In 2022, the stock market has been buzzing with talks of a ‘Great Rotation’. This concept suggests that investors are shifting away from the dominant trend of the past 15 years, which focused on growth-oriented large-cap stocks. However, the specifics of who is making this rotation and what they are reallocating their investments into remain unclear.
State Street, the largest custodian bank globally, provides real-time insights into the asset allocation of institutional investors. Despite some minor adjustments, the overall balance between cash, equities, and fixed income holdings has remained relatively stable. While there may be a subtle increase in flows towards cash and bonds, the data does not indicate a significant rotation between asset classes.
The notion of a Great Rotation is not evident in global stock markets either. Despite some volatility in 2022, the momentum trade in large-cap US stocks continues to drive their dominance within the MSCI World index to new highs. The narrative of a shift towards small-cap or value stocks is limited by the sheer size of mega-cap companies and the ongoing rise of passive investing.
Value investing, as exemplified by fund manager Adam Rackley and his SVS Dowgate Cape Wrath Focus Fund, challenges conventional investment wisdom. Rackley’s approach deviates from traditional rules, such as holding stocks indefinitely or focusing solely on quality companies. Instead, he looks for undervalued opportunities with the potential for short-term re-rating.
Rackley’s investment philosophy emphasizes behavioral factors in stock valuation. He seeks out ‘capitulation events’ where investor sentiment has led to mispricing, and takes contrarian positions based on detailed research and discounted cash flow models. Despite facing challenges like timing issues and market reactions, Rackley remains committed to his deep value strategy.
The Cape Wrath Focus Fund’s portfolio includes holdings like Marstons, Costain, and Watkin Jones, showcasing a mix of undervalued assets across different sectors. Rackley’s willingness to invest in companies like EnQuest, despite their perceived riskiness, reflects his contrarian approach and belief in the potential for significant value appreciation.
Rackley’s diverse background, including military service and extreme challenges like rowing the Atlantic Ocean, has shaped his decision-making skills and ability to navigate high-pressure situations. With plans to merge the New Economies fund into the Cape Wrath Focus Fund, Rackley remains focused on maintaining a small-cap value focus, even as the fund’s assets under management grow.
In conclusion, Rackley’s unconventional approach to value investing challenges traditional norms and offers a unique perspective on navigating the market. While the concept of a Great Rotation may be debatable, Rackley’s commitment to deep value investing and behavioral analysis sets him apart in the investment landscape.