One of our long-standing convictions is that volatility is an opportunity not a risk for long-term investors. Stock prices follow fundamentals and pull-backs like the one we experienced in March of last year allow us to buy great companies at lower prices. We took advantage of it last year and initiated positions in companies like Givaudan, Alcon, Sika and Amphenol, global leaders in their fields with great prospects for growth and value generation.
But volatility is only one of the sources of opportunity in markets. Market rotation is another. Over the last six months, shares in companies that have been subject to disruption over the last five to ten years and that have been materially affected by the pandemic due to their cyclical exposure, high fixed costs or high capital intensity, have outperformed significantly. By contrast, companies that have prospered over the past decade and continued to do well last year even during the pandemic, have been held back. The move has accelerated over the past month. A graph of the ‘value’ vs. ‘growth’ components of the S&P 500 shows that it is almost a 20% divergence between outperformance of value and underperformance of growth over this short period.
Our approach is fundamental and we have exposure to many different types of companies. It is remarkable how far the rotation has gone in terms of the valuation of many of the companies in our portfolios that delivered strong results last year and have prospects for even greater progress this year and going forward. The rotation has left the digital platforms like Amazon, Alphabet and Facebook at valuations that are now outright cheap and at the lowest premium to the overall market since their listings.
If the trade for the past six months has been ‘value’ in the typical sense we are convinced that the long-term trade is to invest in companies that offer quality and value in the long-term: quality in terms of exposure to good and growing markets, strong and sustainable competitive positions, good managements and strong balance sheets, and value in our sense of delivering returns of 8-10% or more over the long-term. They have delivered significant value over the past decade and have great prospects to do so over the next decades as well.
We have to remember that the concerns around inflation and interest rates come from the positive outlook for the global economy. The pandemic had a significant impact on the global economy and on markets. It brought the service economy to a halt, the major source of employment and income for the US and European economies. Governments and central banks stepped in to support their economies through the crisis, preserving businesses, employment and incomes through furloughs and other measures.
One year on, research, technology and innovation has allowed for the development and production of vaccines and therapeutics that will help to overcome the virus. Globally leading companies, including many that we own in our portfolios, have played a critical role in these efforts as we have discussed throughout the year. Most of the attention has been on the Pfizer BioNTech, Moderna and Astra Zeneca vaccines that are being rolled out globally. The recently approved Johnson & Johnson vaccine is highly effective, in particular against severe outcomes including the emerging variants, and will be produced in great quantities as well.