We’re all going on a Cornish holiday

Outlook

Each spring, during the school Easter holiday, my family decamps to the north Cornwall coast for a week. Those familiar with the area will know that the weather can be ‘changeable’ (to be generous) at the best of times. However, over the years we’ve found the weather has very little impact on our perception of the holiday because we’ve come to expect this volatility. Additionally, bad weather typically blows through quickly, so the key is adaptability and being prepared for when the storm clouds make way for sunnier weather. There are distinct parallels to be drawn between Cornish weather and current stock market conditions.

Investors and businesses need to adapt to new conditions. This is not an impossible task. Neither corporations nor financial markets are static. Well-managed companies should have good muscle memory built in from a past decade that included trade wars (in Trump’s first term), a global pandemic, intense supply chain challenges and extreme levels of inflation. The headline-generating machine that is the current US administration is providing a challenging investment environment, particularly for those imbued with the prevailing ‘buy the dip’ and US exceptionalism mentality of the recent past. But investors can become more used to the maelstrom of news.

Another feature of our Cornish holidays is kite flying. Have you ever noticed how a kite appears to move a lot when it’s on a short line but is relatively calm once on a longer line, even under the same conditions?[1] The same applies to equity investing. We can become obsessed with short-term ‘squiggles’ in share prices that are irrelevant once you zoom out for a longer-term perspective. Such a situation may exist today in the life sciences and biotech sectors, where sentiment is currently buffeted by the current US administration’s ‘DOGE’ efforts. We expect this industry will continue to grow robustly over the long-term and have been increasing the portfolio’s weighting to strong business models (recurring revenues and high margins) supplying into it, which have de-rated amidst near-term uncertainty.

Spring and Easter is a time of renewal. There are signs of an awakening in previously unloved areas such as European and Chinese equities[2], while others such as small caps remain in hibernation (for now). We reiterate our view that investors should be reassessing their equity allocations and adapting to conditions. Like preparing for a Cornish holiday, portfolios should be ready for a wide range of outcomes, whereas analysis we look at suggests the majority remain heavily skewed to outcomes that look like the Mediterranean beach holiday of the past two years (back-to-back 20% return years for the S&P 500 are not normal).

We continue to feel well placed to deliver attractive compound returns over the coming years, though we doubt that this will happen in a straight line!

Strategy Update

Activity

We bought no new holdings and exited one existing holding in March.

We sold CDW after performing a drawdown review. Our initial assessment of long-term earnings growth potential now looks over-optimistic. While an IT hardware cycle could support improved revenue growth, CDW also faces headwinds relating to parts of its business selling into government agencies like other players in the IT ecosystem. We have higher conviction ideas elsewhere in the portfolio.

We trimmed our positions in some continental European businesses whose share prices performed relatively well (Aalberts, Bank of Ireland, Danieli) and recycled the capital into building our positions in new holdings with exposure to depressed life sciences (Avantor, Certara) and specialty chemicals (Azelis) markets. We also topped up our holding in US aggregates and infrastructure business Arcosa following the negative share price reaction to its Q4 earnings.We take comfort from buying at the same time as a material personal investment by the CEO, whom we regard highly.

Performance

The fund returned -5.1% in March. In comparison, the MSCI ACWI index returned -6.3% and the MSCI ACWI Value -3.4% (all in GBP).[3]

John Wiley & Sons (+9% in GBP) was the largest positive contributor. At its Q3 results, the management team upgraded the margin guidance for next year and have indicated that they expect ongoing improvements beyond this. Prudential (+15%) released a positive set of 2024 results, which beat profit and dividend expectations. Crucially, capital generation was above expectations, paving the way for further shareholder returns at the half-year results, and a clear path to the 2027 free surplus generation (akin to free cash flow) has been spelt out. The shares have also benefited from improved sentiment towards China. Having no exposure to NVIDIA, Apple, and Meta Platforms contributed +0.7% to relative performance.

Clarkson (-23%) was the largest negative contributor. Its shares fell sharply on the day of results after it offered conservative guidance due to the uncertain macro environment. Our recent meeting with management was reassuring about the sustainability of broking earnings despite their elevated position versus recent history. Certara (-19%) has now retraced all of January’s move and is back near its lows. Sentiment towards life sciences, biotech and derivative businesses such as Certara (which provides software and services to improve drug development efficiency) has soured. Concerns centre around the impact of grant reductions and lay-offs at the FDA and NIH in the US. We believe the current challenges will be temporary and that the current administration is unlikely to want to impair a world-leading and strategically important US industry. A recent meeting with Certara’s management reinforced our conviction in the company-specific growth opportunity.

 

[1] When a kite is flown on a short line, the arc it traces through the wind window (the area where the kite can effectively generate power) is smaller. This means the kite covers less distance in the same amount of time, making its movements appear faster.

[2] We have direct exposure to the former but not the latter in this portfolio.

[3] Fund: B share class (GBP), midday to midday pricing. Benchmark: close-of-business to close-of-business pricing. All performance data is from Bloomberg Finance LP.

 

 

KEY RISKS

The value of investments and any income generated may go down as well as up in response to general market conditions and the performance of the assets held, and is not guaranteed. An investor may not get back the amount originally invested.

Past performance is not a reliable guide to future results.

Changes in exchange rates may have an adverse effect on the value, price or income of investments.

There is no guarantee that the Fund will meet its stated objectives.

The movements of exchange rates may lead to further changes in the value of investments and the income from them.

There is a risk that any company providing services such as safe keeping of assets or acting as counterparty to derivatives may become insolvent, which may cause losses to the Fund.

 

For professional investors only.

Capital at risk.

 

For more information about the fund and how the fund is positioned, please visit our fund centre below: