At a time of great political and economic uncertainty and conflict, our responsibility as investors and as fiduciaries of the capital we manage is to focus on the fundamentals of the companies we invest in and on their long-term prospects for growth and value creation.
We do not seek to time markets, but to choose quality companies that will deliver significant returns over time, through economic and investment cycles, and periods of uncertainty and adversity. This philosophy has delivered in previous periods of volatility and we remain confident that it will continue to do so going forward. It also lends itself to low turnover and long holding periods.
We believe that interest rates have finally normalised for the first time since the financial crisis and we are very close to peak rates in the US and Europe. We do not believe that US interest rates have to rise much from here if at all but we also do not believe they need to fall.
This normalisation of interest rates is a positive and we very much believe that ‘the new normal’ which people have been so worried about, will be more like the good old days. We are in a Goldilocks environment. Of course we wish the global economy were like the fairy tale where the little bear’s porridge is just right. The reality is that economic data will never be just right, it will always be too hot or too cold. What matters is the outcome: a world in which nominal interest rates are between 4-6%, where inflation is sustained at 2-4% and therefore real interest rates are between zero and 2% is a world to look forward to – not to be afraid of.
Our rigorous approach to investing in companies that have quality and can compound over the long term leads us to invest in the world’s largest and best companies, many of which are also disruptors. These companies have enduring and sustainable competitive advantages in attractive long-term growth industries, notably information technology but also consumer products and services, healthcare and life sciences, and industrials and infrastructure. They have above-average pricing power through branding, ownership of intellectual capital or similar and low exposure to the main areas of current inflationary pressure in their cost base.
We are only at the beginning of the digital transformation of the global economy and there is much more to come. Computing capacity will increase exponentially and offer many opportunities for companies providing products and services to businesses and consumers. Companies like Alphabet and Amazon have been holdings for the past ten years. Last year we bought Nvidia and this year we bought ASML. These companies will be will be long-term beneficiaries from digital transformation, we expect them to continue to represent a large part of our portfolio.
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