After a jittery April when investors pushed back hopes for falling interest rates, global equities recovered in May and ended the month up 10.8% in EUR for the year so far[1]. Market sentiment – and appetite for AI-related stocks in particular – remains strong, despite inflation proving stubborn and company valuations generally priced above long-term averages[2].
SKAGEN Global has delivered a solid start to the year, gaining 5.4% in EUR but lagging the MSCI All Country World index largely due to companies not in the portfolio, rather than those it owns. “The world’s six largest companies – Microsoft, Apple, Nvidia, Amazon, Meta and Alphabet – have grown over a third bigger on average in 2024,” explains Lead Portfolio Manager, Knut Gezelius. “This has made it hard for active funds to keep pace with US and global benchmarks so far this year.”
After scaling back its out-sized position in Microsoft on valuation grounds in the first quarter, only Alphabet of the six names is in Global’s top ten. The Google parent company is up around 25% year-to-date and only bettered by Brown & Brown in the fund’s contributors in 2024 with the US insurance broker reporting strong growth, helped by rising policy prices.
The SKAGEN Global portfolio generally continues to perform well with the latest earnings reports mostly in-line with the fund managers’ expectations. Unfortunately, the market has taken a different view in some instances and the few holdings that have undershot consensus forecasts have been marked down.
Its solidity means that there have been no significant losses across the fund’s 30 holdings and the portfolio managers have taken advantage of share price weakness to increase several positions. The biggest drags on performance in 2024 have been Accenture with the IT consultant overshadowed by rivals with closer ties to AI, logistics company DSV which has inevitably been slowed by falling economic activity, and Nike which has struggled to recover from the pandemic but whose brand remains very strong.
Bubble territory
Despite SKAGEN Global’s short-term relative performance suffering, it will benefit longer-term from avoiding the tech bubble that commentators and market participants increasingly believe to be forming. In the US, the seven largest stocks now represent almost a third of the S&P 500’s total capitalisation (Nvidia alone is bigger than the energy sector) and over half (51%) of respondents cited them as the most overcrowded trade in Bank of America’s latest monthly global fund manager survey.
Gezelius agrees: “Following the Magnificent Seven, we’ve seen similar acronyms emerge for stocks in Japan, Europe and even Pakistan. This is probably a sign that this area of the market is getting over-hyped and the risks of losing money are now much bigger than from missing out.”
Another parallel with the dot com bubble at the turn of the century is that the companies driving the AI revolution today won’t all be longer-term winners. “In the same way that those selling picks and shovels made more money than the diggers during the gold rush, our holding ASML provides the machines that produce the chips needed to make AI work and will triumph whoever wins the race,” believes Gezelius. “We also own companies like RELX which has a generative legal AI platform, and Intuitive, a leader in surgical robotics, which could be among the main beneficiaries as AI develops and usage expands.”
Attractive entry point
SKAGEN Global’s portfolio is attractively valued with estimated upside of 47% over a 2–3 year investment horizon, up from 39% at the end of the first quarter. There is particular potential in the fund’s two largest holdings, Canadian Pacific and DSV, as Gezelius explains: “Freight companies tend to be fairly cyclical and have faced sluggish market dynamics of late, but we expect this part of the portfolio to outperform when global economic growth begins to accelerate. Our aim is to always have an all-weather portfolio that is built for a range of scenarios, which means that some holdings will do better at different stages of the economic cycle and in different market conditions.”
Similar caution is applied to protecting the portfolio on the downside, particularly in an environment like we have at present with elevated valuations and an uncertain economic outlook. “The best protection comes from selecting strong companies in terms of business models, competitive advantages and especially balance sheets,” explains Gezelius. “Our unconstrained mandate also means that we can avoid countries where we consider the geopolitical risks are likely to go unrewarded. We haven’t owned anything in Russia or Turkey, for example, for a number of years.”
All info as at 31/05/2024
[1] MSCI ACWI in EUR as at 31/05/2024.
[2] Source: JP Morgan, MSCI World forward P/E 18.3x at 31/05/2024 vs. average 16.3x since 1990.