Thornbridge Global Opportunities Fund – Continued outperformance after a positive return in January

We are pleased that amidst the market turmoil in January, the flagship A Acc share class returned +4.1%.

We prefer discussing the companies we own rather than making general market comments. However, after a weak month, where many investors are down double digits, and one where the MSCI World Value Index beat the MSCI World Growth Index by eight percent, we feel it deserves a few words.

So, what happened?

In brief, US inflation at 7% is the highest it has been since 1982. Except back then the 10-year government bond was 14%, meaning bond investors still enjoyed a “real return” of 7%. The price-earnings ratio of the S&P 500 was also trading at only 7x earnings, which equates to a 14% earnings yield – the same as the 10-year bond yield.

Fast forward 40 years and we have the same inflation rate, except now we have 10-year bond yields of only 1.8%, for a “real return” of minus 5% (perhaps “real loss” is a more appropriate phrase). The price-earnings ratio of the market at 24 equates to an earnings yield of only 4% and while earnings yields are real, this is only true if companies are able to pass on inflation. The results and comments of many companies reporting in January show this is no certainty.

If you want to achieve a real return on your money, you have to be certain that any de-rating in valuation doesn’t offset any growth in earnings.

The first problem is that the price-earnings ratio of the market is at very high levels and with bond yields rising, de-rating is possible.

But there’s an additional problem – the largest companies in the World Index are absolute giants and growing off these huge bases is becoming ever more demanding – Apple’s revenue last QUARTER was $124bn.

When you consider that this is 6 times larger than the quarterly revenue of the largest consumer products company, Procter & Gamble, or 12 times the quarterly sales of Coke, you get a sense of the scale and challenge.

Apple “only” grew revenue by 11%, but this growth equated to $12bn, equal to the quarterly sales of Nike or twice the quarterly sales of McDonalds.

Ecosystem or not, growing off such a large base is no mean feat.

Investors are only willing to pay higher price earnings multiples for earnings growth, but if that growth starts to slow, they will pay less.

So, if this high inflation, rising interest rate world is likely to be the status quo, how do we protect and grow our capital?

For us, it means buying decent businesses, run by management who are on our side, for substantially less than they’re worth. And this means we have limited downside if we’re wrong.

Old economy sectors outperformed the tech sector over the past month. Some investors may think this rotation has run its course. We don’t believe this is the case and think there is a very large value discrepancy between the companies we are invested in and the big index stocks.

The wind has been largely blowing in one direction for the past 14 years. It has only just changed direction.

If you would like more information click on the link to Global Opportunities Fund.