As investors in London, New York and beyond prepare for the short Festive break, one character is conspicuous by his absence – Santa Claus and his feted end of year market rally. While there is still time for bruised investors to hope for some end of year relief, the numbers suggest that hope – and belief in the existence Santa Claus (and his rally) is not a strategy that Mayar can recommend.
Bah Humbug as Ebenezer Scrooge might say. However, we think that the fundamentals of the market and select businesses do give reason for optimism over the medium-term. As we identify great businesses and great companies we are also prepared for the opportunity to buy at points which offer great value. The market seems set to provide such an opportunity.
While we never make specific forecasts of where overall equity markets are heading over the short term (and we don’t believe anyone can do that consistently), valuation is usually a good place to get a general steer on expected returns. Looking at the MSCI World Index, we observe the following:
Valuations have come down substantially during the past 12 months with earnings increasing and stock prices falling. The MSCI World Index now trades at a trailing PE ratio of 16x, a 14% discount to its historical 20-year average of 18x (orange line in chart below). For comparison, in 2017 it was trading at more than 20x, well above average.
More importantly, it is now very close to a one standard deviation level below the historical average (green line in below chart), which has been a good place to be buying in the past.
Different geographies have fared differently and so have different industries and stocks. This is why the Mayar Global Equity Strategy has been able to generate positive returns in 2018 in a down market. Furthermore, we have found many more attractive opportunities over the past 6-8 weeks than we have over the past two years. We expect these to perform strongly over the next 3-5 years, even if markets are volatile.
In our own valuation framework, we always think about the next 5 years starting from today. In a sense, we think like a private equity investor making a purchase today and trying to estimate an exit value in 5 years’ time to calculate an expected IRR. We perform this exercise on a real-time basis and it helps us determine when and what to purchase. Looking at our portfolio today, we estimate that it is trading at a 23% discount to our conservatively-estimated intrinsic value. This would translate into an expected IRR of 10-12% over the next 5 years.
While we have been conservative during the past 2 years, we believe that opportunities are now getting more interesting. Over the past few weeks, we have deployed a significant proportion of portfolio cash holdings into what we believe are attractive opportunities.
As a result, we are not listening out for sleigh bells or leaving carrots for reindeer. Instead, we are confident that our decisions will help drive investor returns over the next 5 years.
Mayar Fund Performance
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