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October 2023 Monthly Update

Updated: Feb 8

Both funds performed broadly in line with the benchmark for the month, over the year ending October, and importantly meeting the funds formal rolling 5-year objectives.

Sustainable growth in earnings is what drives stock prices longer term. We use megatrends to heighten the likelihood that the highly profitable businesses we invest in will excel over time beyond market expectations. However, in the shorter term interest rates can have a substantial influence on stock prices. The last three years clearly demonstrated their impact. In 2020/21 incredibly low interest rates drove up valuations, particularly for companies that were unprofitable or considered to be high revenue (sales) growth companies. In 2022/3, as interest rates rose sharply, these same companies experienced a collapse in their valuations and stock prices.

It is a reasonable probability that interest rates will remain higher for longer and therefore a focus on valuations becomes crucial. Recent corporate earnings reports showed that any earnings ‘disappointments’, particularly for companies on higher valuations, leads to devaluation with an ensuing swift and significant drop in stock price. Growth funds that tend to invest in companies at any price is now a high-risk strategy.

Insync’s investment process strongly focuses on valuations, driving a third of our assessment of companies. This provides additional risk management ‘guardrails’ in managing individual positions, particularly if the future growth is more than reflected in current share prices (an example earlier this year was Nvidia). Generative AI is an example of a whole sector also requiring closer scrutiny. Whilst it captures our attention and imaginations for good reason the excitement creates considerable stock price volatility and, at times, lofty valuations. Insync’s process dynamically captures these periods of overvaluation resulting in the fund recently reducing its exposure to these stocks.

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