In a rapidly evolving global market, where economic shifts and geopolitical tensions create a landscape that is constantly shifting, the recent performance of the Arysteq Global Opportunities Fund (“AGOF”) offers a compelling glimpse into how we are navigating these challenging times. Guided by a disciplined investment process and philosophy, AGOF has strategically positioned itself to capture opportunities amidst volatility. Emphasis remains aligned with the goal of delivering sustainable, long-term value to our investors (see Figure 1 below for top 10 holdings).
Figure 1: AGOF Top 10 Holdings as at end October 2024
The United States (“US”) market has experienced remarkable growth in recent months, largely fuelled by the start of the rate cutting cycle, easing inflation, and solid GDP growth of 2.5% in the second quarter. While this economic landscape appears positively skewed, there are some concerns lingering among investors. A deteriorating labour market, rising debt-to-GDP ratio, increased credit card delinquencies, and a growing number of small business bankruptcies cast a shadow over the broader economic outlook.
Despite various concerns, the US stock market has already reached 45 new highs year-to-date, with investors pouring in as if the bull market is only just beginning. Much of this growth is driven by sectors benefiting from the skyrocketing demand for Artificial Intelligence (“AI”) technologies. So far, sectors such as information technology, communication services, utilities, and financials have outpaced broader market indices, reflecting the accelerating influence of AI innovations (see figure 2 below for a breakdown of these sector performances).
Figure 2: Global Market Sector Performances (Source: Bloomberg)
In response, AGOF has strategically strengthened its positions in industrial, financial, and consumer staple sectors. Year-to-date these sectors have all provided the fund active returns, with the financial sector being the best performing sector within the portfolio. Conversely, sectors such as energy and materials remain in cyclical lows, detracting from overall portfolio performance. In the near term, we anticipate that global central bank interventions could serve as catalysts to revitalise these undervalued, cyclically low sectors.
In recent years, AGOF has delivered strong returns by strategically overweighting investments outside of the US, leveraging opportunities in international markets. Our approach of focusing on regions such as Japan, the United Kingdom, and broader European markets has been particularly rewarding. However, 2024 has shifted the landscape significantly. The US market, driven by positive sentiment and surging AI demand, has outpaced all major developed markets, reversing prior trends and impacting our relative performance. This shift underscores the dynamic nature of global markets and highlights the importance of adapting our investment strategy to capture emerging opportunities (see figure 3 below).
Figure 3: Market Performance (S&P 500 Index = United States, FTSE 100 Index = United Kingdom, MSCI Europe Index = Euro Area, Nikkei 225 = Japan) (Source: Bloomberg)
The performance of the US market has naturally led to a lopsided weighting within the index, now representing 71.9% of the MSCI World Index, implying that either the US market is overbought, or the rest of the world is underbought. Irrespective, there is significant untapped value beyond the US market, and AGOF remains well-positioned to capitalise as these markets play catch up. That said, despite being underweight the benchmark, the fund continues to hold high quality US stocks, in line with Warren Buffett’s advice: “Never bet against America” (see geographic allocation below in figure 4).
Figure 4: Arysteq Global Opportunities Fund Geographic Allocation
The general rule when investing is to “Buy Low, Sell High”. As it stands, AGOF offers a compelling “buy low” narrative. AGOF is trading at an attractive price-to-earnings (P/E) ratio of 13.9x, compared to the benchmark’s P/E of 28.2x. This significant discount, combined with a robust dividend yield of 3.8% (more than double the index’s 1.8%), underscores the fund’s compelling value proposition (see figure 5).
Figure 5: Price-to-Earnings and Dividend Yield vs MSCI World Index (Source: Bloomberg)
An example of a standout company trading below the market that has provided significant alpha for AGOF is Itochu Corporation. Being one of the largest trading houses in Japan, the stock trades at a forward P/E of 12.8x vs that of the Nikkei 225 Index at 22.1x and has a dividend yield of 2.5% vs that of the index at 1.8%. Valuation and return metrics combined with strong cash flow generation and a healthy balance sheet are just some of the things we look out for when investing in businesses. Our approach has a strong focus on finding the best businesses to invest in at the right price.
Our investment philosophy remains rooted in disciplined, long-term investing with a focus on maintaining a margin of safety and a collaborative team-driven approach. We are confident that AGOF’s current holdings represent some of the highest-quality assets in the market today. As experienced investors, we have successfully navigated multiple market cycles, and our steadfast commitment to prudent investment principles continues to serve as the foundation of our strategy. While we remain prepared to adjust our approach in response to evolving market conditions, our long-term focus remains unchanged.
