Vector 2023 Semi-Annual Review

10 jul. 2023

Dear investors,

We hope this message finds you well, as we reflect upon the trials and triumphs of the investment landscape during the first half of the year. After a challenging 2022, a ray of optimism broke through the clouds, bringing a renewed sense of joy to investors worldwide. Fears surrounding inflation and monetary policy gradually dissipated, paving the way for market growth. Moreover, the increasing awareness of AI's potential impact on global growth prospects infused the investment community with a sense of anticipation. As a result, global equity experienced a significant upswing during the first half of the year.

While observing the regional performance, we find the land of the rising sun, Japan, shining exceptionally bright in local currency terms. However, the depreciation of the Yen against the Euro, owing to the low-interest policy of the Bank of Japan, caused the region to settle within the middle of the pack with a respectable +10.5% gain. Europe (+11.1%), despite the appreciation of the Euro against various currency pairs, once again found itself overshadowed by North America, which soared to impressive heights with a remarkable +13.9% gain in Euro terms. Given that the United States harbours a multitude of mega-cap tech companies, this outcome comes as no surprise. Emerging Asia, marked by a modest 1.7% gain, faced disappointment as investor optimism regarding the reopening of the chinese economy failed to extend into 2023.

This year continues to highlight a profound divergence in sector performance. While Information Technology, Communication Services, and Consumer Discretionary sectors proudly boast double-digit gains, three sectors—Energy, Utilities, and Health Care—have endured a decline year-to-date. The remaining sectors have seen only marginal gains. Delving deeper into sector analysis, it becomes evident that the robust performance of certain sectors owes itself to a handful of mega-cap growth companies driving their returns.

After a brief respite in 2022, Growth companies have once again asserted their dominance, outshining all other factor styles with an impressive +21.5% gain. Particularly, the largest companies have basked in the glow of an extraordinary 2023 thus far, fuelled by their strategic positioning in capturing the AI market. In a manner reminiscent of the dotcom era, the question remains: who will emerge as the primary beneficiary of this remarkable innovation? While uncertainty surrounds the ultimate winners, history reveals that companies across various sectors tend to reap the rewards. Ultimately, the question thus remains whether the increasing share prices of these few mega-caps does not price in perfection for some and should not be shared more equally in general. Conversely, Value stocks (+2.0%) failed to replicate their stellar performance of 2022. This reversal also impacted Momentum stocks (+0.6%), which had significantly increased their exposure to value stocks due to their outstanding performance in the previous year. Alas, even Small Caps (+5.7%) and Low Volatility (+3.1%) stocks, regardless of where one looks, the returns pale in comparison to the extraordinary results generated by mega-cap growth companies.

Given these developments, we acknowledge the challenges we faced in keeping pace with the benchmark. At our core, we remain devoted stock pickers, steadfast in our commitment to identifying promising opportunities rather than engaging in factor timing. In the current climate, where the largest companies dominate the market with their stellar returns, maintaining an equally weighted strategy presents difficulties. Even when our model successfully identifies some of these mega-cap growth companies—such as Microsoft, a longstanding position in our portfolio—it represents just one among the approximately eighty positions we maintain. Its passive weight in the benchmark (4.24%) far exceeds its weight within our portfolio (1.62%), despite our conviction in the stock.

As a result, Vector Navigator has achieved a commendable gain of 5.09% thus far, trailing the broader market by a small margin. Vector Flexible, which is taking a defensive stance, is suffering from rising markets as well as a negative alpha on the portfolio selection component, bringing its year-to-date result to -0.54%. While this outcome may bear a tinge of disappointment, it is sadly to be expected in the prevailing market climate. Nevertheless, we find solace in the gradual diminishment of underperformance witnessed in recent weeks. We fervently hope that the current market, steeped in enthusiasm for a select few companies, will soon direct its fervour toward the diverse and splendid companies that grace our portfolio. These hidden treasures, not only embodying remarkable potential but also offering more enticing valuations, eagerly await their moment to shine.

Best regards,
Werner, Thierry & Nils