At a time when the investment environment is challenging, it is worth considering a diversified offshore portfolio. Jéan Minnaar takes a look at prospects in key sectors and explains why the PCS Global Equity Portfolio is strongly positioned.
The PCS Global Equity Model Portfolio recently achieved its eight-year milestone and continues to deliver solid investment returns. This concentrated yet well diversified portfolio invests directly into high quality companies that have a track record of delivering consistent earnings growth and is used as a point of reference for investors seeking offshore exposure. Initially established in 2014 amid a relatively benign investment environment (low interest rates, very little economic volatility and generally rising asset prices), the past two years have seen the portfolio navigate extremely challenging conditions.
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The current environment
While Covid-19 and the subsequent global lockdowns are widely cited as the main reasons for the challenging investment environment we are currently contending with, the reality is that much of what we are witnessing had been brewing for a while. Covid-19 was perhaps just the catalyst that set the ball rolling.
The 2008 Global Financial Crisis unleashed an era of ultra-loose monetary policy around the world, which spurred asset prices higher. Consequently, valuations across a myriad of asset classes were pushed to lofty levels. Then in 2020, Covid-19-induced lockdowns saw governments relax fiscal policies by directly handing out cash to citizens. Now, two years later, we are seeing inflation levels well above anything we have seen over the past 40 years. However, monetary and fiscal policy are not the only contributors as complex supply chains and higher commodity prices – which have both been long in the making – are also playing a role. While there is no shortage of speculation around how this will all play out, the truth is that no-one really knows. We can all have views, but just as at any other time in history, uncertainty ensures that the path to the future is never straightforward.
Positioned for performance
In line with our bottom-up investment philosophy and process, we construct well-diversified portfolios that are invested in resilient businesses that can withstand the full economic cycle. The diversified nature of our Global Equity Model Portfolio is not overly reliant on a specific sector or single investment theme.
Balancing defensiveness and innovation
At just over 20%, health care is the portfolio’s largest sectoral exposure and key holdings include Medtronic, J&J and Danaher. Global health care stocks have outperformed strongly over the past year, with the MSCI World Health Care Index returning -1.8% over 12 months to end June (versus the MSCI World Index’s return of -13.9%). This is unsurprising given that health care is viewed as a more defensive sector. However, not all health care is equal. In the current environment, pharmaceuticals (more defensive in nature) have performed superbly, while medical technology stocks such as diagnostics and medical devices (which have growth characteristics) have lagged as elective procedures stalled in the midst of economic lockdowns.
Despite this, we remain confident about the overall health care sector’s future prospects and believe that it will benefit from favourable long-term trends. These include rapid innovation, an ageing population, changing lifestyles, a focus on prevention rather than cure and increasing life expectancy. In this way, along with protecting on the downside, the sector also provides strong future growth potential.
Separating the wheat from the chaff in tech
Technology is the portfolio’s second largest exposure, with holdings in Apple, Alphabet, Amazon and Microsoft. Given how well the technology sector has performed over the last few years, we constantly review our positioning to ensure that the portfolio is not vulnerable in the event of a market pullback.
However, similar to health care, not all technology companies are the same. The businesses included in the portfolio are all well established, generate real revenue and earnings, are backed by strong cash flows, and are supported by solid balance sheets. As such, we remain confident around their abilities to navigate the current environment – and the results certainly indicate that they are faring well in this regard.
At the opposite end of the technology spectrum is a cluster of businesses that we have aptly named the COPS (crazy overpriced stuff). Many of these businesses have strong future aspirations, but their profits also lie far in the future (should they materialise at all). As such, these unprofitable businesses are valued on hope, and have proven to be very vulnerable in this environment. The PCS Global Equity Portfolio has no exposure to such businesses.
Understanding what lies beneath
While financials appear to be the portfolio’s third largest exposure, on a look-through basis, this exposure is far more diversified than meets the eye. Visa and Berkshire Hathaway are the portfolio’s two largest holdings and although they are classified within the financial sector, they operate very differently to traditional financial businesses. Visa is widely regarded as the market share leader in the global payments industry, which still has significant scope for growth as consumers, governments and businesses across the world increasingly migrate to electronic payments. VisaNet, Visa’s proprietary transaction network, is the world’s largest electronic payment network and we believe that this will continue to support strong earnings growth in years ahead.
With its origins in insurance, Berkshire Hathaway is often regarded as a large collection of financial assets. However, under the guidance of Warren Buffett, Berkshire has successfully evolved and operates many businesses across a wide array of sectors, while also owning a very significant and diversified investment portfolio. As an example, Berkshire owns and operates more US-based infrastructure assets than any other US business. As such, it is far more than a collection of financial assets.
The best times during the worst times
While we do not know what lies ahead for markets, we are certain that the current environment has not diminished the quality of the businesses held within the PCS Global Equity Portfolio. So while investors may find the prevailing conditions uncomfortable and painful to endure, we view the current period as a great opportunity to gain exposure to superior businesses at attractive valuations. And as with most things in life, patience
and time are required to achieve meaningful results.
Jéan Minnaar is the Managing Director of Old Mutual Wealth Private Client Securities.