CIO Insights 4Q2024

The end of 2024 marked our 20-year anniversary in global equity investing on behalf of public collective investment vehicles. The continuous track record has come about by weathering all ups and downs during the period, applying the same guiding principles, resisting any style drift, and with the same decision makers in charge. Time to reflect on a constantly evolving investment management industry and the part we play in it.

From our perspective, four trends have shaped common investing behavior over the past 20 years more than anything else: (1) the focus on relative performance measurement; (2) the indexation and commoditization of pooled equity products; (3) the use of formulas and algos as the main decision tools; and (4) the rising turnover in individual security holdings. We do not label these phenomena as either good or bad. Instead, what matters to us is to accept them as they are and try to take advantage of the potential behavioral gaps they leave.

First, relative performance measurement may be instructive in understanding past relationships between various investment opportunities. However, most investors’ savings goals are framed in absolute terms. For example, people typically ask: “I need accumulated capital of X by the time I retire.” In answering this question, past relative performance is not a very meaningful planning tool. That is the reason why we have always worked with a long-term absolute-return mindset rather than a discrete-period relative performance goal as our relevant guidepost.

Second, the use of passive products and robo-advisory largely rests upon a “buy-what-goes-up-and-sell-what-goes-down” mentality. Nonetheless, our record over the past 20 years shows that a “buy-what’s-cheap-and-sell-what’s-dear” approach retains its legitimacy. In other words, contrarian thinking can still thrive in a world of momentum investing. In fact, asset allocators can use the two in a complementary fashion. For example, by its very design the latter is not able to capture inflection points such as turnarounds and mean-reversion effects, areas we specialize in.

Third, considering the vast computing power available nowadays, it may seem sensible to use preset formulae and algorithms to choose investments—if only they were able to keep their integrity in an unknown future. Obviously, the back-testing of past data relationships is a straightforward exercise, but what’s the output’s explanatory power going forward? Especially in deep value investing, with its high degree of corporate idiosyncrasies to be evaluated, it is exceedingly difficult to come up with a reliable way of identifying lucrative investment opportunities using a standardized quantitative approach. Hence our continued preference for an entrepreneurial case-by-case equity selection process, which enables us to pay heed to the unique operating and financial attributes of each company in question.

And fourth, the dramatic fall in transaction costs and technological advances in trading have led to a rapid-churn mood in equity investing. Clearly, a basic commitment to ride out the inevitable rough patches in a company’s long-term trajectory has become a rare trait. However, empirical evidence shows that higher turnover is no ticket to better portfolio returns—quite to the contrary. It seems that “the grass is not always greener on the other side of the fence”—the next portfolio idea is not necessarily better than the last one. Hence, we remain firm believers in a buy-and-hold approach. For example, if things look temporarily bleak but the long-term merits of a business look to be intact, we are willing to give a company our analytical “benefit or the doubt.”

For the investor with the patience to stick with the Fund over time, total return accrual becomes ever more powerful the longer the track record gets. This compounding effect instils us with plenty of vigor and motivation to continue the journey and write the next chapters in fund management. Come rain or shine, we are holding dear to our fundamental assumption that the endeavor of seeking out and investing in companies that can be bought at bargain prices will be as weatherproof in the next 20 years as it was in the past.

Sincerely,

Gregor Trachsel
Chief Investment Officer SG Value Partners AG