Annual Report 2017

Investment Strategies

Global and International Equities

JOHCM Global and International Equities

Our Global Opportunities team believes that investors need to follow strategies that have the avoidance of capital destruction at their heart.

Our Singapore-based JOHCM Global Select team recently established new positions in two interesting idiosyncratic Japanese stocks. The first, Renesas Electronics, is a leading global semiconductor company that experienced difficulties after the global financial crisis but is now growing again after successfully restructuring under the Japanese-style Chapter 11 provisions. The second is a company called PeptiDream, a unique patented drug discovery platform that combines man-made and natural amino acids, creating trillions of potential peptide combinations for potential new drugs. The company earns milestones and royalties from every product that emerges from its platform, which is now licensed to most leading pharmaceutical companies. For example, Kyorin in Japan and Merck in the USA have identified peptides that meet their respective targeted applications, with the promise of many more milestone payments to come, not to mention massive royalties on the drugs if they eventually reach the market.

Our London-based JOHCM Global Opportunities team are actively looking to diversify the portfolio away from fully valued growth companies into shorter duration assets with less growth potential, but solid cash flows and good yields. Uniti and Rio Tinto are both recent purchases and good examples of this. Elsewhere, the offline retail sector looks increasingly interesting as the market is unwilling or unable to look beyond the threat of online competition, which is undoubtedly real but will affect some more than others. Those companies with high barriers to entry and a service-based proposition, with the ability to evolve with the times, are likely to survive and thrive.

Our Global Select team sees the market rotating between three main scenarios and has sought to position the portfolio accordingly. Scenario one is a continuation of trends seen so far in 2017 of a narrow, technology-led bull market. Scenario two is a change in market leadership to more economically sensitive stocks such as commodities. Finally, scenario three is a bull market correction at best, or a bear market at worst. As a result, the team has been letting cash levels drift up to around 10 percent to provide more ammunition to buy any dips if and when any market sell-off occurs.

With stock markets hitting record highs in recent weeks, our Global Opportunities team believes investors should be wary of complacency, as valuations across many areas of global stock markets currently afford little room for error. Unlike in previous market highs, like the dotcom bubble, the problem for equity investors now is not the distortion of stock market indices by a single, extremely overvalued and consequently oversized sector. The current problem is that valuations are elevated across the board, in ‘quality’ and ‘value’ segments of the market as well as ‘growth’. Unlike in 1999, there is currently no obvious area of the market offering genuine value.

Our Global Opportunities team believes that investors need to follow strategies which have the avoidance of capital destruction at their heart, while maintaining the flexibility to judiciously back the best investments where the risk and reward balance is clearly positive. To that end, it is worthwhile recalling Warren Buffett’s top two rules of investing: ‘number one, never lose money; number two, repeat number one’.