The stock market struck a familiarly strong tone in October, with information technology companies once more to the fore. The fund posted positive returns, but behind the market. There is growing disquiet amongst market commentators about the overall price level, particularly of companies and sectors related to the artificial intelligence roll out. We share these concerns about valuation at the aggregate level. However, through the application of our valuation discipline and resultant portfolio changes over time, we do not worry about the valuation of the fund’s portfolio. This discipline often means investing in parts of the market that are out of fashion, and in a time when returns have been heavily focused around a few core themes means more patience is being needed than usual. Our process does not simply look for the cheapest stocks in the market though; an investee company must also exhibit attractive economics and prospects for growth.
During the third quarter reporting season we have seen some of the companies for whom growth has been more challenging recently start to see signs of a recovery. IT consultancy and outsourcer Capgemini for example had seen sales growth stall, but is now expected to turn in +2% organic revenue growth* for the current year. Not spectacular, but in the face of an industrial slowdown driven by macroeconomic uncertainty at some of its customers, it is a sign that the negative trends will not persist forever. At the other end of the growth spectrum Microsoft is somewhat at the epicentre of the AI boom, and we are watching its capital expenditure plans and valuation closely. Whilst its share price represents an acceptable valuation on our view, we have kept the position size lower than we might otherwise have at a better price.
With organic revenue growth for the portfolio at +5% on a weighted average basis in the last quarter, we see the portfolio making the sort of steady progress we expect. That we can hold the portfolio at an attractive valuation gives us conviction that patience will ultimately be rewarded.
*Organic revenue growth excludes impact of mergers/ acquisitions and foreign exchange
The stock market struck a familiarly strong tone in October, with information technology companies once more to the fore. The fund posted positive returns, but behind the market. There is growing disquiet amongst market commentators about the overall price level, particularly of companies and sectors related to the artificial intelligence roll out. We share these concerns about valuation at the aggregate level. However, through the application of our valuation discipline and resultant portfolio changes over time, we do not worry about the valuation of the fund’s portfolio. This discipline often means investing in parts of the market that are out of fashion, and in a time when returns have been heavily focused around a few core themes means more patience is being needed than usual. Our process does not simply look for the cheapest stocks in the market though; an investee company must also exhibit attractive economics and prospects for growth.
During the third quarter reporting season we have seen some of the companies for whom growth has been more challenging recently start to see signs of a recovery. IT consultancy and outsourcer Capgemini for example had seen sales growth stall, but is now expected to turn in +2% organic revenue growth* for the current year. Not spectacular, but in the face of an industrial slowdown driven by macroeconomic uncertainty at some of its customers, it is a sign that the negative trends will not persist forever. At the other end of the growth spectrum Microsoft is somewhat at the epicentre of the AI boom, and we are watching its capital expenditure plans and valuation closely. Whilst its share price represents an acceptable valuation on our view, we have kept the position size lower than we might otherwise have at a better price.
With organic revenue growth for the portfolio at +5% on a weighted average basis in the last quarter, we see the portfolio making the sort of steady progress we expect. That we can hold the portfolio at an attractive valuation gives us conviction that patience will ultimately be rewarded.
*Organic revenue growth excludes impact of mergers/ acquisitions and foreign exchange