Rapidly evolving circumstances mean fund managers need to stay on their toes, say Mark Costar, Tom Matthews and Vishal Bhatia, Senior Fund Managers of the UK Dynamic Fund at JO Hambro Capital Management.
The world is always changing but there is no question the recent pace has marked a phase of profound discontinuity. Geopolitics and technology are witnessing monumental changes, and they are clearly not mutually exclusive. The world is getting more fractious, conflicts are escalating, and modern warfare has changed beyond all recognition.
Adverse impact of technology
At the same time, technology continues to advance at a blistering pace, and the diffusion from corporate disruption to societal disruption has begun. Entry-level jobs are disappearing, the graduate premium is eroding, and early casualties are emerging in marketing, coding and consultancy, with plenty more in the pipe. The Knowledge Economy will never be the same again.
In bearing witness to these complex dynamics, markets have been surprisingly serene. Muscle memory has led investors back to the former leaders but, beyond that, there have been subtle changes in the internal dynamics.
Ownership of lazy duration, thematics, and expensive growth will be considerably less fruitful; in its place, selectivity and valuation discipline will prevail as performance dispersion widens. Simply put, a beta focused world is shifting back to alpha.
UK Plc still at a discount
Back in the UK, political noise continues to dominate the headlines as the economy wrestles to reach escape velocity. The scorecard for Labour’s first year in power is clearly a mixed one. Much-needed structural reform has been mapped out with the publication of an Industrial Strategy, the Strategic Defence Review, NHS modernisation, key infrastructure renewal and a long overdue sweeping away of planning bureaucracy.
This disconnect between the core fundamentals and perceptions is why the UK has been, and continues to be, incredibly cheap. It is why corporate and private capital continue to feast on world-class assets at bargain basement prices, with the 86% premium offered for Spectris just the latest in a long line of examples.
It’s also why we can find so much opportunity, a market rich with compelling upside but also high margins of safety. It’s a great combination. Share prices have always driven narratives and not the other way around. When the anomalies start to correct, the market will look at the same set of facts through a different lens. Investors will inevitably gravitate here in due course.
We have no idea when that will happen, but time is on our side as the businesses we own on behalf of our investors continue to build recurring equity value underneath their share prices. Experience has taught us the value of patience, but not at the cost of being dogmatic.
Outlook
Markets have had a good run given what has transpired more broadly. A lot of this can be attributed to an unwinding of the extreme positioning that took shape during the initial tariff scare, but also typically very resilient company results and, specifically in the UK’s case, very attractive valuations and continued elevated corporate activity. UK Dynamic, as detailed above, has been active over this period, evolving the portfolio as conditions and opportunities dictate whilst rigorously enforcing overall risk discipline.
Despite good performance, the free cash flow of the fund remains near double-digit territory and balance sheet risk levels near historic lows, a compelling combination. The portfolio is differentiated, and conviction is building across a broad range of key positions.
There has never been a faster pace of change in the world but – sadly – it will probably never be as slow as this again. We are as prepared as we can be for the period ahead, cognisant we need to stay on top of rapidly evolving circumstances, but excited by the opportunity and the upside potential of the companies we own on your behalf.
