30th January 2026
We always describe ourselves as valuation focused investors: not value, not quality, not growth. We are style agnostic, but at different points in time will have meaningful style tilts within our portfolios depending on prevailing valuations.
We look for portfolios of assets that can deliver inflation-beating long-term returns and are valued attractively relative to their own history and/or the asset class they are investing in, relative to their future growth prospects, and relative to other asset classes we can invest in.
In recent years within equity markets, we have had a meaningful value-style tilt. This was because value-style portfolios had become exceptionally cheap in absolute terms, and versus their own history in the aftermath of Covid, and often this cheapness was also baking in depressed earnings outlooks for the foreseeable future. Trough multiples on trough earnings equals exciting opportunity. At the same time, quality and growth style portfolios had rerated aggressively over a 10+ year period (really since the depths of the GFC) and were very expensively valued versus longer term history whilst earnings outlooks were also very rosy. Peak multiples on possible peak earnings equals elevated risk.
Over the past 5 years this has worked well, with value outperforming quality and growth in most regional equity markets (with the glaring exception of the US thanks to the Magnificent 7). Recently, this outperformance has been driven more by re-rating and a growing momentum trade within the value style, and less by fundamentals (dividends, earnings growth, business transformations). At the same time, quality and growth style portfolios have suffered significant de-ratings since the valuation peak in 2021.
As a result, it shouldn’t be a surprise that we have been actively revisiting quality focused funds to dive into the opportunity set in more detail and understand whether we should be making changes to our equity exposure.
Whilst valuation is our guiding star, qualitative assessment is also a vital part of our process. One of the key areas of interrogation has been around whether the de-rating in quality style portfolios is justified by deteriorating fundamentals or whether it has been driven by non-fundamental reasons like a shift in sentiment. For example, changing consumer habits (K-shaped economies, cost of living pressures, diminishing brand loyalties) and the impact of AI have upended many business models of traditional quality businesses that have historically been viewed as long term defensive compounders – these are fundamental changes that justify lower valuations.
Another key consideration is that while there has been significant multiple compression from the post-covid valuation peaks, apply a longer-term lens and many quality and growth style portfolios remain at the upper end of the historical valuation range (stripping out the post-covid extremes).
Where we have been convinced of the opportunity being compelling enough to start deploying capital is within the UK market. We have surveyed the market extensively, speaking to both well-known and lesser-known proponents of quality investing. Ultimately, we have decided to introduce a new position in the open-ended Castlebay UK Equity. The underlying portfolio has been performing well operationally with earnings growth compounding at 10% a year for the past 5 years, and the de-rating has pushed the free cash flow yield on the portfolio to a record high. We believe we are accessing a talented fund management team, motivated to perform, at an attractive fee point.
We are not going in two-footed, but rather gently adjusting the exposure as valuations evolve. Often, we are early when making new investments. Valuation, after all, is a poor short term timing tool and when sentiment is poor valuations can overshoot to the downside. However, over a reasonable investment horizon (5+ years) the opportunity set in UK quality is strong enough for us to start building exposure.
Dan Cartridge – Fund Manager
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For professional advisers only. This article is issued by Hawksmoor Fund Managers which is a trading name of Hawksmoor Investment Management (“Hawksmoor”). Hawksmoor is authorised and regulated by the Financial Conduct Authority. Hawksmoor’s registered office is 2nd Floor Stratus House, Emperor Way, Exeter Business Park, Exeter, Devon EX1 3QS. Company Number: 6307442. This document does not constitute an offer or invitation to any person, nor should its content be interpreted as investment or tax advice for which you should consult your financial adviser and/or accountant. The information and opinions it contains have been compiled or arrived at from sources believed to be reliable at the time and are given in good faith, but no representation is made as to their accuracy, completeness or correctness. Any opinion expressed in this document, whether in general or both on the performance of individual securities and in a wider economic context, represents the views of Hawksmoor at the time of preparation and may be subject to change. Past performance is not a guide to future performance. The value of an investment and any income from it can fall as well as rise as a result of market and currency fluctuations. You may not get back the amount you originally invested. FPC26634.
