Skagen Global remains an outlier among global equity funds. The fund shuns most big American technology stocks. ‘The valuations are still unjustifiable for us,’ says manager Knut Gezelius who, despite this underweight to big tech, still managed to beat the market year-to-date.
Most global equity fund managers do not dare to ignore Facebook, Apple and Amazon. But of the famous FAMANG shares, Gezelius only owns Microsoft, the shared largest position of Skagen Global with a weighting of 6.2% of the portfolio, and Google-mother Alphabet (3.5%).
‘We cannot justify the valuations of most major technology stocks and question the sustainability of their business models,’ he says in an interview with Investment Officer. According to the Swede, those valuations are based on the expectation that current trends, from which those large technology stocks benefit, will continue almost indefinitely. ‘Take Netflix, for example. It has done extremely well because of the enormous popularity of streaming. But for us it’s no certainty that streaming will remain so popular for the next 10 to 20 years’, says Gezelius. ‘But in the valuation of Netflix this has been priced in.’
Nevertheless, it is often assumed that the large tech companies, with their strong market position and cash position, will receive another boost from the corona crisis. ‘We do indeed see a winner takes all dynamics in the markets, which has been reinforced by the crisis,’ Gezelius admits. But the fund manager does not think that this is the beginning of an even stronger domination of the large technology stocks. The cards may be stacked a little differently now than before the crisis, but according to him this has already been priced in.
Rational market
‘Overall, the market has acted very quickly and remarkably rationally during the Covid crisis’, notes Gezelius. ‘Even before California was the first US state to go into lockdown, share prices had fallen dramatically. But the market also came back very quickly when the virus was brought under control,’ he says.
Gezelius does not regard last week’s fall in prices as a sign a new market correction is coming. He still believes in a V-shaped recovery as a real possibility. ‘In my opinion, these falling prices were caused by investors taking profits following the gains of the past two months. We wouldn’t be surprised if the market continues to rise.’
The fund manager points to the rapidly declining cash allocations of fund managers. In May, the cash positions of fund managers were still historically high according to Bank of America’s monthly Fund Manager Survey, but in June cash positions saw their strongest monthly decline since August 2009. ‘This indicates that institutional investors are bringing a lot of money back to the market, and confidence has returned.’
No small-cap premium
In addition to large caps, Skagen Global also invests in small and medium-sized companies. For example, the British insurance broker Beazley, with a market capitalisation of less than £2.6 billion, is the fifth largest position in the fund, even before the Alphabet is thirty times as large.
‘It’s no problem for us to hold a number of less liquid positions in small businesses,’ says Gezelius, who has led the fund since 2015. The fund manager emphasises that he does not invest in small companies because of an alleged small cap premium. This is said to exist because small caps are followed by fewer analysts and are avoided by some investors because of lower governance standards and higher liquidity risk. But according to Gezelius, such a premium does not exist. ‘The small-cap premium is a myth. If it were so easy to find alpha in small-caps, wouldn’t everyone buy it?.’
Gezelius invests in small caps for a different reason. ‘As a shareholder in small companies you often have easier access to management. We see ourselves as guardians of our customers’ capital, which is why we value close relationships with the management of the companies we invest in,’ he says.
Financials
A final conspicuous aspect of the portfolio is its large allocation to financials: no less than a third of the portfolio is invested in the sector. At first sight, it therefore seems surprising that the fund managed to outperform its benchmark this year by roughly 2.5 percentage points. Banks and insurers have been struggling for years, but the corona crisis has only put them under extra fire.
However, the explanation is simple: ‘We only have one bank in our portfolio, the American JP Morgan. In addition, perhaps two-thirds of our holdings in financials are in the wrong sector in our opinion,’ Gezelius explains.
Among others, Skagen Global is invested in the stock exchanges Nasdaq and International Exchange. ‘These are not old-fashioned financials. I see them as technology companies. In particular, the trading data held by these companies are very valuable. In fact, I wouldn’t be surprised if the classification of those companies is eventually changed’.