Spotlight on Ned Bell, Chief Investment Officer & Co-Portfolio Manager, Bell AM
Global Thought Leader Spotlight
Ned Bell, Chief Investment Officer & Co-Portfolio Manager, Bell Asset Management
In the role of CIO and Co-Portfolio Manager, at Bell Asset Management Ltd, Ned is responsible for the overall return outcomes of client portfolios and providing investment leadership. In addition to Ned’s portfolio management duties, he has primary research coverage responsibilities for Materials and Telecommunications sectors and secondary responsibilities over Industrials and Health Care sector stocks. He is also responsible for recruiting talent, and organising, mentoring and imbuing the investment team in the Bell Asset Management way of managing assets.
Ned also has overall responsibility for ESG research, engagement, escalation, implementation and monitoring, as well as being accountable for the compliance with ESG restrictions and the achievement of portfolio ESG targets, in his role as Co-Portfolio Manager.
The key developments (both current and further out on the time horizon) that are unfolding in the equities asset class which present as risks and opportunities for investors include:
1. Top-heavy rally on its last legs:
Although only representing 18.4% of the MSCI World Index, the mega-cap stocks anointed as the “Magnificent 7” have accounted for 49% of the YTD return as of 30 June 2023. This profound and concentrated rally has primarily been a function of multiple expansions rather than underlying earnings growth. Our view is that these companies have subsequently been bid to valuations in excess of their fair value and as a result may devalue across H2 2023.
2. Quality poised to mean-revert:
Led by many of the companies discussed above, Mega-Cap Quality-Growth has dominated markets throughout 2023. Nonetheless, we expect that traditional Quality will rebound across forthcoming periods. Although inflation continues to moderate, interest rates remain elevated, and we expect that this environment will benefit Quality companies that possess strong market presence, healthy balance sheets and consistent profitability.
3. SMID Caps currently at very attractive valuations:
Although unwarranted, the underperformance of SMID Cap equities throughout the last few years has led to them trading at unprecedented levels relative to the broader market. As of 30 June 2023, SMID Caps are trading at a:
40% discount to the MSCI World Large Cap Growth Index
9% discount to the MSCI World Index vs. an average 9% premium across the last 10 years
4. Financially, SMID Cap companies are very well positioned:
The increased flexibility and speed to which SMID Caps Boards can operate with allowed them to significantly deleverage their balance sheets through the COVID-19 period. This has seen their debt drop to the lowest levels since the GFC and as a result, margins increase substantially.
In addition, consensus estimates also see SMID Caps exponentially growing earnings across the next 12 months – roughly double the pace of Large Caps.
The concentrated rally experienced at the top-end of equity markets this year has, in our opinion, left many asset owners unexpectedly holding an excessive amount of capital in only a handful of names. Given the multiples that the “Magnificent 7” have been pushed to, the valuation sensitivity of many equity portfolios has subsequently ballooned, which has left many investors vulnerable to significant losses should they mean-revert. Particularly ahead of a year where there is a risk of further volatility in equity markets due to persistent macroeconomic and geopolitical uncertainty.
One way that we believe institutional investors can reduce their exposure to such risks is by down-weighting a portion of these positions whilst they are trading at a premium, and reallocating to SMID Caps equities. In doing such, one can enter a position into an under-owned asset class that is simultaneously:
i. trading historically low valuations in a relative sense;
ii. operating healthier balance sheets than at any point in recent memory; and
iii. are expected to outgrow large-cap equities across the medium term.
In addition to the above, the substantial weights allocated to such names in benchmark indices also present an opportunity for investors to achieve significant outperformance should they establish underweight positions to them prior to a de-rating.
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Although inflation continues to moderate, and interest rates remain elevated, we expect this environment will benefit Quality companies who possess strong market presence, healthy balance sheets and consistent profitability.
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Ned Bell, Chief Investment Officer & Co-Portfolio Manager, Bell Asset Management
Ned has over 26 years of experience in the investment industry researching and managing global, international and regional equity strategies across differing market cycles. Ned first gained his stock selection and portfolio construction skills while working for Loomis Sayles and Co in 1997, working in cities across the US, Boston, Massachusetts, San Francisco, California and Washington DC.
Ned joined Bell Asset Management in November 2000 and from 2003, took over sole responsibility for managing all equity portfolios. This included the formulation and design of the Investment Philosophy and Process, as well as the Investment Style based on the premise that a portfolio of very high-quality businesses will deliver above-average returns over the medium to long term - ‘Quality at a Reasonable Price’.
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Disclaimer
The views expressed in this publication are solely those of the individual and do not reflect those of their employer organisation. These views should not be relied on as research or investment advice regarding any stock and are subject to change. There is no guarantee that any forecasts made will come to pass. Forecasts are subject to numerous assumptions, risks, and uncertainties, which change over time, and the individual undertakes no duty to update any such forecasts. International investing may involve risk of capital loss from unfavourable fluctuations in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations.
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