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Finding value in times of uncertainty

We also reflect on the importance of a credible and verifiable approach to sustainability that mirrors the characteristics and objectives of the investment products.

Reflecting on the year that was

One year ago, my themes were the pandemic, inflation, and the potential for great power politics impacting the capital markets. While one might be tempted to claim prescience and offer more of the same this year, I suspect that uncertainty is probably a better epithet for the ride that has been 2022:

"To be uncertain is to be uncomfortable, but to be certain is to be ridiculous" - Socrates

Throughout this year, the forces influencing the capital markets have been both real and imagined. Participants have been surprised; even disbelieving the evidence put before them – a former Sandhurst[i] classmate of mine, Sir Jim Hockenhull, when UK chief of defence intelligence, forewarned of the Russian invasion of Ukraine early in the year only for market participants to discount it as unlikely.

For investors, the recent past is no longer the guide it once was. Money now has a price and current earnings count most – as evidenced by the decline of technology and other growth companies. Uncertainty and sentiment are increasingly behind the market's current fragility, where even the merest piece of good or bad news seems to have a disproportionate effect. Smarter people than me will no doubt provide complex analysis of this in the coming weeks, positing all manner of future outcomes, and forecasting at length the likelihood of fractional variations in interest rates and inflation and other such variables. Of course, such things are relevant, and we will read and digest them, but knowing what you can know matters more.

Know what you can know

In an uncertain world, an active, price-driven, contrarian and long-term investment strategy, such as SKAGEN's, offers great advantage. When all around is hard to fathom or predict, knowing precisely what you are buying, why, and at what price, matters. Identifying the changes that a company might make to improve outcomes, or improve reputation, and helping them to do so, makes a difference. And being courageous when others are fearful confers advantage, especially when applied together with a longer-term investment horizon. This is not complex; it is common sense. After all, it is the same in any period of crisis or uncertainty, whether international or domestic. Those actors that focus on what they can control and care less about what they cannot, invariably prevail.

Knowing what we can know and then acting on this, are two quite different things. We see this in the extent to which our clients agree their investment strategy, but then stop short of putting their money to work – seeking greater certainty that the market has turned and is rising. Make no mistake, the market will always turn one way or the other before any of us see it. In such situations, an incremental approach offers a similar degree of common sense. Providing one invests for the longer term, entering the market and taking profit in a stepwise way reduces the element of uncertainty and increases the likelihood of exposure to beneficial risk. This is the way we invest, so there is sense in it being a guide for our clients in their investment decisions.

"Hel ved"

The concept of hel ved – literally translated as solid wood – is an important test in SKAGEN. We need things to be proper and credible if we are to do them, or indeed invest in them. And so it is with sustainability. Much of the wider financial industry has been swift to garb themselves in the cloak of ESG, making widespread and often undocumented claims. This is a failing that is now beginning to attract the regulator's attention, and not before time.

We have been more modest, choosing primarily to continue with integrating sustainability considerations in our investment process. In addition, we have developed a more structured documentation and follow-up of this. These processes are substantial and credible. They are also aligned with our investment philosophy and the mandates of the funds that we run. We continue to focus on actively engaging with our portfolio companies on a range of environmental, social and governance issues. But our focus will always be on those opportunities that provide the greatest potential for investor return; this is our overriding fiduciary responsibility.

New Year's Conference

As 2022 draws to a close, we start to eagerly anticipate one of the most important events in our yearly calendar, namely our 19th New Year's Conference. On 11 January 2023, we will be hosting a hybrid event out of Oslo, welcoming a line-up of prestigious speakers. We look forward to hearing from the likes of Mohamed El-Erian, Fiona Hill, and Aswath Damodaran, amongst many other world-renowned experts. Fiona Hill is a Northerner, like me. She is also an expatriate, although now a naturalised US citizen. And she has sat right at the centre from where the decisions that very often shape our world are made. I am excited to hear her assessment in January. Find out more about our New Year's Conference and sign up here.

Reasons to be cheerful

We have seen much that is negative during 2022, including the ugly spectre of war in Europe. And both the international and domestic media probably don't improve matters; I am reminded of an old newspaper saying, "bad news is journalism; good news is marketing".

Either way, amongst the negativity there is much that bodes well for the future. Sustained protests against those most authoritarian regimes, China and Iran, are evidently having impact, with some policy adjustments already made. For the first time, a high efficacy malaria vaccine[ii] will be deployed in Africa during 2023, with life-preserving consequences for so many. And recent success with fusion-based energy looks set to put aside all thoughts of disastrous energy policies in Europe – although we may have to wait a while.

So it is with SKAGEN's funds. Strong investment performance over the second half has seen us recoup Russia-related underperformance – most of our Russian holdings remain priced to zero until such time as more normalised trading occurs. Our client platform has remained very stable despite the generally bleak economy, successive market drawdowns and investor uncertainty. We have implemented the latest round of regulation related to sustainability in a credible and substantial way. And the portfolios remain well priced for the opportunities undoubtedly to come in the year ahead.

God Jul

All that remains is for me to wish you and yours a merry Christmas and the very best of good fortune for the year to come.

God Jul

[i] Royal Military Academy Sandhurst – UK officer training academy
[ii] WHO's Malaria Vaccine Implementation Programme (MVIP)

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