Christopher Johnson: From tech sell-offs to Trump’s tariffs, global equities have had an eventful start to the year. But despite the discord, investors are still seeking and hunting for opportunity. To discuss the holding she backs, I am joined by Charlotte Ryland, the head of investments at CCLA Investment Management.
Charlotte, thank you for being here with me. So, my first question to you is, according to Morningstar, over a one-year period to the Feb. 10, the CCLA Better World Global Equity Fund returned 20.12%, underperforming the MSCI World Index. So, what do you put the underperformance down to?
Charlotte Ryland: You’re right that, you know, ’24 was slightly disappointing year. And I’d say the longer-term track record still remains very good. But, why that performance differential? I suppose we go back to what it is we’re trying to do. We are investing in quality businesses. We’re investing in businesses where we can see good structural growth drivers. And we have valuation discipline. And one of the things also about our process is that we have a reasonably diversified portfolio.
Why Has CCLA’s Fund Underperformed the Benchmark?
2024 was a year in which market leadership was very, very concentrated. The US market, I’m sure we know, was the best performer. And even within that, there was a very small group of companies really dominating returns. So, if you look at the S&P 500, it was outperforming the equally weighted index by nearly 12 percentage points over the year. And only 38% of stocks in the S&P actually outperformed, which is a lot lower than it would normally be. In fact, it was a level of market concentration, the last time we saw that was back in 2000. And we know how 2001 came out.
Why was there that concentration? Of course, it was the big tech names, the Magnificent Seven, so-called, that were really dominating things. And there is clearly a justification for that in terms of the cash flows those businesses are generating. Very impressive growth they’ve had. A lot of them derated back in 2022 and improved in terms of their valuation since then. And then, of course, we had AI as well. And then the rest of the market, actually, areas that in the long term we think are really attractive, like healthcare, like some parts of consumer, some of the industrial businesses, they had a more difficult time. So, I think it was that sort of imbalance between things within the portfolios that was particularly a headwind.
So, as we come into 2025, the question is, is it going to be another one of these very concentrated years? Is it going to be completely dominated by those same kind of names? And I suppose our concern is probably twofold. One is that we have quite a crowded market at the moment. The certain names the market is very much focused on. And we’ve seen before, back in the summer of last year when we had that sort of yen-carry trade unwind, you saw a lot of those names beginning to rattle back. So, that momentum turning can be quite significant.
And also, valuation. I mean, the US market is now on, if you look at cyclical adjusted PE, I think in about 38, which again is very high. About 2000 is probably the last time again where you’re seeing markets at similar levels. Doesn’t mean, all of the US market is unattractive or expensive, but certain parts of it are. And there are businesses like, say, a Tesla TSLA, we would say the valuation isn’t particularly attractive and not something that we would want to have exposure to. So, we still think that having a diversified portfolio is right thing to do. And we still think there’s also really, really interesting opportunities beyond those narrow list of names that just have dominated. And we would say that, you know, while 2023-2024 have been great years for the equity market, there are a lot of uncertainties out there. And certainly we see our approach would tend to hold up much better if there were market selloff, because of our focus on quality, because of our focus on business, good returns and good margins.
Can the Magnificent Seven Continue its Dominance?
Johnson: I want to ask quickly about the Magnificent Seven, which you were talking about. Do you think they can still sustain their technological dominance now that China has produced DeepSeek, which has just taken the world by storm effectively? What do you think about that?
Ryland: I mean, I think it would be dangerous to dismiss companies like a Microsoft MSFT or an Amazon AMZN or an Alphabet GOOGL. I mean, these guys have been investing in their R&D. They have, you know, huge resources behind them, companies like Nvidia NVDA, have that huge software library of things like CUDA. So, I think we shouldn’t say that these companies have a significant structural issue, but I think what we can say is perhaps we’ve underestimated what Chinese technology can do, particularly given that they have, you know, some of these restrictions on some of their high-end chips that they’ve been having to deal with. But what I suppose what DeepSeek does say for us is that actually you can do AI more efficiently. The costs within that are beginning to fall, that as we shift away from training very expensive new models to actually using them at inference, that actually some of that AI compute cost will begin to fall and some of that CapEx intensity will begin to come back. And therefore, perhaps the market’s attention is going to shift away from just the CapEx and the data centers and on to how do we actually use this new technology. But I think it’s probably going to be better for the hyper scalers and better for some of the software companies that are actually beginning to use some of this tech.
Why Is the CCLA Not Backing Tesla?
Johnson: You also mentioned that Tesla stock, for instance, was overvalued. Are there any other reasons why you wouldn’t want to invest in a stock like Tesla?
Ryland: I mean, you know, fundamentally it’s an auto company and that doesn’t really fit in with what we’re looking for in terms of high quality businesses. The auto sector is very, very competitive, very cyclical, very capital intensive. And yes, it’s a leader in electric vehicles, which is an attractive longer term area in terms of the shift away from combustion engines. But actually there’s an awful lot of other companies coming into that, not least the Chinese. So it’s going to continue to be very competitive and it’s a business, again, where, you know, we probably have some questions about the corporate governance behind it as well.
