Credo News

The £119m (R2.8bn) Credo Global Equity fund is a value portfolio with a quality overlay.

‘The fund has a value-orientated outlook and feel with the quality overlay. That protects investors when pure or deep value continually underperforms,’ Credo portfolio manager Jarrod Cahn told Citywire South Africa during an interview.

Cahn co-manages the Credo Global Equity fund, which is available in South Africa as the R478m BCI Credo Global Equity feeder fund, with Citywire + rated Jason Spilkin.

Citywire + rated Cahn said the fund has a 70% correlation to value.

‘I pay far more attention to what’s happening in growth as a strategy rather than say quality because we are inversely correlated to growth,’ he added.

Credo aims to buy high-quality businesses.

‘We look at the market position of that company, its economic moat, management and fundamentals around what the business does – the runway and growth for the business,’ Cahn said.

‘Typically, the type of companies we buy are in the top three of their market sector,’ he added.

‘We are not deep value investors. This is abundantly clear in the type of businesses and the P/E of the businesses we buy. However, we are not scared to buy companies that trade on higher P/E multiples,’ Cahn (pictured below) said.

However, he said Credo was unlikely to buy Tesla or Nvidia, but potentially something like Paypal.

‘We don’t want to be boxed in something to say we will only buy a stock if it trades on eight or 10 times. Typically those [stocks] are kind of value-trap businesses,’ Cahn said.

The fund’s benchmark, the MSCI World index, trades on a P/E multiple of 15 to 16 times and the P/E of the Credo fund is about 12 to 13 times, he added.

‘The fund has always traded at a discount to the MSCI World index and traded at a similar P/E ratio to the MSCI Value index,’ Cahn said.

‘We don’t want to buy junk, low-quality businesses, i.e. dysfunctional businesses or businesses that are broken and will never actually make money for clients,’ he added.

Credo has a three-pronged approach to investing in and valuing businesses.

‘The first prong is revenue or earnings per share growth. The second prong is a multiple rating. The third prong comes from your free cash flow yield, which determines your dividend yield.

‘Those three elements bring you some calculation that gives you what we have, which is our internal rate of return (IRR). We look at what the stock’s total return index or the IRR will be over a three- to four- to five-year period,’ Cahn said.

He said 2023 had been a difficult market for most investors outside the Magnificent Seven.

Mid-cap stocks punished

‘Even growth investors that invested in lower-quality growth have not performed well because the markets punished mid-cap stocks,’ he added.

‘It’s been a savage market for most participants other than in mega-cap tech. The big conundrum has been the excitement around the AI explosion,’ he added.

‘Interest rates at some stage will start to come down in the US, which you would think would be better for growth than value. The big concern I have had for the last six months is that all the rerating in the market has taken place through multiple expansions in growth, as opposed to multiple expansions in value.

‘We’ve also seen this massive bifurcation of returns between the mega-cap stocks and the equal-weighted stocks. These periods of outperformance are unsustainable, and they can last a year or two, and then the bubble gets pricked and bursts, and you get a mean reversion,’ Cahn said.

‘I’m saying this could continue for another six to 12 months, and you could get the same kind of outperformance of these stocks next year.

‘I think you get some kind of rebalancing, and maybe they just start underperforming for a significant period. Other sectors of the market will start outperforming,’ he added.

‘The valuation of growth versus quality and value is getting back to extremes. At some stage, there’s a level of mean reversion,’ Cahn said.

Fixated on a theme

‘The markets are fixated on a theme and a certain portion of the market, but that can’t last forever,’ he added.

‘Either you have earnings disappointment or some kind of disintermediation that looks very unlikely at the moment. But things change quickly,’ Cahn said.

‘Our portfolio has never been thematic in the sense that we back just China, or we just bet [on] technology, or we just back energy. You need a diverse portfolio of stocks across different sectors and buy quality businesses that are attractively valued,’ he added.

‘The concentration of return and risk is unique and you’ve got to go back to 1977, I think, where you had such a narrow band of stocks that influenced the market to this significant degree ie over 20% of the portfolio,’ Cahn said.

‘We’ve seen it with the oil embargo in the early 1980s. We’ve seen it with Japanese banking stocks and even in the Internet bubble. Even then, those tech stocks didn’t represent 20% of the portfolio’s index. They represented, I think, about 15%,’ he added.

Uncharted territory

‘We are in uncharted territory,’ Cahn said.

Over the year ending in October, the portfolio delivered 10.5% versus the fund benchmark return of 12.7% and the Asisa global equity general category average of 10.8%.

From the fund’s inception in February 2020 until the end of October 2023, the fund has delivered 10.6%, versus an annualised 9% for the Asisa category and then 10.8% for the benchmark.

‘[The years] 2020 and 2021 were massive years for growth. It’s fair to say that if we are yin and yang with value and negatively correlated to growth, we would have underperformed during that period, and that’s what we did,’ Cahn said.

‘But in 2022, when value did well, we massively outperformed the MSCI Value and the MSCI World indexes. The significant outperformance regained a lot of the underperformance in 2020 and 2021,’ he added.