SORBUS VECTOR: Manager commentary June 2022

This is an underperformance against the benchmark MSCI UK IMI All Companies Index which rose by 6.93%. Our longer term performance remains strong, however, being ranked 6th out of 238 funds in the IA All companies sector over 3 years and 7th out of 229 funds over 5 years. 

The primary reason for this negative disparity over the past six months is the relative underperformance of small and midcap stocks during the period against large cap stocks (i.e. those within the FTSE100). 

SORBUS VECTOR has approximately 56% in small and mid size companies, as they have historically delivered faster growth than many large cap businesses and have strong prospects for future profit and dividend growth.

The small and midcap indices fell from their peaks reached in September and October 2021 and finished the half year period down by (9.9%) and (14.4%) respectively. By contrast, the FTSE100 (which accounts for around 80% of our benchmark) rose in value over the 6 month period, due to rising valuations for companies in the oil & gas, mining and financial sectors.  SORBUS VECTOR has no exposure to these sectors and so has not benefited from the oil, gas and mining stock price rises driven by the global supply shock from the Russian invasion of Ukraine in February.

We repeat what we said in our March letter to investors: “with oil and bank stocks it is true, as the old expression goes, that a stopped clock is right at least twice a day. We have never purchased an oil stock for VECTOR as they do not meet our investment criteria, and are unlikely to ever do so.

It is not our remit to criticise other investment funds that have done well recently by owning such businesses. Everyone has their own approach. However, we would say that given both Shell and BP have had to rebase (that is permanently reduce) their longstanding dividends by half or more in 2020 one has to question the durability of the dividends and the earnings that support them.

Even after the recent run up in oil prices, Shell’s share price is around the same as it was at the start of this century.  BP’s share price stood at over 600p in 2000 whilst today it stands at 370p. This indicates to us the capital misallocation and poor returns on investors’ capital that such companies and their management have been responsible for over that period.

With such poor financial returns, allied to the huge cost involved in transforming such businesses into renewable energy companies fit for the next century, we do not believe they represent an opportunity despite the current high oil price.”

Needless to say, we are also no fans of the banking and financial sectors given their even worse performance, both financially and in their returns to investors, over the past 20 years plus.

We remain confident that we own the right companies for the harsher economic environment that is coming. These are companies that have pricing power and can therefore ultimately pass on the costs of inflation. These companies produce and sell everyday goods or services that people or businesses want to purchase and that are not huge discretionary item decisions. They have stood the test of time, have enduring earnings, dividend power and strong balance sheets that will not disappear overnight. 

We think many of them will not only be able to navigate the current treacherous economic situation of high inflation with moderating growth (or possibly recession) and the current world geopolitical events better than others but will be the kind of businesses other investors will start to value much more highly in price terms and want to own in the coming months.