The first quarter ended with a 6.4% decline for the Sifter Fund, which is quite a good result after a roller coaster quarter.
The year began with a sharp decline in share prices of growth companies after a strong year in 2021. In February, the stock market levelled off and finally in March the Fund’s value rose by 3.9%. For example, the war in Ukraine in March had little effect on global stock prices, unlike on many European stock indices.
At the end of February, our team conducted an in-depth analysis of the current portfolio and evaluated the impact of the Ukrainian war on our companies. We concluded that our investments’ business operations are not in danger. Only a few of our industrial companies with operations in Europe are exposed to the consequences of the crisis.
Sifter Fund portfolio changes in Q1/2022
Sifter Fund made one new investment in Q1/2022. We studied Universal Music Group for more than two months and concluded that the company meets Sifter’s quality criteria.
- The Dutch UMG is the world’s largest record label company.
- We like the company’s earnings model, where more than half of its revenue comes from people listening to music produced by UMG through different streaming services like Spotify.
- We expect the long-term outlook for UMG to be promising.
- The company earns royalties from the music it produces far into the future, even for several decades.
- Most of the royalties come from songs released years ago, which improves UMG’s earnings predictability.
- We believe that music streaming will become more common, especially in the older age groups, and UMG will get a significant slice from this growing end demand.
The UMG investment was financed by selling off S&P Global position and slightly reducing the weights of Cotsco, Old Dominion, Atlas Copco, and ADP. The reason for the lightening of the weight of these current companies was the rapid rise in the share prices of these companies in relation to the companies’ earnings i.e., the expected earnings yield decreased because of increased share price. In this way, we aim to improve the price-quality ratio of the Sifter portfolio and enable good returns in the future as well.
A globally diversified portfolio provides protection
Currently, the companies in the Sifter Fund are spread across nine different countries and into 20 sub-sectors.
- The United States accounts for about 50% of the portfolio, and when two of our companies from Canada are added, North America accounts for nearly 60%.
- In Europe, we have invested in five companies with a combined weight of just over 20%.
- In Asia and Japan, respectively, we have just under 20% weight.
- The largest field of activity is the players in the pharmaceutical sector, with a weight of about 12% (e.g. Novo Nordisk).
- The second-largest sector is held by semiconductor companies about 10% like Taiwan Semiconductor & Texas Instruments.
- And the third largest sector is semi equipment manufacturers operating in that value chain such as Disco Corporation and Lam Research, with a total combined weight of about 7%.
The goal of Sifter investment strategy is to find the best company in its sector or niche market. Therefore, we avoid excessive concentration on companies in one sector or direct competitors.