CLAM’s Global Equities investment team discuss their approach to stock selection, particularly when it comes to the ‘Mag 7’ stocks currently dominating the North American and global indices.
One of the key tenets of our core philosophy within the CLAM Global Equities team is to start our assessment of a given stock with a market weight in mind and then adjust for a whole variety of inputs. These include macro sensitivity, valuation discrepancy, moat, contrarianism, financial leverage, sustainability, profitability and management strength. This is not to say that we hold all benchmark names, and in many cases, we do not have any exposure at all. It is more to say that a high conviction under- or overweight would most often be in the range of plus or minus 250 basis points vs the index weight. So, for the biggest names in the index, we would modulate our holding and most likely have at least some exposure. It is fashionable – and dare we say popular – to deviate as much as possible from index weights and sometimes even to avoid the very biggest names altogether. However, we very much balance risk and return and generally avoid outsized deviations, as one of our most important aims is to manufacture a higher quality of return without significant drawdowns, and be aware of the benchmark but not tied to it.
The question of intentionally avoiding the big names comes to mind for the Magnificent Seven (‘Mag 7’) of highly performing technology stocks which comprise circa 30% of the North American indices and 20% of the global market. Using Bloomberg indices, the North American market return in 2023 was 26.4% (USD, total return) whilst the Bloomberg Mag-7 Index rose by a staggering 107.0% on the same basis. A non-trivial number of portfolio managers, however, are very underexposed to these stocks, despite the overt AI drivers and their striking profitability. However, we do not shy away from these stocks; we start our thought process at the index weight and then adjust accordingly. For this very reason we were positive and therefore overweight Nvidia – at the time one of the most successful stocks in the Mag 7 basket – at the start of last year. The company’s success is driven by significant customer demand for its technologically superior graphics processing units (GPUs), which are used in data centres to power customers’ AI applications. It turned out to be one of our best attributors in 2023.
The chart below shows our overall Mag 7 weights over time and how they have varied from -2.0% relative to +2.0% relative. However, it should be noted that our individual exposures have varied rather more, with our key overweights now being Amazon and Microsoft, whilst and we are currently not invested in Tesla at all. With such huge contributions last year from these names, it was very easy to miss out on these returns, but our core process gave us positive attribution from this group in 2023. Currently, as well as being zero Tesla, we are underweight Apple, whilst we have increased our position in Amazon (starting in mid-2023) as it was seen as a laggard in the AI investment cycle, but we believe it will be a strong player. Microsoft remains a long-term favourite.
Source: Bloomberg & Canada Life Asset Management, March 2024.
The final piece of the puzzle is to point out that this is not a passive or near-passive approach. Active share in the WS Canlife Global Equity Fund is in the range of 60- 65%. We find this to be the perfect balance in attempting to generate consistent returns over time and avoid the pitfalls of factor-generated volatility and drawdown.
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
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Promotion approved 08/04/24