The second quarter of the year continued positively for the Sifter Fund, generating a return of 3% (R-class). Following the rapid growth in the first quarter (14.7%), the Fund’s performance was more moderate, which is entirely normal. Since the beginning of 2024, the Fund has yielded 18.2% (Sifter Fund Global R-class, June 28, 2024).
Please note that the historical performance of the Fund is not indicative of future results.
More Active Six Months
During the first half of the year, we made several changes to the Sifter Fund’s portfolio. Overall, we executed 43 buy or sell transactions, resulting in a turnover of 21% in the portfolio’s content and weight.
Due to elevated valuation levels in some companies, we have made deliberate reductions in the portfolio in those companies where quality and price do not align perfectly and replaced them with more affordable companies.
We reduced the weight of several current holdings in the portfolio due to excessive valuations. We reduced the positions of some semiconductor manufacturers, as the AI hype may have created overly high expectations for the long-term earnings of certain companies. However, no tree grows to the sky. Despite these reductions, we are still invested with a 28% weight in six different companies in the semiconductor sector.
We increased the weight of several existing portfolio companies where we see the appropriate risk-return potential, such as Canadian National Railway and Deutsche Böerse. We have also steadily increased the weight of Safran, a French aircraft engine manufacturer. Safran is now among the top five holdings in the Sifter portfolio. More details about Safran are available in the video.
Portfolio balancing aims to keep the Sifter portfolio in good shape for the years ahead.
We have avoided major failures
One untypical reason for good returns on stock investments often remains overshadowed by spectacular growth stories. By avoiding the biggest mistakes, one should fare reasonably well.
Over the past five years, companies in the Sifter portfolio have not delivered major disappointments, and the prices of individual stocks have not experienced significant declines.
Typically, the biggest mistakes arise when too high expectations are set for a company and its stock, or a certain risk materializes and permanently impairs the company’s profitability. We have managed to avoid these pitfalls.
Extremely high-quality businesses rarely experience unexpected failures because their cash flows are very predictable.
High predictability stems from the companies’ business models, the critical nature of their products and services to customers, and high barriers to entry in the industry. New competitors find it challenging to threaten high-margin businesses.
The decline in the U.S. exposure
We are often asked: Do the good returns of the Sifter Fund stem from a high weighting in U.S. stocks, particularly the Magnificent Seven?
Surprisingly, the portion of U.S. holdings within the Sifter portfolio has declined by 18 percentage points over the past five years, now constituting 44% of the entire portfolio.
On a global equity index (iShares MSCI ACWI ETF, ISAC LN), this figure stands at 62%, and in the S&P 500 index, naturally 100%. Therefore, the Sifter Fund returns do not rely solely on the stellar performance of U.S. growth stocks. Out of the Magnificent Seven, we only own Microsoft and Alphabet.
There are two reasons for the decrease in the U.S. allocation
- While U.S. stocks have performed well, other stocks have outperformed. The best-performing stocks in the Sifter portfolio over the past two years have been Disco Corporation from Japan, Novo Nordisk from Denmark, and BE Semiconductor from the Netherlands.
- We have identified new, more affordable high-quality companies in Europe and Asia and simultaneously sold/reduced U.S. holdings. While there are very high-quality businesses in the U.S., some of them have relatively high valuations that do not meet Sifter’s criteria. Hence, it’s natural to find more affordable companies outside of U.S.
Sifter’s investment philosophy is straightforward: We aim to own a small number of exceptionally high-quality companies globally. We focus our research on the long-term business results and predictability of these companies.
Changes in stock prices are not the primary factor in our investment decisions, but we avoid owning overpriced companies. Therefore, we make calm and necessary adjustments to our portfolio. This is how we have operated during the first half of 2024.
