The first quarter of the year was excellent for Sifter investors, producing a total rise of 9.0%. This increase was even 3.6% better than the world stock index (MSCI, ACWI). In January Sifter’s rose by 4.3%, and continued with a 1.4 % rise in February and in March, the price of Sifter Fund accelerated by an additional 3.0%.
3 reasons for outperformance
According to our assessment, the Fund’s Q1 return was affected by three things.
- During 2022, several of the companies in our portfolio, especially semiconductor and ICT companies, fell too much in our opinion, and now their share prices have recovered.
- We bought more of these over-depreciated quality companies in late 2022 and early 2023.
- The banking crisis experienced in March sent shares of several banking stocks and indices down. Since Sifter Fund does not invest in banks, this had a positive effect on our Fund’s returns.
What do we promise to our investors?
Although we are extremely pleased that the quality company strategy is working so well, we never try to forecast stock price changes in the future. The one thing we can promise is that as a Sifter investor, you own very high-quality companies around the world that Sifter’s team constantly monitors.
When we look at the key business indicators of the companies in the Sifter portfolio, we believe that we have succeeded in finding very strong businesses.
- The turnover growth has been 11% during the year, which means that our companies are growing.
- The operating profit margin of 26% also indicates a strong ability to make money and that the increased costs have not eaten into the result.
- The return on invested capital (ROIC) has grown towards 22% over a period of more than five years. This gives us confidence that the company’s management has invested profitably in its business.
What actions did we take during the quarter?
At the start of the year, we invested in a new semiconductor company, called BE Semiconductor Industries headquartered in the Netherlands. The company is specialized in semiconductor equipment manufacturing and it is a market leader in its niche segment. We see many quality characteristics in its business and potential long-term growth in the company. We will provide more information about Besi’s business during the spring.
Besi is currently the only company manufacturing production-ready hybrid bonders – the next big technological jump in advanced packaging which is a key technology in furthering the world’s need for faster, more power-efficient, and smaller chips.
We also made two sales. Both were Japanese companies.
- We owned Koito Manufacturing for 7 years, but after in-depth analysis, we decided that the company no longer meets the criteria of a quality company. Koito operates as a subcontractor in the automotive industry, specializing in car lighting. In our opinion, it is difficult to make money in the automotive value chain. Margins are squeezed so much.
- We also sold our stake in Nitori Holdings, which we invested in the spring of 2021. The original investment hypotheses for the company were correct, but the Japanese home decoration market weakened somewhat, and the company’s outlook for its business no longer encouraged us to hold the company’s shares.
What does the future look like – Debt-free and healthy companies can make it through difficult times
The only sure thing is that uncertainty will continue in the market this year as well. The most surprising changes are taking place in the market, which we have all witnessed in recent years – the latest is the banking crisis.
In our view, investors are starting to value healthy companies even more. We estimate that the ongoing uncertainty towards banks will lead to an even greater preference for debt-free companies. Correspondingly, for indebted companies, getting a loan may become more difficult and also expensive.
The companies in the Sifter portfolio are on average debt-free, meaning they have more cash than loans.
We believe that the current market situation will reward a cautious and risk-averse investor. In our opinion, a tested investment strategy and its disciplined adherence are the only ways to prepare for market surprises and uncertainties.
