The market, says long-serving equity fund manager Nick Train, is finally going his way.
Train’s suite of global and UK equity funds and investment trusts have been caught in the tailspin of the stock market rotation away from growth and towards value stocks in 2022, but in his latest update to shareholders, he says, “The growing macro-economic disturbance afflicting many nations has also weakened investors’ confidence in the earnings power of cyclical businesses.
"As a result, we note, investors have turned for their equity exposure to the shares of durable, conservatively financed and steadily compounding companies – on the expectation their business operations are likely to be less adversely affected than the average.”
Those are the sorts of companies that would typically be placed in the growth category. Growth investing is a style of which Train is a vociferous advocate, but as he alluded to above, it is a style that has sharply underperformed for most of this year.
That underperformance came mostly as a consequence of investors seeking exposure to economically sensitive stocks as economies re-opened after Covid-19.
But since the end of May, some of the more typical value sectors, such as commodities, have started to underperform, as a consequence of what Train describes as the market being less certain about the outlook for the economy.
But if we are in a world where value and growth can whipsaw that sharply in less than a year, what does a diversified equity portfolio look like?
Apart from being a growth investor, Train’s other characteristic is that he runs concentrated portfolios.
He says that only a small number of equities have the potential to deliver returns through multiple economic cycles, and he feels owning a longer list of stocks does not necessarily improve the portfolio.
This is a view echoed by Mark Hargraves, head of global equities at Axa Investment Managers, who says portfolios with as many as 80 stocks are not much more diversified than those with 40 stocks.
He says around 90 per cent of all of the diversification benefit that can be attained from an equity portfolio comes from a small number of stocks, and owning the remainder achieves comparatively little.
Chris Elliot, who jointly runs the Evenlode Global Equity fund, a mandate which it is fair to say invests in a way similar to how Train manages his money, says diversification in equities can be achieved through investing in a relatively small number of companies, if those companies are large and global.
He says: “Nestlé sells thousands of products, across a range of categories and geographies, with millions of individual customer purchase decisions per day. The importance of each low-ticket decision is itself low, providing predictable revenue growth and profitability.