Johnson: And in January, Microsoft, which is your top holding within the fund, shed around $200 billion in market value because its cloud unit posted slower growth. Does this concern you at all?
Ryland: Not really. I think it was slightly weaker, but I think it was still growing at 31%. The guide had maybe been 32% growth from the business. And they were pointing out a little bit of weakness in their go-to marketing, in some of the smaller clients that they’re going to. So it sounds like it is a temporary issue. And we would say that the long-term drivers for the Azure business, whether it’d just be traditional companies moving their software and their infrastructure onto the cloud, or whether it’d be AI, which was growing, I think about 13% in the quarter, you’re beginning to see the revenues come back from the investments they are making there. So we would still say it’s the number two hyper scaler out there, it’s the number two cloud provider. It’s still got a long runway of growth ahead of it. And one quarter slightly weaker number doesn’t change that.
How Will Trump’s Tariffs Impact Europe and The UK?
Johnson: And everybody’s talking about Trump’s tariffs. Are there any stocks within your fund that you are going to sell out of because of the impacts of Trump’s tariffs? Are you kind of re-evaluating part of your portfolio because of the uncertainty?
Ryland: I think uncertainty is exactly the word we should be using with Trump tariffs, because we seem to get a different announcement every day. And then things like, they were putting tariffs on Canada, and then they suddenly reversed them, and they were going to put them off for a month. So there’s a lot of noise. And I suppose this is the lesson that we had from his last time that he was in power. He says a lot, but what he actually does might be more measured. There are certainly some brakes on what he can do in terms of the legal system, Congress, and getting approved, some of these things. So I think it’s dangerous to be too presumptive in terms of what you do. And you’ve got to actually wait for the details to come through and the actual reality of those tariffs to come through. I mean, clearly we’re thinking about our companies and thinking about where areas might be vulnerable. And I think these areas like autos, which I say we don’t have an exposure to, or commodities, steel, for example, they are most in the headlines, possibly companies like some of the alcohol producers in Europe, where they have to manufacture in a certain location because of the problems that product. And that will bring some additional costs. But at the moment, we’d say that businesses that we are investing in are high margin, have pricing power, have that ability to pass on additional costs should they come. And I think businesses have got much more flexible in their supply chains having seen tariffs before back in 2016 onwards than to have them come bursting in.
What Are the CCLA’s Top UK Stock Picks?
Johnson: And to move on to UK equities. So food catering business Compass Group CPG is the top UK equity in your fund. And why are you bullish on this stock? But also, do you expect the group to continue its acquisition spree like it had in 2024, in particular buying up companies in Europe?
Ryland: Yeah, sure. So I mean, if I took a step back and said, why is Compass an attractive business? I mean, it is the leader in terms of contract catering. I mean, had very difficult times during Covid. Not surprising, everybody was locked at home, couldn’t go to the office, couldn’t go out. But it’s been coming back very strongly since then, and actually getting more first-time outsourcing from business in. So you’ve seen that growth rate really beginning to accelerate as they come out of the pandemic. And the big advantage that Compass has is its scale in food buying, it has its food buying operation called Foodbuy, which is huge scale. And that gives them buying power, gives them cheaper prices, which they can then pass on to their customers and therefore win new business and retain business. So, we just think it’s a really steady compounder continuing to take share. And one of the things they have been doing more recently, as you point out, is making some acquisitions in Europe. That’s a strategy they followed in the US as well, just rolling up, adding to their capabilities. You know, and we would expect possibly they will continue to make some bolt-ons within Europe to make that business bigger for them. But really for us, the core drivers behind the business is that core outsourcing trend.
Johnson: I also wanted to ask you about the London Stock Exchange Group LSEG. So UK investor Steven Hugh you publicly said he thinks the LSE should just sell the stock exchange and just rebrand completely as a technology business. Do you agree with this statement?
Ryland: I think to be honest, actually, you know, the London Stock Exchange is actually a very, very small part of the LSE Group at this point, you know, it’s less than 5% of revenues. So really where this business has moved on to is the Refinitiv business, data feed business. There’s the workspace terminals that they have particularly enlarged with Microsoft and using some of the AI and cloud technology that Microsoft can bring to them, and that’s become a much more competitive product with people like Bloomberg. They’ve got a big indexes business, they’ve got data businesses in there. So I think the business itself has moved an awfully long away from its historic route within the stock exchange. So, even if they own it or don’t own it, the focus on the business is very much on that technology and data.
Johnson: And finally, do you think that UK equities can bypass the worst impacts of Trump’s tariffs?
Ryland: I mean, I think the UK itself is sort of hoping that because we haven’t got a huge trade deficit with the US that we’ll be treated more favorably, we will wait and see whether the government can achieve that. UK companies themselves tend to be extremely global. And so therefore, there’s probably going to be some impact, I would imagine, even if it’s no tariffs on the UK, then might be tariffs on parts of their international operations that they’re going to have to put into place and make sure they have that flexibility to cope with them.
Johnson: Thank you, Charlotte. This is Christopher Johnson from Morningstar UK.
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