On Wednesday 13 March the Royal Society, the oldest scientific academy in continuous existence, published research showing how giant sequoias, more commonly known as redwood trees, were thriving in the UK. Introduced to Britain, from California, as seeds and seedlings in 1853, sequoias are now estimated to number around half a million in the UK and are growing at a rate nearly equivalent to those found in their native range1.
The story resonated because of its similarities with our own. Our Trust also has its origins in the 19th century. Launched in 1868, just 15 years after the sequoias first took root here, we are the world’s oldest collective investment scheme. And we too have thrived, £5.7 billion in asset under management (as of 31 January 2024) and 53 years of consecutive dividend growth. At the Trust’s inception, the aim was to bring the benefits of creative and responsible investing to a wider audience. That vision still sustains us today.
Concentration
At a fireside chat to discuss 2023 results, among the questions we received were some asking whether a more concentrated portfolio had been considered. The Trust is purposefully designed to be a one stop investment vehicle investing across both public and private markets, where a more balanced approach helps to ensure the Trust is not overly exposed to any particular risk or theme. A diversified portfolio is advantageous in the long run, and in particular during environments where style leadership rotates quickly, as we saw in 2022 and 2023.
With a concentrated portfolio you get extremes of performance, in both directions, with potentially elevated volatility, steeper drawdowns, and outsized positive or negative impact from individual holdings. If things go well, you can achieve extraordinary gains but equally, if they go badly, you can incur large losses that require even larger subsequent percentage gains to fully recover. The Magnificent 7 are delivering exceptional performance today but we live in a fast-changing environment. Elevated valuations in this part of the market, a heightened regulatory regime and public scrutiny of big tech companies are potential headwinds we need to keep in mind. For electric autos maker Tesla the rapid emergence of competition from Chinese electric vehicle manufacturers (notably BYD) is a challenge to monitor, with Apple also facing similar challenges around heightened Chinese competition, on top of ebbing innovation and lagging investment in AI capabilities versus peers.
Myriad of moving parts
Globally, 2024 is a very busy election year. The US, UK and India are among the more than 50 countries going to the polls2. And these elections are being held against the backdrop of simmering geopolitical conflicts. Elements of uncertainty are forever present. The politics changes, the conflicts change, the technology evolves but investing against the backdrop of multiple moving parts maintains.
Putting all your eggs in one basket is a bit like trying to time the market. It’s tempting but almost impossible to replicate time and again over a very long period. For this reason, we continue to believe that individually concentrated portfolios, blended together, offer a better ‘all-weather’ solution for our shareholders over the long-run.
Active versus passive
Active versus passive management is another topic high on the investment discussions agenda. Active management costs more than passive and with a tight concentration of stocks driving index returns at the prevailing time, it’s an obvious and valid matter. As with the question about concentration though, there are reasons, in our view, why active management has the edge over passive.
While exceptionally high returns are the gift of a narrow group of stocks presently, this will not always be the case and we expect a broadening in the sources of market return to resume in the medium term. In the meantime, whilst maintaining a diversified approach we have actively managed changes to our portfolio with the aim of accessing strategies best suited to our medium-term analysis of the market. We have moved our US large cap strategy from T. Rowe Price to JP Morgan following the departure of the strategy’s long-standing portfolio manager and our global equities strategy to the strong-performing Global Focus strategy managed by our colleague David Dudding. Like the sequoias, the dominant above ground biomass is just a part of the whole. Deep underneath those majestic canopies is a network of well-woven roots that holds the structure steady while the tree grows. So too with our Trust. Unlike a passive ‘set and forget’ asset allocation we engage in intense research to factor in changes to volatility, macroeconomic developments, divergences in regional performance and much more. This doesn’t mean we engage in frequent activity, but it does mean that we are always in a state of readiness to act should market conditions change, either according to our forecasts or unexpectedly. Additionally, the aim of our research is as much to mitigate potential sharp drawdowns as to identify new opportunities. For instance, in 2021 we took steps to meaningfully increase our exposure to value stocks whilst reducing large cap growth, prompted by rapid tightening from central banks, slowing growth and historically high equity multiples particularly in the growth segment of the market. Indeed 2022 saw significant dispersion in returns between highly valued growth stocks and more lowly rated value stocks, with global value stocks outperforming growth counterparts by the widest margin since 2000.
