7 June 2023 EFFICIENT PRIVATE CLIENTS: OFFSHORE FEEDBACK - By efpc
A favourite pastime of ours is wandering the weekends away at our local market, where we venture from one booth to the next hoping to find a hidden treasure or a bargain that simply cannot be ignored. As portfolio managers, we are in the privileged position to do the same during our weekdays, except that we spend considerably more time at each company’s booth speaking to the right parties and weighing up all the intricacies before making a decision.
Portfolio managers have the responsibility to identify markets and companies that will provide the highest risk-adjusted returns over time for our clients. For that reason, we tirelessly look for bargains and prefer the largest possible marketplace to do so. The largest possible marketplace is the global marketplace where the United States (US) accounts for more than 60% of all assets. It is, therefore, self-explanatory that we will allocate the majority of our blood, sweat, and tears to the US when allocating capital.
Unfortunately, US markets are currently in a precarious position. The S&P 500, a broad US market index, is already up by double digits since the start of 2023, with 80% of those returns driven by just seven stocks, almost all of them technology companies. The problem with this picture is that these seven stocks now account for close to 30% of the S&P 500 index, which is enough to keep any benchmark-cognisant investor awake at night. Furthermore, most tech stocks are extremely expensive, largely as a result of the whole artificial intelligence (AI) hype. To emphasise this point, the Nasdaq, a tech-heavy index, is trading at a 48% premium to the S&P 500. For context, the Nasdaq has traded at an average premium of less than 20% during the past decade, even with the additional support of lower interest rates and quantitative easing, which enabled investors to take on additional risk.
More recently, however, interest rates have climbed as a result of high inflation, which is having an effect on global growth. This state of affairs has been amplified in the US, where economic growth has contracted for three consecutive quarters. The latest strong jobs number in the US further solidified the argument for possible further interest rate hikes in the near future. This, together with a broader economic slowdown, will eventually find its way into corporate earnings, even into that of technology firms with their fortress balance sheets. Additionally, with the whole AI hype trade fizzling out, investors will soon be confronted with the reality that not all AI companies are created equal and that there will be both winners and even more losers, similar to the dot-com era. Investors, therefore, need to remind themselves that “trees do not grow to the sky” and neither do stock prices.
In light of the above, the Efficient Private Clients’ investment team has recently been actively raising cash in our portfolios. We have trimmed and sold a few of our recent winners, which provided us with substantial dry powder that we can deploy into high-quality companies over the coming months. We utilised this strategy during 2022 and it enabled us to outperform our peers when markets recovered. Furthermore, we will look to use the volatility in markets to add towards defensive names, such as Procter and Gamble and a few others, at the right prices.
Amid market volatility, Efficient Private Clients will continue to manage your scarce resources with care and providence. We will also continue to actively manage these resources through skilled analysis and timely adjustments. We thank you for affording us the opportunity to do just that!
The Efficient Private Clients Investment Team