Long-term investors who fear they have missed their opportunity to buy into high-quality growth stocks, given this year’s value/growth reversal, should see last month’s snapback as a buying opportunity, according to J Stern & Co managing partner and CIO Christopher Rossbach.
Rossbach, who is also lead manager of the firm’s World Stars Global Equity strategy, is a strong believer in investing in very high-quality companies and retaining conviction in them over long time periods – in many cases, decades.
For instance, J Stern & Co – which is backed by a 200-year-old European banking family that has been investing in stocks for three generations – has now been invested in Nestle for more than 50 years. There are other names in the firm’s flagship global equity fund which Rossbach has been analysing and investing in for more than 20 years.
“We believe that global growth is driven by sustainability, entrepreneurship and enterprise,” he says. “You can invest in these entrepreneurial companies in a number of different ways – whether this is early stage or late stage. But our belief is that, if you buy the best companies in the world which have the highest degree of quality, and which can compound over time, that is how to succeed.”
While its strategy has been in place for significantly longer, J Stern World Stars Global Equity was launched as a UCITS vehicle in April 2019. Since then, the $172m (£140.5m) fund has achieved a top-quartile total return of 49.4%, according to data from FE Fundinfo, compared to its IA Global peer’s average gain of 36.1% over the same time frame.
This is despite the fact quality and growth-focused stocks suffered a sharp sell-off in 2022, with the MSCI World IMI Growth index tumbling by 19.9% while its value counterpart gained 4.5%, as rising interest rates and inflation across the developed world pushed investors into cyclical and economically-sensitive sectors.
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But now, with the growth index already up almost 19% so far this year and value left trailing in the dust once more, Rossbach believes we have finally experienced a long-term normalisation of the macroeconomic environment following more than a decade of unprecedented monetary policy.
“After almost 15 years of essentially deflation since the global financial crisis, we experienced the disruption of the pandemic and the lack of capacity to invest in infrastructure – which caused a tremendous short-term spike in inflation,” the CIO explains.
“We are now in an environment where interest rates have finally normalised for the first time since the crisis. We are very, very close to peak rates in the US. We are close to peak rates in Europe. We may or may not be there in the UK – but that is the result of specific issues. The US economy is ultimately what matters the most for the global economy, and for most of the companies we are invested in.”
While Rossbach believes interest rates will not keep rising, he doesn’t believe they will fall either. Yet, despite the widely-held view that an environment of falling rates is best for growth stocks – as rate rises eat into the value of future cash flows – he calls the current backdrop a “Goldilock’s environment” for the fund.
“This normalisation of rates is a positive. And, as part of that, we very much believe that ‘the new normal’ which people have been so worried about, is a return to the good old days,” he reasons.
“When I started my [analyst] training, we were using risk free rates of 4.5%. We have essentially never used anything else. So, in a world in where interest rates are between 4-5%, and where we have more sustained inflation of between 2-4% we therefore live in a world where real rates are between zero and 2%. That is a world to look forward to – not to be afraid of. It is not a world to spend all our time worrying about when the next rollover takes place.”
Underpinning the current economic landscape, according to the manager, is robust underlying consumer demand, a moderation in inflation and “a pro-active and data-driven approach” from central banks, which he says will “support markets during a critical period”.
“These data points we are seeing truly point to a Goldilocks scenario. Markets are never ‘just so’ but at the moment, the data places us on the balance between the two.
“[As quality growth investors] we have been dealt the blow of inflation and of rising interest rates. The third blow we have suffered is valuations. We saw a significant factor rotation last year where value outperformed growth and all indicators for the types of companies we invest in went against us.
“But despite that, throughout this period since 2020, our stock selection has provided positive returns.”
That being said, a brief market pullback over the last month has seen the MSCI World IMI Growth and Value indices fall by a respective 1.6% and 1.5%, and the average peer in the IA Global sector fall by 2.9%. J Stern World Stars Global Equity was particularly hard hit, having lost 3.5% over the last month to the time of writing (7 October 2023).
“That pullback has been caused by investors thinking over the short term – worrying that either the US economy is slowing down, or that inflation is still running too high so we are going to have a problem with interest rates,” Rossbach explains. “We believe it is going to be neither – it is going to be complicated and choppy, but ultimately a positive path. And in terms of the stocks we own, we now think valuations are at very attractive levels.
“If people are worried that they have somehow missed the right time to get into growth after the sell-off last year, moments like we are in right now suggest otherwise.”
Investing style
While there are several quality and growth-focused funds in the IA Global sector with low turnovers and concentrated portfolios, Rossbach says there are multiple differentiators between his fund and how it is run, relative to other players in the UK retail space.
Firstly, the manager says he has a long-standing focus on the diversity of his colleagues in order to reduce groupthink, with a 50/50 gender split across the six-strong investment team, and each member hailing from varying socioeconomic, geographic and ethnic backgrounds.
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“We believe very, very strongly that the diversity of the team provides diversity of thought and approaches – this allows us to have more robust discussions,” he explains.
Another differentiator is that the fund – which prioritises the long-term sustainability of businesses – will invest in industrials, unlike many of its peers with similar mandates. Contrary to what investors may assume, Rossbach says it is the fund’s focus on sustainability – as well as its team’s independent research – that leads them into these names. According to the fund’s latest factsheet, it currently holds 21% in industrials & infrastructure, as well as 24% in consumer goods and 39% in companies associated with the digital transformation of society.
“We believe that there are great industrial companies out there which are ‘shovel providers’ to the energy transition movement or to net zero, and which are going to be instrumental in enabling us to overcome the challenges we have,” Rossbach says.
“These are tremendous opportunities linked to sustainability. And yet some of these companies earn zero points in relation to EU taxonomy They are also directly linked to the UN’s SDGs [Sustainable Development Goals], which are not just some slogan – they are profound targets which are necessary to overcome society’s greatest challenges.”
One example of an industrial stock held in the portfolio – but which scores a ‘zero’ in terms of its taxonomy – is Sika, a Swiss multinational firm which develops systems and products for bonding, sealing and reinforcing into the building sector. Rossbach has been investing in, and researching, this stock for approximately 20 years.
“About 60% of its business is in the refurbishment of existing buildings,” he explains. “Sika can provide a more efficient use of concrete – it converts buildings so they are fit for purpose, rather than pull them down. It also modernises buildings, which dramatically reduces carbon use.
“It now has the technology to aggregate concrete back into sand, gravel and cement. Recycling concrete is one of the greatest challenges out there. This is a business which is actively disrupting how the industry works for the better.”
EVs
The manager says a ‘false friend’ when it comes to sustainable investing, however, is the electric vehicle sector.
“We are not sure whether the future of transport will be electric cars at all. We think the future of transportation is going to be more of a system and, where autonomous driving is required, we could see the likes of pods that are owned on a shared, rental basis, which would be much more efficient and ecologically sustainable,” Rossbach says.
“Of course we will still have cars over the medium term. But there are some large issues. One of which is around the battery technology – it seems to me that lithium ion batteries are a legacy technology.
“The main issue with lithium ion batteries is that they are not very efficient, and the way the materials are extracted is highly pollutant.”
Rossbach adds that, when making investment decisions, his team “always considers where the disruption is going to come from”.
“I am convinced that, with energy, we are going to move from a hardware phase to a research-led, physics driven phase, where we find new transformative sources of energy altogether.”
