Q How would you assess 2021?
The US equity market has been particularly strong in 2021, but also over the long term relative to most other equity markets in the world. At Ninety One, our Quality capability views the US as probably the highest quality market, in terms of pricing power, high returns on capital, dominant market positions, clear and strong competitive advantages. So, we view that as one of the primary long-term drivers of the US stock market.
From our standpoint, we focus on quality as an investment team and that is an approach that has served us very well, not just during recent periods, particularly the pandemic, but since inception of American Franchise. So, we continue to find exciting and attractively priced opportunities in the US and that remains our focus.
Q Can 2022 replicate this year?
I think it would be difficult for 2022 to replicate 2021. Coming into this calendar year, most investors probably would have expected quite a benign return, if not negative return, from US equities and, as we sit here today in mid-November, we are looking at a 25% return year-to-date for the S&P 500, which is obviously exceptional. So, I think it would be a mistake to necessarily forecast that for next year even though not many people would have predicted the returns you would have got this year at the start of 2021.
Q What do you view as the key risks and opportunities?
The key debate in the market is around inflation and the normalisation of interest rates and how hot inflation is going to run and how long the Fed will wait before it acts in terms of raising rates. We distance ourselves from that debate, running long-term portfolios, and we really focus on individual business models and pricing power is the big part of that.
Companies which have inherent like-for-like pricing power should be able to deal with inflationary pressures relatively easily. Also, our philosophy doesn’t support the excessive use of leverage, so rising rates are less of a concern in terms of the fundamental impact on the companies. Nonetheless, as we move through 2022, inflation and the news still around that is likely to create volatility and, therefore, opportunities.
Q How is American Franchise positioned into 2022?
We take a very long-term approach, so we wouldn’t necessarily position the portfolio for a return in any one year. We are really focusing on the developments for the next decade, not 2022 specifically. At this juncture, we remain happy with our overall positions in the technology, healthcare, consumer sectors, where we see the highest quality, the highest pricing power and the ability to deal with, transitory or not, inflationary pressures. Turnover will remain low. It has historically been about 15% per annum and that is what we are comfortable with.
There are some parts of the portfolio where pricing power is weaker, such as med-tech, so we will keep a close eye on them to make sure the fundamentals remain sufficiently attractive, but otherwise, we will continue to manage the portfolio very much on a decade-long view rather than any individual year.
Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.
All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.