Talk about the bifurcation of markets is currently a common staple of value managers’ presentations. As a small number of growth stocks on extreme share price multiples become ever more expensive, value managers appear to be pushing against the tide as they warn of the dangers of chasing momentum and try to convince investors of the potential in unfashionable areas of the market.
Yesterday Matthew Beddall of the LF Havelock Global Select fund pointed out almost all of growth’s outperformance of value over the past decade was driven by multiple expansion rather than increases in earnings.
Meanwhile fellow value proponent Simon Murphy of the VT Tyndall Real Income fund warned that when the narrative around a growth stock detached from the fundamentals, there would be little opportunity to take profits when the market turned against it.
However, even though Jeremy Thomas runs the top-down Sarasin Thematic Global Equity fund, he too has warned of the polarisation in the most growth-focused market of them all – tech.
This is why, even though digitalisation and automation make up two of the five mega trends he invests in – along with ageing, evolving consumption and climate change – extreme valuations have put him off some of the most popular stocks in the sector.
“Nvidia and Tesla are fascinating companies, but they wouldn't be in the portfolio,” he said.
“Nvidia is $800bn (£600bn) market cap on $25bn of sales – that’s quite rich and makes a lot of assumptions about the future which may or may not come true, but on a probability basis, that foundation is quite rich.
Performance of Nvidia over 5yrs
Source: Google Finance
“With Tesla, you have to start by thinking at least 50% of its future value comes from software dominance in AI [artificial intelligence] and how it can take the platform built around its car and apply it to other industries.”
Yet while the tech sector accounted for most of the stocks whose valuations are difficult to justify, Thomas said it also contained the odd misunderstood business that was being underestimated by the market.
As an example, he pointed to Splunk, which uses machine learning and AI to analyse “the massive amounts of unstructured data that most companies produce”. It then presents it back to its customers in a way that they can use productively.
Yet although it has enormous growth potential and operates in a sector that is very much in vogue, Thomas said it has failed to keep up with the share price explosion of its peers, and trades on “a much more sensible valuation”.
And the manager said this could be down to nothing more than a failure to capture investors’ imagination.
“In a world in which the number of US software-as-a-service companies is quite large, broad and exciting, Splunk has not communicated very well,” he continued.
“We're in a market where there's either a love or hate relationship. With valuations in US technology right now, it is almost seen as if you're cheap, then you're a loser. And we think Splunk has been put in the ‘cheap loser’ box – but it's just cheap.”
Thomas is excited about other tech-related sectors, too. Again though, while the major story of the past decade has centred on consumer-focused areas, such as social media, the manager was most excited about more obscure areas, such as industrial software.
“We feel as though industry has got quite a lot of catching up to do in terms of industrialisation and automation,” he continued.
“Think of a company like Siemens, which is itself going through quite a change and is a very powerful industrial software company. It is the same with Dassault Systèmes and the same with Schneider Electric.
“Many of the holdings of the portfolio are very much tilted towards supporting the next phase of capital automation and digital investment, which we think is very interesting.”
The manager finished by saying that, as an equity investor rather than an asset allocator, he has to remain invested even if he is concerned markets are getting ahead of themselves.
He said this is particularly important right now, with risky methods of investing prevalent in the US market, suggesting a period of de-risking is likely. Meanwhile, he said the Omicron variant has probably capped returns this year, bringing “the Santa Claus rally to a fairly rapid end”.
“That said, we're investing in progress in the future through our themes,” he added. “We're buying a discrete set of companies, all of which we think can grow faster than global GDP on a five-year view.”
Data from FE Analytics shows the Sarasin Thematic Global Equity fund has made 90% since Thomas took charge in December 2016, compared with 90.6% from the MSCI World index and 84.6% from the IA Global sector.
Performance of fund vs sector and index under manager
Source: FE Analytics
The £595m fund has ongoing charges of 0.96%.