Richard Farmiloe, lead fund manager of the Sorbus Vector Fund at Sorbus Partners, a private investment office, looks at the macroeconomic outlook and how to achieve sustainable outperformance.

Although the Sorbus Vector Fund has underperformed over the past year, the fund’s long-term performance has been excellent, Richard Farmiloe told WealthBriefing this week.

Speaking exclusively to WealthBriefing, Farmiloe explained reasons behind the strong long-term performance, saying that the firm looks for growth companies, with high gross margins and strong balance sheets.

“We have underperformed our benchmark over the past year, but we have upheld quite well given the global challenges,” he said. The fund was down slightly 0.3 per cent in July whilst the benchmark, the MSCI UK IMI All Companies Index, fell by 5.0 per cent.

“Many portfolios took a dive during Covid, but our fund performed relatively well as we focus on proven firms that have strong balanced sheets,” he said.  

Companies which the fund invests in include Diageo, Unilever, Fevertree Drinks. “It is heavily invested in consumer staples, as these are companies that sell everyday items that people will continue to spend money on, even if there is an economic downturn,” Farmiloe stressed. “I bought Unilever last August/September at an outstanding value, when prices were down. It is a growth stock and it should be valued at much higher than that,” he added. “We haven’t invested much in technology though as we are very price conscious,” he said.

“We continue to have a high cash weighting and are, as always, actively looking for new investments,” he continue.

“Additionally, the performance of our businesses reflect their ability to pass on cost inputs in an inflationary environment, one we are increasingly confident will pay dividends (both literally and metaphorically) in the current environment of swiftly increasing raw material and wage prices,” he said.

The Sorbus Vector Fund is a UK fund, currently with total net assets of £63,662,500 and the fund can invest up to 20 per cent in overseas stocks, with an historical bias towards small and mid-cap companies, he explained. It’s objective is sustained capital and income growth; generally it has no more than 25 to 30 holdings and a buy/hold strategy with relatively low turnover, he said.

Outlook
“The next 6 to 12 months will be tough, especially when inflation starts to hit consumers hard but our portfolio is ideally placed for tougher inflationary pressure,” he explained. “I think we have the stocks to perform,” he said.

Although many economists are saying inflation should fall to 2 to 3 per cent next year, he thinks inflation could be stickier than that, sitting at around the 4 to 5 per cent mark, unless the Fed engineers a significant recession to squeeze it all out. He also believes that the US could have a deeper recession than many think whilst Europe will have a very significant recession, given the energy crisis.

The UK will also go into recession but he believes that the market is much more reasonably valued than other equity markets. “Valuations in the UK look much more attractive than many other geographies. The UK is very undervalued and we are overweight there,” he said.  

“As a family office, we do invest in emerging markets. We are overweight in the Far East as they are much more modestly valued too. We have exposure to Japan and China, in particular, through ETFs. We are underweight in the US as we think it’s significantly overvalued. We also have very little exposure to Europe as we think it will have very significant recession,” he stressed.

“We do invest in gold, which can be an inflation and currency hedge, and we have some exposure to property,” he added. “We also have some short-dated UK bonds. There’s some value emerging in sovereign bonds but not yet in corporates,” he explained.

“We are fairly defensive at the moment as we think there will be a global recession,” Farmiloe concluded.