16th December 2022
It is that time of the year again. Our inboxes are inundated with market outlooks, 2022-year reviews, and the most used phrase in December (outside of season’s greetings) of ‘cautious optimism’. We don’t believe that anyone can predict the future with any degree of accuracy and profit handsomely from those predictions on a consistent basis (ie vs getting lucky once or twice) – if they could then we simply wouldn’t hear about it. They would have made an absolute fortune and be sunning themselves on a beach, sipping pina coladas (other tropical beverages are available), and gorging on a nice seafood platter feeling ‘intensely relaxed’ or maybe ‘excitedly cautious’ about the next novel they’re going to write. They would not be sending around their cautiously optimistic or constructive (urgh!) musings.
Reading the words always reminds me of the following quote from William A Ward:
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails”
But what about the cautious optimist? They are on the beach, complaining it’s probably not windy enough to sail. Wanting to still get out in the water they opt to drift on an inflatable dinghy. From there, they spot sailors on the horizon having a brilliant time and wish that they’d had enough conviction to go sailing. The dinghy then capsizes.
We tend to read very few outlooks as a result. We stick to our process, how we look at and analyse funds doesn’t change regardless of the time of year – as you would expect. As our job as fund managers is to ensure that the portfolios are well positioned for the next 3-5 years. Where are the outlooks for the year ahead on the 20th February, or the 3rd June? Are they suddenly more relevant in December? No.
Our views are always rooted in the attractiveness of the valuations of funds that we are researching across our vast investible universe. Right now, valuations are some of the most attractive we have ever seen. This is reflected in the cash levels across all three being at all-time lows (for Vanbrugh this goes back nearly 14 years’ worth of data). Across a number of asset classes valuation dispersion is huge, which is presenting great opportunities for active managers to build cheap portfolios but without compromising on quality or future growth.
For instance, we have recently introduced a new position in Federated Hermes Asia ex Japan across all three funds. The portfolio trades on just 8x P/E ratio which is the cheapest since the fund launched in 2013. The 4.5% dividend yield is the highest in the fund’s history, with the yield typically ranging from 2.5%-3%. Despite lowly valuations, the quality of the portfolio is close to the highest in the fund’s history relative to its Asian equity benchmark, with superior return on equity, return on invested capital, lower levels of gearing (low balance sheet risk) and high earnings growth stability (not an overly cyclical portfolio). Fund manager Jonathan Pines has never been as excited about prospects in the funds history and reflects that by having the majority of his personal wealth invested in the fund.
Our portfolios are as full of managers excited about their fund prospects as we can ever remember, from Asian equities to Japanese equities, UK small and mid-cap equities, sterling corporate bonds, cross-over space fixed income, high quality RMBS, select alternatives like battery storage, last mile logistics and steeply discounted private equity.
As a result, forget cautious optimism – we are outright excited for the return prospects of our funds over the next 3-5 years.
Dan Cartridge – Assistant Fund Manager
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