD with ‘growth’ styles falling -12.5%, according to JP Morgan. The lesser known ‘quality’ style category where Insync resides is neither value nor growth, although we tend to hold stocks the market categorises as Growth. 2022 marked the 5th worst start for S&P 500 since 1927. Inflation fears have the market pricing in 5-6 interest rate rises this year, precipitating the heavy swing initially, with Ukraine’s invasion by Russia creating price spikes in both energy and commodity prices as well. Markets hate uncertainty.
It’s no surprise then that material and energy stocks were the best performers in February (Insync has zero exposure to these sectors due to their low ROICs through the cycle). It’s highly probable that the negative macro factors will slow economic growth. This in turn, will then favour a move back to profitable growth companies (rather than growth stocks overall). These are the type of stocks we hold. Thus, we liken the current portfolio to a coiled spring. When investors soon refocus on company fundamentals, the share price performance of quality businesses then rebound quickly and sharply. This usually ‘surprises’ commentators and investors alike. Earnings growth across the portfolio continues to compound strongly despite macro shifts, with valuations becoming more attractive.
Why we are confident that sustainable growth companies are poised to perform strongly
Almost every big slowdown in the past has been preceded by a rise in energy prices and Federal Reserve rate hikes.
Going forward then, markets will likely start shifting focus to the prospect of weaker economic growth and refocus on investing in businesses with durable, sustainable earnings growth and profitability.
This economic backdrop propels precisely the kind of stocks we hold. Overlaid with identified megatrends, it enables these companies to thrive irrespective of higher rates or slower growth.
Meantime, in the near term expect ongoing volatility in markets and most equity funds as well including our own.
Indicators suggest that the market may be surprised on the upside
We have often discussed the difficulty and danger of market timing. The probability of getting it right more often than wrong is extremely low. Right now, investor sentiment is very bearish with the AAII investor sentiment survey at its lowest point since April 2020. Fund managers overall reflect this view, holding the highest level of cash since the covid lows and at the bottom of the GFC.
This is why we remain fully invested when markets swing wildly as one would expect in these moments of macro-economic uncertainty. For good reason we didn’t react in previous occasions such as now, and we won’t in future ones either.
This is also why we remain fully invested unlike many of our peers. Should timing be desired in the hope of avoiding the dips and riding the peaks, then we believe this is a decision for the investor and their adviser.
We continue with our usual rifle like approach of investing in the most profitable companies with a long runway of growth fuelled by megatrends. We refrain from trying to time these shifts as this lowers risks and, longer term, aids returns.
Megatrend in Focus: Enterprise Digitisation is accelerating
Whilst we focused on this exciting megatrend and Accenture last year, things are moving even faster than forecast and so a revisit is timely.
Accenture is a prime holding for this megatrend and thus remains in the Insync portfolio. In their recent earnings call, they announced a very strong demand environment. This has induced double-digit growth in all parts of their business and also across all their markets, industries and services.
Many of their clients are embarking upon bold transformation programs, often spanning multiple parts of their enterprise in an accelerated time frame. Macro-economics have little impact on these companies spend on digitisation. These clients recognize the need to transform almost all of their businesses, meshing technology, data and AI and with new ways of working and delivering their product or service to market.
Current market gyrations have not changed the trajectory of our identified megatrends (including this one) in the Insync portfolio. Our companies such as Accenture continue to grow profitably at multiples many times that of GDP.
Insync’s intense focus on the fundamentals, investing in businesses like Accenture that are compounding their earnings at high rates, gives us confidence that the portfolio is well positioned to deliver strong returns as volatility in markets subside.
Stocks held by Insync possess:
Far lower than market debt to equity,
Excellent interest coverage,
4x the ROIC of the market average,
Not dependent on new capital for growth,
Margin and/or pricing power
Go to our April 2021 edition of our monthly update for a closer look at Accenture and why the Digitisation megatrend is one not to be missed.
Comments