During the third quarter, the world continued to deal with the consequences of the COVID-19 pandemic. Policymakers everywhere grappled to balance the effects of sharp reductions in economic activity with whatever leeway they could afford for budget deficits and monetary policy. Who would have thought that in the middle of one of the sharpest economic contractions ever, the S&P 500 would reach all-time highs, while the number of unemployed rose alarmingly.
The current market dynamic reminds us of the dot-com bubble in many ways, as investors clamour to buy growth at any price and a handful of extreme winners dominate index returns. At Setanta, we believe the problem with a “growth at any price” approach is that it leaves very little margin for error.
Sustaining growth over the long term is challenging. Looking back at the nine largest technology stocks as of March 2000, only two have surpassed that level of market cap since. Justifying very rich multiples on the basis that today’s successful companies can grow far into the future carries significant risks. There will be big winners which garner a lot of headlines but there is likely to be a long tail of disappointments too.
We continue to be disciplined on price while recognising selectively that high quality companies with good growth prospects at attractive returns merit higher multiples. Our focus is on quality companies with durable franchises managed for the long term and conservatively financed, while retaining our valuation discipline as we seek to ensure we don’t overpay.
The Setanta fund commentaries (links below) discuss, among other subjects, the current ‘value versus growth’ debate and the extreme 90 year valuation gap that has opened up. We also analyse the principal drivers of fund performance in Q3 2020, and review portfolio activity over the quarter. We hope you find the newsletters interesting – please let me know if you need anything else.