Peter Brooke  00:00

Good day, I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 16 of 2023, I am going to talk about a great academic paper from Hendrik Bessembinder. 

Now, before you all quickly turn off, I'll tell you the punchline, it's really phenomenal. Basically, only 2.4% of companies have produced all the net wealth from stock markets in the last 30 years. So, while the average stock market comfortably beats cash, the average share does not. In fact, more than half the companies in the world have delivered returns less than cash. And this is effectively because of a massive skew in the distribution of returns where we have a handful of big winners, giving you many multiples of your money, a big chunk that are really going nowhere, and then on the other side of the tail, we have a number of companies that basically go bust. 

Peter Brooke  00:56

We came across Bessembinder's research some years ago through Baillie Gifford. They had used it to drive a phenomenal success through owning a concentrated portfolio of shares, which they believed to be the best companies in the world. And I think this is one of the key conclusions of the research. Major alpha lies in owning a concentrated portfolio. However, the critical issue is whether the alpha is positive or negative. Did you pick the 9% of shares, which had a return of eight times or more on your money? Or did you pick the 9% of shares that went bust? 

And I think this is a critical question for individual stock pickers. Owning a small selection of share picks is extremely dangerous, and should be for fun, rather than for investing. And in fact, one of the advantages of passive investing is that by owning all the outcomes, both good and bad, one avoids this risk of the extreme tails. Even as a professional fund manager, it can often make sense to pick a basket of shares. For instance, we recently bought the entire Thai market to benefit from a recovery in tourism, rather than attempting to pick just one or two shares, where our knowledge of the market wasn't great enough, and there might have been a unique problem, or a stock specific risk. 

Peter Brooke  02:20

We've spoken about this research before. But the new paper brings in data from all over the world versus the original, which was just US Pacific. So, I want to share a little bit of that just for interest. So, out of the top 50 companies accounting for a massive 31% of global net wealth creation: 35 of those were from the US. Think Apple, Microsoft Alphabet, Amazon, while a further 15 were from outside the US. And I think that skew really reflects the dominance of America in this last period where the American stock market has outperformed strongly. 

So, as I said, we're focusing more on the non-US component because that's the new data. And out of that 15, five were from China, reflecting its growing impact on the world economy. And out of that, the biggest one there was Tencent, which is actually in the top five in the world, in terms of global value creation, which we would all obviously know about through our Naspers and Prosus holdings. Three of the 15, were the global semiconductor giants, ASML from the Netherlands, Samsung from Korea, and Taiwan Semiconductor from Taiwan. And then there's a further five which were basically high quality consumer or healthcare names from Switzerland and France. 

Peter Brooke  03:46

What I thought was perhaps more interesting was looking at the biggest value destroyers over the last 30 years. And nine of the 20 were from Japan, including six Japanese banks. And I think this really highlights a weakness of the research. While the US data was on a very long-term study, the international data is for only 30 years. And if you think about Japan, you had a massive bull market going into this, and now you've had a 30 year bear market. 

So, while I think their research on skewness is very powerful and correct, and actually feeds into your philosophy of looking for long-term winners, and making sure that you don't cut your flowers and water your weeds. Um, you've got to have a longer perspective in terms of working out which of those are going to be the winners from here. So, I'm not convinced that the winners of the last 30 years will be the winners of the next 30 years, as we go through a slightly different environment. 

I hope you enjoyed a slightly more technical perspective this week. Chat later.