In October, markets rebounded sharply driven by energy related stocks in the UK and overseas. The largest listed business in the UK, Shell, rose 7% over the month, whilst Exxon, the ninth largest constituent in the American S&P 500, rose by a remarkable 27%. The CSI funds benefitted from the risk-on environment but due to our preference for non-commoditised businesses, did not benefit to the same extent as the index.

It is our view that commoditised businesses are generally of lower quality. They are, by definition, not in control of the price at which they sell their product. They therefore have very little ability to manage the margin, profit, leverage and therefore returns that they generate. We also pay heed to Warren Buffett, who in his 1989 letter to shareholders wrote that “[he] had to learn it the hard way – in fact, [he] had to learn it several times over…time is the friend of the wonderful business, the enemy of the mediocre”.

We believe that it is the combination of wonderful businesses bought at attractive prices that creates opportunity for investors. As an example, Next (the UK listed clothing retailer held within the funds) have an exceptional track record of successfully increasing prices to maintain margins, growing profits and generating attractive returns over long periods of time. The shares are currently available to buy for less than nine times next year’s expected earnings – a level that since 1994 they reached only briefly during 2011 and during the depths of the Great Financial Crisis.

To illustrate the point made by Buffett and to compare the performance of two businesses already mentioned, over October Next returned 2.7% versus Shell at 7.0% and over the previous year Next has fallen by 36.0% versus Shell which has risen by 48.5% including dividends. However once you zoom out to five years Next shares have increased by 26.0% versus Shell, which has increased by 26.9% on the same total return basis. And for the long-term investor, over the last thirty three years since Buffet’s previously mentioned letter, Next shares have returned 13,947%, whilst Shell shares have returned 1,959% - we were warned.

2022 has been a humbling year and we have been disappointed with the performance of the funds, however we remain confident that our bias towards what we perceive to be high quality businesses will prevail – and at current valuations, we believe that the chances are even further tilted in our favour at present.

James Godrich, Fund Manager

The value of securities and their income can fall as well as rise. Past performance should not be seen as an indication of future results. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.

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