It’s been a tricky 2022 for global stock markets and that’s made life hard for ordinary and professional investors alike. In this feature several leading fund managers explain what worked out for them over the course of the year and what went wrong.

James Harries – Securities Trust of Scotland (STS)

What worked?

At Troy (Securities Trust of Scotland’s investment manager) we seek companies that generate sustainably high returns on capital employed bolstered by identifiable competitive advantages, such as consumer staples companies. They have done well for us this year.

A good brand will conjure up in a consumer’s mind a particular idea or concept about a product or company. This engenders both loyalty and a degree of price insensitivity which is especially valuable in more inflationary times. This is made more powerful still when married to a product that is bought on impulse. Examples include Hershey (HSY:NYSE) (chocolate) or Pepsi (PEP:NASDAQ) (predominantly snacks).

What didn’t work?

Domino’s Pizza (DOM). This is a business with extremely attractive returns on capital that had suffered from lacklustre execution and a long running quarrel between the company and the underlying franchisees.

Following engagement by us and the purchase of a significant stake by an activist investor, we were pleased to see changes in senior management including the chairman and chief executive. Unfortunately, the new CEO recently resigned and returned to be the boss of his previous employer. Further, Domino’s is exposed to the cost-of-living crisis.

Andy Brough – Schroder UK Mid 250 Fund (B76VYS2)

What worked?

Telecom Plus (TEP), a multi-utility group, is our second top positive contributor to relative returns this year. Offering a cheaper deal by bundling services together in an environment where consumers are getting squeezed by rising costs has resulted in an acceleration in customer growth (24% year-on-year). Adjusted pre-tax profit this financial year is expected to be £95 million, which would represent an increase of more than 50% on last year.

What didn’t work?

Catalogue retailer Studio Retail (formerly Findel) sells a range of homeware, clothing and gifts and struggled as the cost-of-living rise hit consumers. The company unfortunately fell into administration, and we lost our investment.

Freddie Lait – Latitude Horizon Fund (BDC7CZ8)

What worked?

Having a portfolio of businesses which grow substantially while trading at inexpensive valuations (around 13 times earnings at the start of the year) has allowed us to generate positive returns, supported by underlying cash flow growth, despite a backdrop of falling markets.

What didn’t work?

The small allocation we have to internet and technology shares suffered this year. Technology shares were the poster child of the bubble which ended in 2021, and almost all stocks in this sector have fallen meaningfully. In general, valuations remain high, and we believe there is still a risk of both a further derating and an earnings recession following the boom of 2021.

Jamie Ross – Henderson EuroTrust (HNE)

What worked?

Over the past 24 months, we increased our exposure to financials and energy, and it is this part of the portfolio that has worked well during 2022. Positions in Munich Re (MUV2:ETR) (a German reinsurance business), TotalEnergies (TTE:EPA) (a French oil & gas company) and Deutsche Borse (DB1:ETR) (a German exchange business) contributed positively.

What didn’t work?

Our small positions in Delivery Hero (DHER:ETR) (takeaway food delivery) and HelloFresh (HFG:ETR) (meal kits) have both been costly. We like the long-term positioning of these businesses, but both have been impacted by fears over consumer weakness and an inverse correlation between their equity valuations and interest rates.

Guy Anderson – Mercantile Investment Trust (MRC) 

What worked?

Positive contributions to portfolio performance in 2022 have been primarily driven by stock-specifics. 4imprint (FOUR), the branded merchandise supplier, has delivered strong profit growth, ahead of expectations, as it has capitalised on improving mobility after the pandemic while demonstrating strong market share gains.

What didn’t work?

Our holdings in the consumer discretionary sector have been drags on performance this year. In particular, our holdings in retailers, which as a sub-sector represented 11% of the portfolio at the start of the year, including holdings in Watches of Switzerland (WOSG) and Dunelm (DNLM), have been disappointing.

Stuart Gray – Alliance Trust (ATST)

What worked?

Remaining diversified by style and industry meant that we didn’t suffer disproportionately from the sharp drawdown in growth and technology stocks, while benefiting from exposure to the gains made by energy stocks.

We also benefited from exposure to defence-related stocks such as              BAE Systems (BAE). The war in Ukraine likely drew greater attention to the value of these businesses that we have been invested in for some time.

What didn’t work?

With the market swayed by macro considerations and near-term safety, stock selection based on longer-term company fundamentals wasn’t always easy. In particular, stock selection in the communication services sector, primary in the US, was a drag on returns.

Carlos Hardenberg – Mobius Investment Trust (MMIT)

What worked?

Avoiding some of the major risks in emerging markets. While our stock selection is bottom-up driven, we are very mindful about macro and regulatory risk as well as a lack of governance standards. This has meant that we had no investments in Russia at the time of its invasion into Ukraine, and that we invest very conservatively in China.

We have used the recent downturn to add some highly innovative
companies to our portfolio. They have already had a positive impact on performance. Every crisis creates opportunities, and it is our task as investors to identify them.

What didn’t work?

What clearly hurt performance were companies with direct exposure to the semiconductor cycle. Although we prefer asset-light businesses which are brand and margin leaders, the semiconductor companies have not been immune to the hefty cyclical downturn of the industry. We continue to have high conviction and are looking forward to the recovery in the near term.

We do not invest in sectors that we believe are not compatible with a sustainable investment approach. This includes fossil fuels and mining, sectors that have profited from the shortages and supply chain issues in the wake of the pandemic and the Russia-Ukraine war.

Kartik Kumar – Artemis Alpha Trust (ATS)

What worked?

2022 has been a difficult year for most sectors other than energy and commodities where we have modest exposure. One company that has performed well is Plus500 (PLUS), a stock we have held since 2016. As a retail trading platform, Plus500 has benefited from elevated volatility, and it has been smart with its capital allocation.

What didn’t work?

We carried a significant holding in the airline sector into this year, expecting suppressed demand to rebound strongly. Overall capacity had declined as a result of the pandemic, so we expected surviving airlines to benefit. This view played out but share prices have performed poorly, reflecting concerns over the impact of higher oil costs and uncertainty over the outlook for demand in the near term due to recession.

George Ensor – R&M UK Micro Cap (RMMC) 

What worked?

In a year dominated by a rapid increase in the cost of capital, tightening liquidity conditions and heightened economic uncertainty conditions have been ripe for non-cyclical shorter duration assets.

Our top performer in 2022 has been Capital (CAPD), a business that provides production and exploration drilling services for gold miners. High fleet utilisation has driven improving return on capital and cash generation and the shares remain on a low valuation despite the strong performance.

Diversified Energy (DEC), a consolidator of traditional gas wells in the US, has benefited from European demand for LNG. Shanta Gold (SHG:AIM) has benefited from improving operational delivery at its core asset while its second asset is on track to contribute to production next year and exploration results from its third asset have been exceptional.

What didn’t work?

Early-stage growth companies with high reinvestment rates that support organic growth but depress profitability such as ActiveOps (AOM:AIM), Kooth (KOO:AIM) and CMO (CMO:AIM) have been aggressively sold off due to deteriorating risk sentiment and higher cost of capital.

Poor risk sentiment and record outflows from UK small-cap funds has driven an aversion to illiquidity. Recent surveys highlight extremely depressed consumer sentiment and our overweight to the UK consumer has been painful – the FTSE AIM retail index fell by 84% from its high in February 2021 to the low in October 2022.

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