Lessons learned from 2017?
I think, in general, the last year has served as a reminder of how important the sell decision is. I think we need to get back to being good sellers of stocks. With hindsight, I think we fell in love with too many situations that had been very good for us, both stocks and one sector in particular, pharmaceuticals, which was great for us for about four years. A whole number of individual stocks were very good for us for a number of years and they all rolled over at the one time, I felt. We didn’t spot the sell signals as sharply as we used to, and as sharply as we might have, so we need to get back to that.
Key themes for European markets in 2018 and portfolio positioning implications?
I guess it is a theme I am hoping for, rather than knowing whether it is going to happen. I can’t believe we are going to go through 2018 without a challenge. 2017 has been unchallenged, whether you take the very rare falls in the S&P Index or the very rare falls in the Dow Jones Industrial Average Index. I mention them because they are the lead markets. Equity markets have had this calm lack of volatility, so much so that ETFs (passive funds), themselves having gone unchallenged for a long time, have flooded into low volatility areas. I expect challenges in 2018. I think market direction will be challenged and I think market leadership will be challenged. Growth stocks and low volatility stocks, they have had it one way, with very few interruptions, over the last decade. Mid caps and small caps have had it unchallenged for the last decade. I think the challenges are coming.
Key risks and opportunities for 2018?
Over the last 30 years I have always sought to blend sector themes, where we identify them, with stock specifics. As we stand today, we are relying less on sector themes. I don’t have any big convictions at the sector level. In fact, we have very recently taken profit on what was a very contrarian sector call – my purchase of banks over a year ago. I have locked in some profit there. I am not wildly enthusiastic about big sector themes. The opportunities I see are very much stock specific. A good example of that is, regardless of the fact that it sits in the consumer staples sector (staples to me is a sector that doesn’t offer great value), Carlsberg, one of our biggest positions. It is a beer company. It sits in consumer staples. So our investment rationale is nothing to do with the sector, and everything to do with the stock. That’s the opportunity I see in 2018 – especially if I am right that markets are going to be challenged, leadership is going to be challenged. I think you are going to get good stock dispersion.
These are the manager's views at the time of writing. References made to sectors or asset classes do not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase them.
Volatility: The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility (low vol). It is used as a measure of the riskiness of an investment.
Exchange traded funds (ETFs): ETFs are a type of group investment, or ‘fund’, that tracks an index (such as an index of equities, bonds or commodities). ETFs are traded on a stock exchange, just like a stock, and experience price changes as the underlying assets move up and down in price. ETFs are often invested according to the proportion of the underlying index for each individual company. So if Company A makes up 2% of an index, an ETF will often invest around 2% of its assets in that stock. Larger ‘lower volatility’ companies, those capable of delivering reliable and steady income or growth, have performed well in recent years, and this has meant that ETFs have invested significantly in this area of the market.
Growth stock: Growth companies are those where earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore there is an expectation that their share prices will increase in value.
Mid-cap / small cap: The total market value of a company’s issued shares is known as its market capitalisation. It is calculated by multiplying the number of shares in issue by the current price of the shares. Market capitalisation is often abbreviated to ‘market cap’. Mid-cap and small-cap are not specifically defined categories, but are generally considered to describe a particular part of a market, either in terms of size, or their scale relative to the rest of the market.
Sector: A sector is a category of companies containing firms that operate in a similar area of the market, such as basic materials, consumer staples, or telecommunications.
Stock specifics: The individual characteristics of a company, such as earnings, products, sales, management team or market position. These are some of the characteristics that investors look at when assessing the value of any particular company.
Contrarian sector call: Where an investor decides to buy stocks in a sector that is generally out of favour. The objective is to buy stocks when they are relatively cheap, and benefit from any future increase in value.
Stock dispersion: Variations in pricing between different companies. If stock dispersion is high, it means that stocks are being priced on their individual qualities, as perceived by investors. This leads to a gap between the best and worst stocks, or those with particular characteristics, such as ‘growth’. The greater the dispersion, the more opportunity for good stock pickers to benefit from choosing the right companies to hold. If stock dispersion is low, it means that most companies are seeing their prices change in the same way, usually due to sentiment.