Equity market returns have been narrowly concentrated in recent years. But the unpredictability of market timing highlights the need for a disciplined investment approach and a diversified portfolio of global companies. In this article, Guido Bicocchi explains why focussing on the fundamentals has always been a key part of our investment philosophy.
Question: How have investment portfolios fared recently?
For the year to 31st August, the total return for the Balanced Fund is 7% and for Income Fund is 10%, both of which compare favourably to UK inflation of 4% over the same period.
However, we are mindful that recent returns have not kept pace with some of your expectations. Especially when compared to the US technology stocks, which have largely driven market performance.
Over shorter periods, financial market returns can be heavily influenced by investors’ sentiment, as the recent reaction to US unemployment figures highlighted. But in such an environment, it is critical that we don’t deviate from our disciplined investment approach.
The unpredictability of market timing underscores the need for consistent exposure to a global list of companies.
Diversification has long been recognised as an effective strategy for reducing risk while potentially boosting returns. A principle that has always been a central factor in our investment approach.
Question: Why do you think your investment approach will be successful in future?
Not all investment risk can be predicted, so we focus on investing in companies which are resilient and flexible enough to adapt to unforeseen circumstances.
The strongest companies will not only survive adverse conditions, but are often able to capitalise on them.
As long-term investors, we can sometimes get frustrated when good companies' prospects and share prices are affected by short term noise.
However, history suggests that over time, fundamentals will come to the fore.
It'll be those companies with sound financial health, market leadership, and flexibility that will emerge successful.
Investors' attention, with time, will return to the fundamentals that drive long-term growth, and when they do, our portfolios are well positioned to benefit.
Question: What investment themes are you particularly excited about?
It's an exciting time to be picking stocks.
Our stock selection process focuses on companies that are well placed to benefit from long-term trends in IT and the energy transition.
We're all increasingly using digital devices, whether that's the internet, mobile phones, or cloud computing.
We are concerned that the growth that's been enthusiastically projected for artificial intelligence may not come through as quickly as financial markets expect.
However, there are many companies around the world that are market leaders and stand to benefit from global digitalisation.
Tokyo Ohka Kogyo, or TOK, was added to our portfolios within the last 12 months.
It's a Japanese manufacturer of photoresists, a light sensitive material that's essential in the production of microchips.
It's a leader in what it does and it supplies to the major chip manufacturers.
The continuing miniaturisation of microchips associated with smaller and more powerful devices should provide long-term growth for the company.
Currency movements have affected the sterling value of Japanese investments in our portfolios.
However, a recent research trip to the country suggests that prospects remain robust.
Even if demand for TOK's products fluctuates over the course of a business cycle, its prospects remain good for long-term sales growth.
Question: How are you investing in the energy transition?
The shift in supply and consumption of energy are an interesting investment theme.
The changes will take decades to implement, but we're already seeing the effects in government policies worldwide and also in the results of some of the companies that we hold in our portfolios.
I'm sure many of you will be familiar with National Grid, which operates the transmission lines for electricity in the UK and in parts of the USA.
It will be responsible for building and maintaining the massive infrastructure that's going to be required to connect new greener energy supplies to households and businesses.
Perhaps less familiar is Schneider Electric, which is a manufacturer of electrical components used to improve energy efficiency.
Although its products are perhaps less obvious than National Grid's, they're equally as critical in the operation of factories, microgrids, and the electrical vehicle charging facilities.
Both businesses stand to play a vital role in the expansion and improvement of energy provision.
Question: What factors will likely affect your investment strategy over the next year?
I think one factor will be interest rates.
Central banks have already begun cutting interest rates worldwide, and lower savings rates and borrowing costs should encourage consumer spending and capital investment, which in turn should boost economic growth.
But the central banks must balance supporting economies with the dangers of rekindling inflation, and the recent market fluctuations have demonstrated just how fragile investor sentiment currently is.
Political change is also something I expect we'll be talking about in the coming months.
In the UK, investors are assessing the implications of the new Labour government, but at least a stable government should mean that the UK is a more interesting place to invest.
While in the US, the presidential election is finely balanced.
Historically, a Republican president has been seen as more encouraging for corporate prospects.
However, Donald Trump's economic policy, which emphasises tariffs and populism, poses risks to both inflation and global trade.
Investor sentiment remains vulnerable to shifts in interest rates and geopolitics.
However, there are still many companies which are reasonably valued and should provide positive and sustainable returns over the long term.
Question: How would you summarise McInroy & Wood's current investment thinking?
Our investment strategy continues to focus on the fundamentals of strong balance sheets and good cash flow generation in companies that are well positioned to benefit from long-term investment trends.
At the same time, the bonds in our balanced portfolios add additional diversification as well as benefiting from attractive yields.
This measured approach should mean that portfolios are less affected by shifts in investor sentiment while still proving rewarding for clients over the long term.
Thank you for watching.
I hope you found today's discussion both informative and interesting.
As ever, if you've got any questions about today's video or your investments in general, or have any suggestions for future topics that we might cover, please do get in touch.
