SORBUS VECTOR: Manager commentary December 2023

Dec 12, 2023

So far this year, UK equity markets have been range bound, that is they have been trading within a relatively narrow band.

As we continually reiterate regarding VECTOR, we primarily look at companies that have strong balance sheets, low debt/net cash, good cash generation, high ROCE with long term value. 

Some of our holdings have seen some weakness in their share price over the summer with the likes of Hargreaves Lansdown and Reckitt Benckiser.

Whilst the majority of our holdings are UK centric, many are in their own right true global players.   

However, November saw in our view a complete overreaction by the market to the news issued by Diageo and Burberry (whose shares fell 13% and 11% respectively).

Diageo, issued a profits warning for fiscal year 2024. The company is experiencing a decline of 20% in net sales in their Latin America and the Caribbean operations (representing some 11% of their global sales), due to weakening economic conditions. However, this is a short term issue. Diageo is still gaining market share within the region and the other four regions in which the company operates are growing. Looking beyond 2024 and Diageo is expecting organic net sales growth of between 5% and 7% over the medium term. It is important to note that this trend rate of growth is above their growth rate pre-covid. 

Burberry likewise is experiencing a slow down in the luxury goods sector whilst having to deal with the impact of inflation on operating costs. As a result Burberry is now guiding that operating profit will be towards the bottom of its previously stated range of £552m-£668m and operating margins have declined for the first six months of the year.

Looking through its short term difficulties, Burberry continues to make progress on its strategic objectives, making a number of investments over the period, and retains its strong brand identity. We have experienced periods of volatility in Burberry’s share price before and we are comfortable with riding out the current difficulties, whilst benefiting from its attractive dividend and share buy backs (£400m in 2023).

In both cases Diageo and Burberry remain quality businesses, with strong brand identities. The share price falls reflect short term disappointment but we think the investment case for both companies remains strong.

The sharp price falls are a reflection of how sensitive markets are to bad news at the moment. The overall market backdrop for 2024 looks set to be a challenging year for investors. The risks of a global recession are still real and significant, despite how economies have held up in 2023. Our analysis suggests that this has not been adequately understood by investors. The bottom of a bear market is characterised by stock prices remaining flat or even rising on the back of bad news. This is an indicator that negativity and bad news is already factored into share prices. We are not at this point yet. Poor trading news (which is increasing in frequency) is denting share prices which shows that markets are not correctly pricing the prevailing economic condition. 

For VECTOR, we are still keeping our powder dry and currently sitting on some 12% in cash. We are not going to buy anything for the sake of buying, as we have not seen any real opportunities.

We have added one new holding to the fund in 2023, the Lindsell Train Investment Trust, which we purchased in March. At this time we sold two of our smaller holdings Revolution Bars and Synectics.