The first half of the year closed with a +13% return. It was a good start to the year in absolute terms, but in relative terms the strategy underperformed the MSCI World index by 2 percentage points.
Sometimes underperformance is due to bad stock selections. This year, it has been down more to relative sector performance being unfavourable for our strategy.
Technology and related Growth stock sectors are up around 35% this year, while Value stock sectors such as Financials and Energy have struggled, posting negative returns.
Although our strategy has been overweight the better parts of the Value stock universe – European banks, in particular, are up 14% this year – this has not been quite enough to overcome the headwind against the Value style generally.
The good news is that with investing styles, past performance tends to inversely correlate with future performance. It has historically been worth investing in strategies that are cheap at any given moment.
Because of the poor performance of Value stocks vs Growth stocks in H1, we enter H2 2023 in a positive mood. Our thesis – that banks are too cheap compared to the risks of the sector – is yet to play out. Were valuations to normalise, upside of 30%+ is available from the portfolio over the next 12 months. If a banking crisis is avoided, this upside potential will sooner or later be realised, we believe.