Can you give a brief overview of your strategy in terms of what you are trying to achieve for investors, your investment process, and the make-up of the investment team?
Credo follows a Value based style when investing. Value is a broad tent and includes many different sub-styles. We are not deep value, "cigar butt" investors but rather look to invest in high quality businesses that are temporarily mispriced in terms of our analysis. We seek to invest in stocks which are:
- cheaper than the benchmark (on valuation metrics such as price earnings ratio),
- of high quality (profitable, cash generative, robust balance sheet, good management), and
- valued such that superior growth prospects are not reflected in current multiples
On a portfolio basis, we would always expect our portfolios to have a valuation discount relative to the benchmark.
Additionally, we target companies which are expected to have attractive 3-year holding period returns considering:
- Potential for valuation rerating,
- Estimated EPS growth, and
- Dividend yield
Credo's ethos is not to invest for short-term speculation but with an eye on long-term wealth generation. This means that there is an inherent acknowledgement that our performance may lag in certain periods when, for example, a Value style is not in favour.
Our investment team consist of four investment members, Jarrod Cahn, who is the lead portfolio manager (25 years' investment experience, 21 years with Credo), Jason Spilkin (CFA), co-portfolio manager and lead analyst (15 years' investment experience, 8 years with Credo), as well as analysts Alison Norbury (CFA) and Mira Skuleva (CFA). They operate under the auspices of Deon Gouws (CFA), the chief investment officer of the firm (25 years' investment experience, 9 years with Credo).
How are you positioning your portfolio to prepare for the global recovery from the Covid-19 pandemic?
Through the pandemic, we have had to balance our portfolio between:
- Covid beneficiaries (at a reasonable price), and
- high quality businesses that were temporarily impaired due to lockdown restrictions, short-term changes in consumer behaviour and/or the inability to operate properly during the period.
Clearly, as Value investors, it was particularly difficult to find good value in a market where technology or asset light stocks dominated performance, and simultaneously valuations of those stocks and sectors became inflated. However, we remained true to our style and continued to find pockets of value in sectors like Healthcare (HCA, Cigna), Gaming (Flutter), Specialist Financials (IG Group), Insurance (Progressive) and Leisure (Disney, Crown Resorts). At the same time, we continued to build positions in unloved sectors including Travel and Leisure, Luxury, Insurance, Defence, Healthcare and other out of favour technology names (Alibaba, Intel and Facebook).
We believe that the rotation trade that we have seen since November should continue for the foreseeable future and our fund is well positioned to capture more of that upside.
Can you identify a couple of key investment opportunities for your fund you are playing now in the portfolio? This could be at a stock, sector, or thematic level.
Presently we think that the US Defence sector looks cheap. Concerns over the Biden administration and potential cut of the defence budget is playing on investors' minds. However, many stocks in this sector are screening the cheapest that they have traded against their own history and relative to the market in general for some time. We particularly like Northrop Grumman and Raytheon Technology in that space.
Likewise, although the technology sector has seen some spectacular returns over the last 12 months, there are still pockets of opportunity, either due to regulatory or political overhang. In this regard we think Facebook and Alibaba currently present good value.
