Boutique firm Havelock Asset Management seemed to spring from nowhere although quickly started getting noticed. The firm’s co-founder and chief executive Matthew Beddall gave his views on what 2022 might mean for both his firm and the market in general.
“Not unsurprisingly, as a value investor, our main focus for 2022 is on how extreme the valuations of “growth” stocks have become relative to “value”. The MSCI World Growth Index has a price-to-earnings (P/E) ratio of 37.9, which is 2.3-times that of the MSCI World Value Index with a P/E of 16.6. In the last two decades this ratio averaged around 1.4-times.
“The data suggests that the strong performance of growth stocks was driven far more by what people are prepared to pay, than by actual earnings growth. I believe that thinking of a company as either “value” or “growth” is an oversimplification, but we see lots of quality businesses that appear overlooked by many investors. The fact is that the more you pay for an investment, the lower its future returns, and so the more stretched the valuations of the popular “growth” companies become the stronger the argument for looking elsewhere.”
Regarding macro concerns, despite being fundamental bottom-up stock pickers, Mr Beddall did have some views on the way central bank intervention may play out this year.
He said: “The equity markets have been dominated by the actions of central banks, with euphoric retail speculation suggesting that many new entrants have a sense of invincibility – ‘Buy the f****** dip’! I do not know how this story will play out in 2022. Will we see another COVID wave? Will central banks taper or not? What I do know is that markets will be hanging off every word that the central bankers utter.
“When you look at the history of financial markets, euphoric bouts of retail speculation have never had happy endings. I have no idea what could cause this euphoria to end, but I would not be surprised if the markets deliver a bumpier ride in 2022 than they did in 2021. In other words, expect the unexpected.”
Now for the juiciest part! Which stocks have the firm got their eye on? With its flagship fund the LF Havelock Global Select Fund returning almost double the benchmark in 2021, many asset managers may be interested to see which companies the firm rates.
Mr Beddall added: "We continue to see many quality businesses available to buy for attractive prices, with many companies that we follow having seen price declines of more than 20 percent in the second half of the 2021. The current market environment feels very fickle, with a small piece of bad news often appearing to cause a disproportionate price fall.
“Three companies, in our top 10, that fit this picture are Fresenius SE, the German healthcare conglomerate, Henkel, the German consumer goods conglomerate and Schouw, the Danish industrial conglomerate. All three have well run and diversified businesses, all three are high quality and the prices of all of them, in our view, already contain a lot of pessimism about their future.”
As the old adage goes “buy the fear, sell the cheer”, although if Havelock can repeat their performance of last year there should be much to cheer about from investors holding this fund.
