This fund beat the S&P 500 without holding any Magnificent 7 stocks. Here’s what they’re buying right now
Picking great stocks and avoiding disastrous investments enabled the Ranmore Global Equity Fund to beat the S & P 500 over the past two years, according to its fund manager. The fund, run by portfolio manager Sean Peche, returned 31% in 2023 compared to 24% for the S & P 500 . The performance stands out further for making those stellar returns without owning any of the so-called ” Magnificent 7 ” technology stocks that have dominated the index recently. The Ranmore fund also outperformed its benchmark with 1.8% total returns in 2022 when the S & P 500 and broader indexes nearly fell into a bear market. Key to outperformance When it comes to stock picking, Peche said the key was “to find a few great winners and avoid disasters.” The fund manager noted that even some top growth managers who owned high-flying stocks like Microsoft and Meta underperformed the market last year because “a few stocks in the portfolio blew up.” Andrew Lapping, chief investment officer at Ranmore, said the fund had great returns since it is focused on overlooked mid-small caps and value stocks, saying, “We invest in areas where there’s less competition, where there’s not a huge flow of capital.” The fund is also highly diversified, with stocks like Brazil’s Petrobras , Japan’s Nippon TV , the U.K.’s GSK , and eBay among its largest positions. The fund manager says they take a probability-based approach with many small positions rather than a few big bets. “We like to source our returns from lots of places rather than just one or two big ideas,” Peche said. Where’s Ranmore investing now? While many in Wall Street and the City of London are negative on Europe, Ranmore sees opportunities. For instance, Bank of America strategists see the pan-European Stoxx 600 index down by 15% to 420 points in the last quarter of this year over a slowdown in global economic growth. Similarly, UBS has a price target pointing to a nearly 10% downside for the European benchmark. .STOXX 1Y line Instead of being bearish, Ranmore believes the key is picking stocks like French retailer Carrefour that could benefit from consumers trading down to cheaper private label products during a cost-of-living crisis. The contrarian positioning isn’t new to the fund. Peche increased exposure to Europe after the Russian invasion of Ukraine. When many investors were bearish toward Europe, the fund manager concluded that “not every company out there was going to get hurt” by higher gas prices and potential recession. Instead, he said, “some companies are actually going to benefit.” Lapping also noted that “there’s actually a very low correlation between GDP growth or lack thereof and stock market returns.” Yet, he observed that there is a correlation between returns and valuation. “And for us, valuation in Europe is much lower than valuation in the U.S., and we find more opportunities.” More recently, the fund has been buying heavily into Chinese stocks like Alibaba , despite concerns around an economic slowdown, which Lapping called the “number one opportunity” given compelling valuations. While risks remain, Chinese tech giants are far cheaper than their U.S. counterparts and have less dilution from stock-based compensation , according to Lapping. “Yes, [the economy is] weak, there’s problems,” Lapping said. “When you look at the valuation, that’s already in the price.” ” Alibaba is our third biggest stock [position] now. Why? The valuation is absolutely compelling,” Lapping added. ‘Cheap’ stocks that could ‘double’ The fund owns an eclectic mix of global names like Dutch bank ABN AMRO, diverging considerably from the fund’s benchmark. “If we find a cheap stock. We don’t care if it’s … a television company in Japan or a bank in Europe. If we think it’s undervalued with good return prospects, we’ll buy it,” Lapping said. Nippon TV, for example, trades at about half its book value over concerns around Japan’s shrinking demographics for broadcast television. However, according to the fund manager, the market appears to be undervaluing its cash and securities. “Most of its book value is cash and investment securities in listed Japanese companies,” Peche said. “If Nippon TV just traded at book value, the stock could double.” A similar upside case exists for ABN AMRO, which offers a 10% dividend yield, trades at half tangible book value, and is priced at five times earnings, according to Peche. This ratio is an important metric used by traders to gauge the value of a stock. “It’s a conservative retail bank in Holland, where in the Netherlands, the economy is doing well,” Peche said. “We think that that company could also double.”
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