Stonehage Fleming’s benchmark beating £1.8 billion Global Best Ideas fund is a high conviction product which due to the sheer quality of its constituents sees very little turnover in its 27 holdings.
Its manager and head of the firm’s equities division Gerrit Smit, today released some thoughts on this year as well predictions for 2022. As well as observations about the importance of the vaccine and the at one time debated ‘V-shape recovery’, Mr Smith noted the outstanding performance of the S&P 500, where the vast majority of his top holdings are based (and also significant parts of the index in terms of market cap).
“Many companies reported outstanding earnings, well in excess of expectations. The S&P 500 Earnings Index even exceeds the 2019 (pre-pandemic) level by a fifth. Despite the surprisingly high Equity performance base of 2020, the asset class continued to perform well in 2021,” Mr Smit observed.
Given that a large number of his top ten holdings, which make up over 50 percent of the portfolio are well known growth stocks, inflation must be a worry for Mr Smit as it impacts growth more than value names.
“Investors have grave uncertainties as to what degree the current high inflation levels are merely transitory or to what degree they will remain structurally at elevated levels. The outcome can be quite determinant of different asset class performances,” he said, possibly in a reference to asset classes such as commodities which tend to do well in an inflationary environment.
He also signalled something that many fund managers have been discussing for some time, this being the high multiples that certain names such as Microsoft are trading on. The portfolio as a whole trades on a price-to-earnings average multiple of 36-times, a good deal higher than the index.
“High valuations concern some investors. Most shareholders are impressed with their businesses’ operational performances currently, but wonder whether they can continue growing their earnings at an attractive level. Good insight into future structural growth themes is necessary to compensate for apparent high valuations,” stated Mr Smit.
After a brief mention of China’s recent woes, the note ends with a variation on a familiar theme, that equities continue to be the only game in town.
“The recovery from the pandemic has been quicker and sharper than most expectations. Equities have delivered well despite continuing negative economic effects from the pandemic. Going forward the focus will be more on sustainable above-average earnings growth opportunities, which necessitates good stock selection expertise. We expect future structural growth themes to become even more prominent in decision making”.
With an enviable track record of outperformance, it would be a brave man to beat against Mr Smith’s portfolio construction although his last point seems to suggest that the structural changes brought about by the pandemic are here to stay therefore the portfolio is well positioned to capture more of the upside.
