October has marked a further milestone for global equities with another all-time high for the MSCI All Country World Index. The yardstick of 50 international stock markets continues to make light of the pandemic's after-effects and is on track for its best calendar year for over a decade. For SKAGEN Global – around 9% ahead of the benchmark year-to-date and breaking its own NAV records – 2021 has been even more positive for clients.
Greed may be the dominant sentiment driving stock markets once more but fear is never far away. According to the Bank of America Global Fund Manager Survey in October, inflation remains the biggest tail risk cited by investors but while the majority has fallen, most still expect it to be transitory (see figure 1). China entered the list in second place last month as a result of the ongoing uncertainty over property giant Evergrande and risk of further state regulation.
Supply chain strains
Although they don't feature among fund managers' biggest worries, supply chain constraints have been a major headache for companies. As the world has awoken from lockdowns, staff and input shortages mean that many businesses have struggled to meet the surge in demand for their products.
Nike (3.1% of NAV) is an example in Global's portfolio, with the sportswear giant experiencing shutdowns to its Vietnamese manufacturing facilities. The country has seen an exodus of workers following the easing of strict lock-down restrictions which has hampered production for many companies.
Nike's share price is up 13% year-to-date and has historically been resilient to similar setbacks. Despite experiencing several large drawdowns over the past 35 years – some as much as 60% – it has always recovered quickly and a $10k investment in 1986 would now be worth over $10m. SKAGEN Global's Lead Portfolio Manager, Knut Gezelius, explains: "Nike is a timely reminder that Just Do Nothing is often the most profitable option for investors. We believe the company remains well-placed to benefit from long-term growth trends in fitness and well-being around the world."
Another portfolio example is ASML (2.4% of NAV) which produces the space-age lithography machines used to make semiconductors. The global shortage of microchips has caused high-profile problems for car manufactures among others but also highlighted the Dutch company's quasi-monopolistic market position. Its shares are up over 70% year-to-date but the portfolio managers still see significant upside given its products are central to driving the digital economy of the future.
Both companies illustrate the type of investments SKAGEN Global looks for, as Gezelius outlines: "We like businesses capable of delivering multi-year returns under a range of economic scenarios due to competitive advantage and balance sheet strength. They also illustrate our attraction to companies we believe are substantially undervalued when viewed through this long-term prism, rather than superficially cheap on an earnings or book value basis."
Continuing to get rich slow
As well as beating the index year-to-date, Global is ahead of benchmark over one, three and five-year periods, in line with the longer-term investment horizon recommended for clients*. Reflecting investment decision-making based on fundamental analysis rather than macroeconomic predictions, most of this outperformance is attributable to good stock selection, rather than sector, country or currency factors. This year it has been led by three of the fund's largest holdings, Alphabet / Google (5.4% of NAV), DSV (3.4% of NAV) and Nasdaq (3.8% of NAV).
The portfolio currently consists of 32 holdings and while no new companies entered the fund during the first half of the year, JP Morgan, UPM and Munich Re were added during the third quarter. More information about these companies is available in the fund's third quarter report.
The portfolio is spread across eight sectors with currently no holdings in energy, utilities or real estate. The largest exposures are IT (30%) and Financial Services (22%) where the fund is overweight compared to the index, although these labels mask a variety of companies with a wide range of underlying profit drivers.
The portfolio is also well-diversified geographically, as Gezelius explains: "We focus less on where a company is listed and more on its underlying revenue streams. In this sense the fund is very international; we estimate around half of revenues come from the US with the remainder roughly split equally between Europe (EMEA) and the rest of the world." A good example is China – the worst performing major stock market of 2021 – where Global has no direct investments but attractive exposure to Chinese consumers via holdings in French luxury goods companies LVMH and Hermès.
The portfolio is estimated to contain 36% share price upside over a 2-year investment horizon, higher than the fund's historic average. It is also well-positioned on key valuation ratios versus the index with return on equity and operating margin more than double those of the benchmark, while leverage is almost half.
By most metrics SKAGEN Global is well-placed for a wide spectrum of possible scenarios. With change being the only constant for investors – whether caused by economic uncertainty or market volatility – we are confident the fund will continue to deliver long-term rewards and break new ground for our clients.
NB: Information as at 31/09/2021 unless stated.
* Over the five-years to 30/09/2021, SKAGEN Global has returned an annualised EUR return of 13.3% net of fees versus 12.5% for the MSCI All Country World Index over the same period.
 As at 19/10/21
 31/12/20 – 19/10/21 (source: Nike)
 31/12/20 – 19/10/21 (source: ASML)
 Median ROE 2021(e): Fund: 28% vs. Index 13%; Median EBIT margin 2021(e): Fund 33% vs. Index 13%; Median Net debt / EBITDA: Fund 0.7 vs. Index 1.3