Calling time

As the year draws to its close, our analysts highlight the articles they think are the team’s best calls from 2022…by Pascal Dowling

 
Even a stopped clock is right twice a day, but given the massive investment we’ve made in our team this year, which now includes six full time analysts, all of considerable pedigree, one would hope that we might be a little more consistent in our accuracy.

Seeking evidence of that, we look back at a year of thoughtful theories, clever ideas, spurious hypotheses and downright quack suppositions that – together – form the mass of our thematic research and highlight the articles which, in the views of the team, have stood up best to the tests of time and reality.
 

William Heathcoat Amory

 
I think this article may prove a useful one for readers to absorb over the holiday period. In the market environment that we have seen over 2022, it’s often easy to forget the long term, when the short term is slamming you in the face so hard and so repeatedly.

Over the long term, smaller companies have reliably beaten large caps. They are more nimble, capable of faster growth and they occupy interesting niches within markets. But aside from the asset class, which should provide a tailwind for returns over the long term, patient investors in the UK Smaller Companies investment trust peer group also have three other factors lending a metaphorical shoulder towards achieving long-term outperformance.

Firstly, the UK small-cap universe is very inefficient, without a very great depth of market analysis. There is significant potential for active managers to add alpha, or value-add, by applying their long experience and stock-picking skills. Added to this, the UK market, as a whole, has been studiously avoided by international investors, meaning the market is less expensive than other markets. Finally, discounts to NAV have widened again. As we have seen time and time again, the discount can act as a useful accelerant to returns, when a sector returns to favour. The best time to buy has not been historically when discounts are at exceptionally narrow levels, but when they are at least in line with their long-term averages, as is the case today (see chart below). Within the peer group, in our view, there are plenty of Christmas crackers for investors to find.
 

 

Thomas McMahon

 
Looking back, I think the note I wrote in February asking if regime change meant investors should overhaul their portfolios proved to be pretty much on the right track. It was then becoming clear that central banks had lost control of inflation even before Russia invaded Ukraine, and I suggested a couple of reasons why they may have got it wrong which I think still ring true.

I also think my argument the consumer was able to keep spending and send inflation much higher before a recession hit continues to be borne out – the looming recession has been looming for an awfully long time, and for all the fear and fury the UK economy appears to have contracted just 0.2% in the last quarter.

Some of the trends that benefitted from higher inflation have since gone into reverse: bonds have done well in recent weeks, while growth equities have bounced. Thankfully I am not being asked to make my predictions for next year, but I do think inflation will continue to be high and volatile for some time to come, even if the peak has passed.
 

Alan Ray

 
Having joined Kepler in October of this year, I’m enjoying the luxury of reading other people’s work from earlier this year and I’ve chosen a piece written in January, when no one could have had the slightest idea how 2022 would pan out. There was a nice analysis called “Apples and pears” asking whether discounts of investment trusts had any correlation with open-ended funds’ inflows and outflows. It’s an excellent question to ask, because when you go back to basics, investment trusts and their open-ended equivalents are all just funds, right? But, as the piece correctly points out, investment trusts as a group are quite idiosyncratic and it’s easy to find a dozen reasons why an investment trust’s discount doesn’t correlate with a trend. That’s why we find them so interesting.

Although I agree with the conclusions of this analysis, I think statistics like fund flows are terribly useful as they can tell you a lot about sentiment and make you ask questions. In my favourite TV show, The West Wing, there is an episode where the White House staff are worried about the economy falling into recession. They are told that even using the word ‘recession’ in public makes it more likely there will be one and, in an escalating series of ridiculous conversations, end up substituting the word ‘bagel’ for ‘recession’. That is, until the fictional president, a Nobel Prize laureate of economics, dismisses them with a withering “I’m not calling it that”.

I think it’s quite likely that this fictional piece of silliness has turned into received wisdom in real political circles, so I’m not counting occurrences of the word ‘recession’ in the Financial Times to get a steer on the economy. But I am interested in harder data and if a particular sub-set of the funds’ world has seen huge inflows in the last year, I want to know why, and why I should be buying something that so many others have already bought, possibly at lower prices. It doesn’t mean it’s the wrong thing to do because bull markets can carry on for many years, but it’s a good question to ask. In my pick for 2023, next week, I’ll ask the opposite question: why have so many people been selling?
 

Nicholas Todd

 
Following what many have labelled a banner year for private equity in 2021, my pick for 2022 was the first of a series of articles reviewing the listed private equity sector (LPE). It considered a handful of trusts that offer investors exposure to sources of returns that are otherwise hard to access, and have offered diversification during the drawdowns experienced across the public equity market in the months that followed.

Although valuations are difficult to monitor due to inconsistency regarding valuation dates, the asset class, which has proven to deliver handsome returns, might be an opportunity at the current moment for a long-term investor willing to ride out the short-term noise.

Over the last 12 months Private Equity has done well again in NAV total return terms and the listed private equity trusts mentioned in the article generating an average of 22.3%. Currently, the average discount of these strategies sits at -36.6%* (as at 15/12/2022) which may present a further opportunity, although we would remined investors to be aware of the underlying NAV update announcements.
 

Ryan Lightfoot Aminoff & Helal Miah

 
Given the performance of the sector and some of its constituents – International Biotechnology Trust (IBT) for example up c.20% since the bottom in May – it is perhaps no surprise that more than one of our analysts chose this article as their ‘pick of the year’.

Ryan and Helal chose this article, highlighting the long term tailwinds behind the healthcare and biotechnology sector, and an in depth look at the World Health Organisation’s (WHO) report on Global Expenditure on Health report (2021). The report finds that developed countries spend the most on healthcare as a proportion of GDP and rising. Spending is also rising amongst emerging markets and global healthcare spending has strong defensive attributes.

Helal summed up the theme best: “The major theme of the article is deferral of death – not at the individual level, but across societies given that across the world life expectancy is on the rise. Longer life expectancy has major implications for societies and huge investment opportunities for investors looking to ride this theme.

“The article looks at investments trusts focused on traditional healthcare stocks as well as the more vibrant and dynamic biotechnology area.”

He added: “I would like to point out, as I think is my duty, that the value of investments can go up and down and this article will not defer your death”.
 

 
This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.