As 2017 progressed we became increasingly cautious in our view of markets. Essentially this was the result of a lack of opportunities presenting themselves at attractive prices: in other words valuations are increasingly causing us a problem.
Throw into the mix clear and present signs of momentum driven markets and we require little further encouragement to believe that we have probably entered the final phase of this long bull market. Acknowledging that such phases can become dangerously self- fulfilling, we believe that the enormous growth in popularity of passive investment vehicles coupled with central bank policy around the world has created perfect conditions for the perfect momentum storm. The most egregious examples are of course in areas such as the cryptocurrency bubble but we believe it extends to less daft areas such as technology and other “growth” stocks.
Such periods have occurred before in financial market history and they will occur again. They are always testing for the value conscious investor and 2017 was such a period. It was a year which, at times, caused us to question our very being, as our focus on financial metrics such as free cash yields and balance sheet strength seemed destined to be consigned to the status of quaint. Nevertheless, we have continued to stick to the knitting and, in particular, to the discipline of trying very hard not to overpay for the assets we buy. It so happens that many a stock looks to be trading on high multiples of high profit margins. If we are right that mean reversion is not dead, the scene is set for a challenge to the momentum consensus. As for timing: who knows?
The fund’s net asset value (NAV) fell by 0.6% in the quarter compared with a rise of 0.4% in the benchmark index.
In a reversal from the previous quarter the financials sector was the largest detractor over the fourth quarter of 2017. The financials sector remains our largest single sector allocation although we have continued to take some profit in the sector by disposing of our small position in Swedbank and reducing our holdings in BNP, Intesa Sanpaolo and Societe Generale. Brewer Carlsberg was the best performer at a stock level as our consumer staples allocation contributed.
|Discrete year performance
Selected Opportunities Fund (%)
|FTSE World Europe
(ex UK) Index (%)
|1 year to 31/12/2017
|1 year to 31/12/2016
|1 year to 31/12/2015
|1 year to 31/12/2014
|1 year to 31/12/2013
* Source: Morningstar, at 31 December 2017, nav-nav, net income reinvested, net of fees, Class I Acc shares, in Sterling. Past performance is not a guide to future performance. Prices can go up and down and you may not get back the amount originally invested. NAV = net asset value.
Fund activity review
Activity in the quarter included the introduction of a position in Norwegian fish farming leader Marine Harvest, where we have identified attractive top line prospects as well as favourable supply/demand dynamics. After meeting its management we also added Nokian Tyres, which specialises in the manufacture of winter tyres, with a large part of its output coming from Russia. We are excited by the potential long-term return on capital when a new plant, currently being constructed in the US, is fully operational. We established a position in Vivendi whose operations range from music, games and television to film and telecommunications. Following years of stagnation, music sales are once again growing strongly. We added pulp and paper manufacturer UPM-Kymmene which is on an attractive valuation. Finally, we returned to oil majors Total and BP and topped up our holding in Royal Dutch Shell as we increased our exposure to the energy sector.
We disposed of our longstanding holding in French office supplier BIC.
Janus Henderson Investors
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