Global stocks have been on a rollercoaster so far this year and there is little sign of the volatility easing as we enter the summer. Markets reacted badly to Russia's invasion of Ukraine in February and concerns have steadily grown that the conflict's inflationary impact on energy and food prices shows no signs of slowing and is spreading across the economy. Although stocks typically offer good inflation protection, investors fear that the erosion of consumer spending power could cause recession, particularly with companies facing rising costs and central banks aggressively hiking interest rates in an attempt to cool the economy.
These worries have pushed global equities down nearly 12% year-to-date and into bear market territory. For SKAGEN Global, 2022 has been particularly challenging – the fund lags the index by around 7% – but the portfolio remains strong and well-positioned to continue helping clients 'get rich slow'. The fund's performance over our recommended holding period (5-years+) also remains very healthy with 8.6% annualised returns over 5-years, 9.8% over the last decade and 13.0% since launch in 1997.
Following the fund's outsized returns in 2021 – Global returned a stellar 40% and outperformed the index by 13% – a period of retraction this year should not be alarming, however painful such drawdowns inevitably feel. Looking further back, the fund has outperformed strongly in the periods following previous bear markets, which provides grounds for optimism once equity markets begin to recover.
More reassuring is that the current portfolio holdings are performing strongly. First quarter results have generally been solid for our portfolio companies and our investment theses remain intact. A benefit of a concentrated portfolio of 30 companies is that we are able to monitor them closely while our long-term ownership means that we understand the markets and challenges they face.
Consistent with the fund's longstanding investment process, all positions have been identified and built bottom-up based on the portfolio managers' assessment of their ability to outperform over a range of different macro and economic scenarios. They also provide exposure to attractive investment themes such as emerging market quality of life, high switching costs, family ownership and structural winners.
The geographic exposure of the portfolio based on where companies derive their revenue is currently around 53% US, 19% Europe, 2% Japan and 27% Rest of World, demonstrating a diversified footprint across the globe.
A recent addition is Dollar General, the US retailer with over 18,000 convenience stores mostly serving rural America. The company is expanding rapidly, particularly in the west and mid-west, and with new store costs recovered in two years, earnings are growing at an attractive rate. It also has a very strong management team with significant share ownership, which is one of the core themes running through the portfolio. Dollar General has performed relatively well this year with its shares rising 14.0% versus a drop of 22.0% for the broader US retail sector, reflecting its strong customer proposition and resilience to economic headwinds.
More broadly, we believe Global's portfolio companies enjoy significant competitive advantage in their respective industries. The holdings are more than twice as profitable as the index (median ROE of 29% vs. 13% and EBIT margin of 34% vs. 14% for the index), meaning that they are also well-placed to withstand or pass on price rises in an inflationary environment.
Similarly, if we enter a recession, our companies should be well-equipped to outperform thanks to the relative strength of their balance sheets. Analysis of debt servicing ability shows that the portfolio is much healthier than the broader index (median net debt / EBITDA ratio of 0.7x vs. 1.3x and interest coverage of 22x vs. 7x). This is clearly advantageous if demand falls as a result of economic downturn and if interest rates continue to rise.
No one knows when global equities will stabilise, particularly as uncertainty around the global economy and war in Ukraine remains. However, we do know that markets have fallen a relatively long way already and that valuations – typically the best predictors of future returns – are now far less stretched than before the correction.
The Global portfolio managers recently revisited their holdings' forecasts and believe that the portfolio contains 72% upside over a 2–3-year investment horizon, up from around 25% at the start of the year. With the downside protection provided by the companies' strong balance sheets and competitive advantages, SKAGEN Global looks well-placed for long-term value creation and helping clients to reach their financial goals as a core part of their own investment portfolios.
NB: Portfolio metrics as at 31/05/2022 unless stated otherwise.
 Source: MSCI. MSCI ACWI in EUR as at 24/06/22
 Source: SKAGEN, in EUR net of fees as at 24/06/06/22
 31/12/21 –24/06/22 (Dow Jones U.S. Retail Index used for sector returns)