Evenlode Global Opportunities significantly outperformed its benchmark index over the month of July, as the momentum trade began to unwind and market volatility again rose. The momentum factor had led equity markets over the previous three months, with excitement around artificial intelligence hitting fever pitch and memory shortages leading to rapid increase in semiconductor share prices. We have repeatedly stated that we do not believe that these valuations are justified by either current fundamentals or prospective returns on investments. This is not to denigrate the technology, but instead a realistic view on the speed of user adoption, required cost to operate the systems, and the dramatic shifts in wider business models that would be needed to generate attractive returns on investments. The dot.com bubble is frequently cited as comparison with today’s market. When this unwound in the early 2000s, it did not come suddenly. The greatest single session drawdown on the Nasdaq was 9.7% on the 14th of April 2000, having peaked 35 days prior. The total 78% drawdown would not be complete until October 2002 – a full 30 months later. While we acknowledge the differences between today and this previous market correction, an acquaintance with history often helps when considering positioning in response to market corrections.
Our actions over the past few months have been consistent with the beliefs mentioned above. We dramatically reduced our position in Alphabet in June and then exited the position following the results in July. While the company has many positive attributes, the ever-increasing investment in AI capital has sent the quarterly free cash flow negative for the first time since listing. This compares unfavourably with the fund’s forward free cash flow yield of 5.4%. At the same time, we have been increasing our exposure to the AI underdogs, those companies often (and incorrectly, in our view) assumed to face existential disruption threats. At the same time, we have also broadened our exposure into asset-light, high-quality businesses in new segments, such as Energy (GTT) and Aerospace (Honeywell Aerospace), to both increase diversification and take advantage of the market’s myopic valuation focus.
Today, we write at the peak of the Q2 results season. The company readouts have once more been steady; again averaging high single digit organic revenue growth and maintaining operating margins. This consistency in delivering the fundamentals has remained our guiding star over the past few difficult months, supported by the team’s excellent research into the companies’ competitive advantages, threats and ever-changing market dynamics. We have high conviction that the portfolio businesses will continue to grow profitability and invest for future success. We greatly appreciate the faith that has been shown by those investors that have stuck with us through this difficult period and look forward to repaying your confidence in the months ahead.
Evenlode Global Opportunities significantly outperformed its benchmark index over the month of July, as the momentum trade began to unwind and market volatility again rose. The momentum factor had led equity markets over the previous three months, with excitement around artificial intelligence hitting fever pitch and memory shortages leading to rapid increase in semiconductor share prices. We have repeatedly stated that we do not believe that these valuations are justified by either current fundamentals or prospective returns on investments. This is not to denigrate the technology, but instead a realistic view on the speed of user adoption, required cost to operate the systems, and the dramatic shifts in wider business models that would be needed to generate attractive returns on investments. The dot.com bubble is frequently cited as comparison with today’s market. When this unwound in the early 2000s, it did not come suddenly. The greatest single session drawdown on the Nasdaq was 9.7% on the 14th of April 2000, having peaked 35 days prior. The total 78% drawdown would not be complete until October 2002 – a full 30 months later. While we acknowledge the differences between today and this previous market correction, an acquaintance with history often helps when considering positioning in response to market corrections.
Our actions over the past few months have been consistent with the beliefs mentioned above. We dramatically reduced our position in Alphabet in June and then exited the position following the results in July. While the company has many positive attributes, the ever-increasing investment in AI capital has sent the quarterly free cash flow negative for the first time since listing. This compares unfavourably with the fund’s forward free cash flow yield of 5.4%. At the same time, we have been increasing our exposure to the AI underdogs, those companies often (and incorrectly, in our view) assumed to face existential disruption threats. At the same time, we have also broadened our exposure into asset-light, high-quality businesses in new segments, such as Energy (GTT) and Aerospace (Honeywell Aerospace), to both increase diversification and take advantage of the market’s myopic valuation focus.
Today, we write at the peak of the Q2 results season. The company readouts have once more been steady; again averaging high single digit organic revenue growth and maintaining operating margins. This consistency in delivering the fundamentals has remained our guiding star over the past few difficult months, supported by the team’s excellent research into the companies’ competitive advantages, threats and ever-changing market dynamics. We have high conviction that the portfolio businesses will continue to grow profitability and invest for future success. We greatly appreciate the faith that has been shown by those investors that have stuck with us through this difficult period and look forward to repaying your confidence in the months ahead.