This year has got off to a volatile start with investors whipsawed by software sell-offs, uncertainty over trade and geopolitical tensions culminating in the conflict in Iran.
Simon Edelsten, manager of the Goshawk Global Fund and former manager at Artemis, has navigated this volatility by turning to what has worked in prior periods.
Over a 25-year career, Edelsten has delivered a 456% total return to his investors, having managed portfolios through major downturns such as the global financial crisis and the Covid 19 pandemic, according to data from FE Analytics.
“If your core position is that the outlook is going to be very tricky, then you should go back to the lessons of what worked when it used to be very volatile,” he said.
See also: Simon Edelsten returns to join Alex Illingsworth at new venture
“I’ve now got around 50% in the US, 12% in Japan and about 2.5% in real assets like oil. That’s how I invested in 2010,” he explained.
This has led to Edelsten filling the portfolio with what he called “old-fashioned” companies with high barriers to entry that many investors had been avoiding.
Defensive “cockroach stocks” that the market cannot do without have derated from their previously high premiums, leaving many incredibly cheap despite being well positioned for a downturn, according to Edelsten.
“You need to ask three questions about stocks when the outlook is this unclear: Can something like AI undermine what you do, can the world do without it, and do they have strong balance sheets?”
For example, SLB (Schlumberger), a UK oil producer, is one of his top 10 positions.
He conceded he “got lucky” with his oil stocks, purchasing them before the recent conflict in Iran, which has caused sharp fluctuations in the oil price as the Strait of Hormuz has become contested.
See also: Iran war escalation prompts investor ‘panic’ as oil surges past $100 and FTSE plunges
“All the same, if you want a part of the stockmarket which is about as out of fashioned as it gets, which several people have abandoned and which has been seen as in the past and phased out, oil fits that.”
Similarly, he has recently increased his allocation to the streaming service, Netflix. The stock had slid to a recent low earlier this year ($76) over the market’s fears it would try to buy Paramount.
When it did not, the market breathed a “sigh of relief”, and the stock rallied upwards.
“It’s a great example of a reliable business, which generates a lot of cashflow and has a lot of choice. And it’s not exactly going to be attacked by market volatility and forces,” Edelsten said.
“To someone like me, having a portfolio that looks like it did in 2010 is comforting because I look at the index and how unbalanced it is, and I think I wouldn’t want to be anywhere near it,” he added.
‘You need to question your assumptions’
Having this old-fashioned portfolio is particularly important in a period where many of investors’ recent favourite stocks are being challenged, according to Edelsten.
He argued investors have relied for years on the same blue-chip stocks, which they saw as having strong economic moats. Despite these companies facing increasing challenges, he said investors have remained too complacent and have not properly assessed their investment thesis.
This can place investors in a very dangerous position, because stocks they initially bought as a low-risk, defensive investment may no longer fit that mould and so cannot fill the same role in portfolios that they used to, he added.
For example, this is the case with Guinness and Johnnie Walker owner Diageo, which has long been a favourite for UK quality growth managers, he said. Not only are people drinking less, but the drink maker also has “miles more debt than they used to,” which is part of the reason why it had to slash its dividend earlier this year, he said.
According to the Goshawk manager, investors are also overconfident in software businesses.
Companies such as RELX and Sage Group have slid owing to investors’ fears that AI may replace them, with RELX down 12% and Sage sliding 20%, according to Google finance.
While it is difficult to say if these falls are justified, investors should be more critical of these stocks than they have been so far, Edelsten said.
“If you ring them up, these companies will, of course, tell you it’s fine, and they are on top of AI. But the truth of the matter is that the barrier for entry has gone down.
“If you bought a company for that barrier to entry, and you know it’s changed, then you need to start questioning the investment thesis.”
Investors have become similarly complacent in financial services, he added. People will argue no one will ever change their banking habits, but online banking apps such as Revolut prove this is not the case, he said.
“I just think you need to be a bit more sceptical. I’m shocked at how little people are questioning some of their long-held assumptions.”
