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Printed: 02 April 2023 10:21 PM


30 Mar 2022 - A tumultuous start to '22!

By: Insync Fund Managers

A tumultuous start to '22!

Insync Fund Managers

March 2022


Economy-wide events dominate the headlines

Big inital swings are a typical reaction to a change in the macro-economic outlook and are not cause for us to react. This movement was primarily driven by the largest swing towards value stocks in over 20 years. 

As at the end of February, the 'value' style category fell -2.8% CYTD with 'growth' styles falling -12.5%, according to JP Morgan. The lesser known 'quality' style category where Insync resides is neither value nor growth, although we tend to hold stocks the market categorises as Growth. 2022 marked the 5th worst start for S&P 500 since 1927. Inflation fears have the market pricing in 5-6 interest rate rises this year, precipitating the heavy swing initially, with Ukraine's invasion by Russia creating price spikes in both energy and commodity prices as well. Markets hate uncertainty.

It's no surprise then that material and energy stocks were the best performers in February (Insync has zero exposure to these sectors due to their low ROICs through the cycle). It's highly probable that the negative macro factors will slow economic growth. This in turn, will then favour a move back to profitable growth companies (rather than growth stocks overall). These are the type of stocks we hold. Thus, we liken the current portfolio to a coiled spring. When investors soon refocus on company fundamentals, the share price performance of quality businesses then rebound quickly and sharply. This usually 'surprises' commentators and investors alike. Earnings growth across the portfolio continues to compound strongly despite macro shifts, with valuations becoming more attractive.


Governance factors are why Russia and its peers don't appear with Insync

Russia's invasion of Ukraine is one of the greatest tragedies of our lifetime. We have no direct exposure to Russian equities and virtually zero indirect exposure. The simple reason is that Russia is a Kleptocracy run by a ruler who has used his poitical power to systematically steal billions of dollars of its national treasure owned by its people. When there is no rule of law - and therefore no shareholder rights - valuations do not matter. The risk of near total loss of capital is too high. Companies with strong governance nearly always do the right thing and also deploy capital wisely.


Why we are confident that sustainable growth companies are poised to perform strongly

Almost every big slowdown in the past has been preceded by a rise in energy prices and Federal Reserve rate hikes.Going forward then, markets will likely start shifting focus to the prospect of weaker economic growth and refocus on investing in businesses with durable, sustainable earnings growth and profitability.

This economic backdrop propels precisely the kind of stocks we hold. Overlaid with identified megatrends, it enables these companies to thrive irrespective of higher rates or slower growth.

Meantime, in the near term expect ongoing volatility in markets and most equity funds as well including our own. 

Indicators suggest that the market may be surprised on the upside

We have often discussed the difficulty and danger of market timing. The probability of getting it right more often than wrong is extremely low. Right now, investor sentiment is very bearish with the AAII investor sentiment survey at its lowest point since April 2020. Fund managers overall reflect this view, holding the highest level of cash since the covid lows and at the bottom of the GFC.

This is why we remain fully invested when markets swing wildly as one would expect in these moments of macro-economic uncertainty. For good reason we didn't react in previous occasions such as now, and we won't in future ones either.

This is also why we remain fully invested unlike many of our peers. Should timing be desired in the hope of avoiding the dips and riding the peaks, then we believe this is a decision for the investor and their adviser. 

We continue with our usual rifle-like approach of investing in the most profitable companies with a long runway of growth fuelled by megatrends. We refrain from trying to time these shifts, as this lowers risks and, longer term, aids returns. 

Funds operated by this manager:

Insync Global Capital Aware FundInsync Global Quality Equity Fund

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