A concentrated stock portfolio, like Sifter Fund, cannot outperform stock indices every year, as these typically include hundreds or even thousands of stocks. Various macroeconomic situations can periodically impact the returns of a concentrated portfolio either negatively or positively.
This was evident in Q3/2024, when capital on the stock markets shifted from technology companies to so-called defensive companies.
In our view, the business value of quality technology companies has not declined to the same extent, and we took advantage of the opportunity to add discounted technology stocks to our portfolio.
We believe that in the long run, a portfolio of 30 companies should outperform many market indices when companies are selected with solid reasoning, major risks are avoided, and our disciplined investment process is followed.
Historically, we have succeeded. Over 21 years, the Sifter Fund has outperformed the index 12 times and underperformed it 9 times. Bad years are inevitable and very likely to happen.
Cumulatively, over 21 years, the Sifter Fund has returned 649%, while the index has returned 552% over the same period (June 20, 2003 – November 18, 2024)*
This demonstrates that a concentrated strategy can generate significant excess returns over the long term, even though individual years may be challenging. Please note that historical performance is not indicative of future results.
In terms of returns, 2024 has been excellent so far with +10.9%, but the global index has delivered slightly better performance. Why has the Sifter Fund lagged behind the index this year?
Overweight in Semiconductor Equipment Manufacturers
There are currently two narratives within the semiconductor industry. The main attention is on AI chips, where Nvidia and TSMC are making massive profits. The Sifter Fund does not own Nvidia, which is the largest holding in nearly all indices. We have owned TSMC since 2015.
The other story in the semiconductor industry is less well-known, as there is no hype around it—quite the opposite. Basic chips, used in cars and electronics, are at the bottom of their cycle.
These are manufactured by companies like Texas Instruments and several large Asian chipmakers. When most of the industry is at the bottom of its cycle, it affects the entire supply chain.
The Sifter Fund has invested approx. 15% of its assets in four semiconductor equipment manufacturers, including Lam Research, Applied Materials, Disco Corporation, and BE Semiconductor. These equipment manufacturers are enablers, providing the “picks and shovels” for chipmakers. Although the demand for AI chips is hot, the reality is that large volumes of chips and the entire semiconductor industry (excluding AI chips) are at the bottom of their cycles.
However, we believe that the long-term growth drivers of the entire semiconductor industry are very strong. We are likely to see excellent results from most companies in this sector in 2025 and 2026.
Given the stock market’s short-sightedness, we do not believe that these future peak results are yet priced into the valuations of our companies. Therefore, we have slightly increased the weighting of these equipment manufacturers in the portfolio after their stock prices declined between August and October.
The semiconductor equipment manufacturers we own, like Lam Research and Applied Materials, are clear market leaders in their niche markets. They capture the lion’s share of the growing demand for chip manufacturing capacity, and with very high margins.
Of course, we have identified the potential risks of U.S. tariffs and export bans on semiconductor equipment to the Chinese market. At the same time, while China’s growth is being curbed, the rest of the world (U.S., EU, and Asia) is heavily investing in new chip factories (capacity) at a rapid pace. This trend is unlikely to stop.
Thus, Sifter has a tenfold overweight (approx. 15% vs. 1.5%) in semiconductor equipment manufacturers compared to the global stock index. This is why the fund’s return has been slightly lower in 2024 compared to the global stock index, which has benefited from the rise of Nvidia and other popular stocks.
Strong Performance of the Banking Sector in 2024
The banking sector has generally performed exceptionally well this year, but the Sifter Fund does not invest in banks.
The 2008–2009 financial crisis taught us that bank balance sheets are too complex and opaque to assess, making it difficult to predict their future earnings and risks.
For example, in 2023, the banking sector experienced a significant crisis when several banks faced financial difficulties, and a run on deposits brought down Silicon Valley Bank — a major, high-quality bank, until it no longer was.
This affected the entire sector’s stability and highlighted the weaknesses in bank balance sheets and their vulnerability to market disruptions. The Sifter Fund enjoyed excellent returns in 2023, partly because we do not own banks. This year, the situation has been reversed.
We do not claim that banks are bad investments or companies, but they do not meet Sifter’s quality criteria for inclusion in our portfolio. The risks associated with banks are not the risks for Sifter investors.
Portfolio Size and the Side Effects of Concentration
We believe in concentration, not excessive diversification. According to several studies, owning more than 20 quality companies from different parts of the world, preferably in different industries, provides adequate diversification. The Sifter Fund holds 30 companies, while indices often have thousands of stocks.
A concentrated portfolio enables a deep understanding of individual companies, which is especially helpful when stock markets are turbulent.
Investment decisions are always better when the value of companies is viewed over a five-year horizon. This approach avoids exposure to short-term opportunism or excessive risk-taking during market crashes or hype.
However, a concentrated portfolio can expose the fund to lower returns, as problems in individual companies or sub-sectors can affect the entire portfolio’s performance, as has happened in the second half of 2024.
On the other hand, the advantage of a concentrated strategy is the potential to achieve significant excess returns over the long term. This strategy requires disciplined execution of the investment process and the ability to avoid timing the market based on macro news.
What Kind of Investment Targets Are We Looking For?
The purpose of the Sifter Fund is to hold a small number (up to 30) of quality companies over the long term. On average, we hold companies in the portfolio for over five years, with a low turnover rate (10–15% per year). There are dozens of indicators of quality business, but we primarily look for companies that combine three key aspects:
Growing End Market
A growing end market is one of the most important factors for a successful quality company. When a company’s industry or niche market grows, it creates opportunities for business expansion and earnings improvement for years to come.
For example, the growth in the semiconductor industry is driven by the global increase in data volume, continuous chip miniaturization, and massive customer investments in new technologies. Companies operating in such markets can benefit from both organic demand growth and new innovations that strengthen their competitiveness and market position.
Our research shows that over 60% of a company’s long-term growth can be attributed to industry and end-market growth.
Sustainable Competitive Advantages and Unique Revenue Model
Sustainable competitive advantages are crucial in quality business. A company may have, for example, a dominant market position, providing a strong lead over competitors, or scalable products that enable cost efficiency and growth without large additional investments.
Cumulative learning, or the company’s ability to leverage long-term experience and continuous improvement, can create competitive advantages that are difficult to replicate. Additionally, patented innovations ensure that the results of the company’s product development remain its exclusive benefit.
A unique revenue model or delivering unique value to the customer can also differentiate the company from competitors and strengthen its market position.
Strong Financial Position
A strong financial position is the foundation of a quality company. This means a strong balance sheet with low or no debt, as well as high margins that indicate business profitability and the ability to maintain pricing power.
A good return on equity (ROE) or return on invested capital (ROIC) shows that the company knows how to use the capital provided by shareholders efficiently and create value. Financially strong companies can also capitalize on market uncertainties and invest in growth when competitors may struggle to obtain financing.
We Are Disciplined Long-Term Investors
The Sifter Fund’s strategy is based on a concentrated portfolio of quality companies and a disciplined screening process. Over 21 years, the fund has achieved significant excess returns, though not without annual challenges.
Historical success does not guarantee future returns, but a disciplined process and strategy are essential components of success.
Santeri Korpinen
CEO
*Sifter Fund Global PA class vs. MSCI ACWI Index (NDEEWNR), 20.6.2003-18.11.2024, return in eur. Source: Bloomberg
