It has been a volatile start to the year thanks to higher than expected inflation and the prospect of multiple rate rises in 2022.

Growth stocks have been hardest hit, but so have the ‘quality growth’ names that we focus on. By this, we mean businesses that demonstrate ‘quality’ characteristics today, such as strong balance sheets, high margins and high cash flow returns on capital. Businesses that we invest in must also have demonstrable growth records that we believe will continue for many years to come. Such businesses are rare gems that investors typically must pay high multiples to own.

This month we had the rare opportunity of the market deciding almost in an instant that such quality growth businesses were unattractive in a rising rate environment and instead favouring low quality and low/no growth ‘value’ businesses such as oil & gas majors, tobacco and fixed-line telecoms. The chart, right, demonstrates how stark this divide has been, between Halma and Spirax-Sarco (quality businesses that we own) on the one hand and ‘value’ names such as BP, HSBC and British American Tobacco.

As one can see, if this chart is stretched out over any meaningful period, Halma and Spirax-Sarco are lightyears ahead thanks to their exceptional historic growth rates combined with steadily compounded cash flows. See chart, below, right.

We have been active adding to positions across the Fund, where we believe that shares have oversold and that valuations are now very attractive. In the natural chemicals sector we added to Croda, in industrials we increased our weight in Halma and Spirax-Sarco, within healthcare it was Genus and Dechra Pharmaceuticals and we even had a chance to build up our stake in JD Sports 20% below where they were trading in November.

Much of these additions were funded from existing cash within the Fund and we also exited our position in RWS to recycle the capital into the above positions.

We cannot say when the market will move on from its current trend for value stocks at the expense of all else, however we will continue to be disciplined with investing for our clients only in the highest quality businesses and focusing on the long-term. These markets have allowed us to further strengthen our portfolio and we are confident that patient investors will be rewarded.


The above article has been prepared for investment professionals. Any other readers should note this content does not constitute advice or a solicitation to buy, sell, or hold any investment. We strongly recommend speaking to an investment adviser before taking any action based on the information contained in this article.

Please also note the value of investments and the income you get from them may fall as well as rise, and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.

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