Stock markets powered ahead in the first quarter of 2024, with our benchmark, the MSCI All Country World Index, returning an impressive 9.1% on the back of investor optimism about the outlook for corporate profits. Our portfolio outperformed the market, rising by 10.3% in terms of net asset value, but total shareholder returns were higher at 11.2% due to a narrowing of the discount. The discount reduced to -4.8% at the end of March from -6.3% at the beginning of January amid robust demand for the Company’s shares.
By design, this outperformance was due to good stock selection by our team of ten fund managers. Stock selection more than offset the negative impact of being underweight the US market, which hit a record high in the quarter, and overweight the UK. The UK continued to lag other major equity markets through much of the quarter, although the gloom hanging over locally listed stocks lifted somewhat in March when they benefitted from a rotation away from expensive technology shares towards cheaper energy, materials, and financials stocks, which make up much of the FTSE 100 Index. For once, the main UK market rose by more than the S&P 500 in the month.
But the first quarter of the year was largely a continuing story of global returns being driven by US tech stocks, particularly the stellar performance of the so-called “Magnificent Seven” (Nvidia, Microsoft, Amazon, Tesla, Apple, Alphabet and Meta). The star of the group was Nvidia, which climbed an impressive 84% in the quarter. However, there was increasing dispersion between the “Magnificent Seven”, as investors focused more forensically on individual company performance rather than the broad theme of artificial intelligence. There were also signs of a gradual broadening out of positive returns beyond big tech to other sectors and regions.
For example, besides the late rebound in UK-listed “old economy” stocks, the Japanese stock market continued to mount a strong comeback after decades in the doldrums. China also had a rare, good month in February, and small and mid-cap stocks showed some signs of life, having been overshadowed by large-cap stocks for so long.
Despite benefitting to varying degrees from owning Nvidia, Amazon, and Meta, the biggest contribution to our outperformance of the benchmark came from not owning Tesla and Apple, which have both started to drift apart from the other members of the “Magnificent Seven”.
Tesla’s share price declined by 28.6% in the quarter due to multiple worries about declining deliveries, price cuts pinching margins, competition from Chinese electric vehicles, and talk of a potential bust in global electric vehicle sales. Apple declined by 10%. Until recently the largest company by market cap, Apple’s share price has been hit by concerns about its high valuation compared to expected earnings growth and perceptions that it lags Alphabet and Microsoft in the race to monetise developments in artificial intelligence. We believe the underperformance of Tesla and Apple underlines the importance of actively managing exposures to technology, and other sectors, based on individual business fundamentals, as opposed to following a thematically based approach to investing.
The main detractors from relative returns were HDFC Bank in India, Misumi Group in Japan, which makes and distributes factory automation parts, and Kuehne & Nagel, the Swiss-based logistics company.
While all our managers posted positive absolute returns in the first quarter, GQG was the strongest performer. As well as owning Nvidia and Meta, it benefitted from appreciating stakes in the pharmaceutical company Eli Lilly, which is a key player in the rapidly growing market for obesity, and ASML Holdings, the Dutch chip toolmaker that is Europe’s biggest tech company. GQG’s contribution to portfolio returns was also boosted by a 30.5% rise in the share price of China’s state backed PetroChina.
At the other end of the spectrum, the weakest contributor to returns was Jupiter, which exited the portfolio at the end of March, to be replaced by ARGA Investment Management (ARGA). Like Jupiter, ARGA is a global value manager, founded in 2010 by Chief Investment Officer A. Rama Krishna, who has over 30 years’ experience managing global and emerging markets equities. He previously worked at Pzena Investment Management from 2003 to 2010 where he led development of global value strategies while co-heading the emerging markets value team. Prior to that he worked for Citigroup Asset Management and AllianceBernstein. ARGA has £10.7bn billion of assets under management and its staff are split between Stamford, USA, Chennai and Mumbai, India, and London. The firm’s investment philosophy is rooted in traditional value principles which seek to capitalise on investors overreacting to negative events and mistaking temporary stresses in share prices for permanent losses of capital.
By replacing Jupiter with a manager with a similar approach to investing, it will ensure the portfolio remains balanced across investment styles and continues to focus on stock selection for adding value, as opposed to style, sector or country biases.
Jupiter’s replacement with ARGA was unrelated to its performance. The change in manager was triggered by Ben Whitmore’s decision to leave Jupiter later this year and set up his own business. While we continue to have high regard for Ben’s skill as an investor, his new business arrangements represent potential risks and will take time to fully assess.
Monthly Factsheet
Quarterly Newsletter
Sign up for updates