Wealth Strategies

J Stern & Co Likes Today's "Shovel Provider" Firms In Tech Play; Smiles On Industrials

Tom Burroughes Group Editor London 20 May 2024

J Stern & Co Likes Today's

This news service speaks to an investment partnership – born out of a family office – with origins in Europe, and now reaching to the US. It explains how it plays the AI story, and other trends that are turning business models upside down.

While there is much noise about AI and technologies potentially upending the global economy, it makes greater sense to play this story as the shrewder business folk did during the mid-19th century gold rush. That means focusing on shovels, wagons, work clothes and related kits, rather than trying to find the yellow metal. 

This sort of approach is very much part of how London-based investment house J Stern & Co approaches putting money to work, it told this news service in a recent briefing.  

The “shovel providers” of today – manufacturers of advanced silicon chips, related computer equipment, cloud computing firms, energy connective businesses and the like – are the kind of areas that appeal to J Stern & Co. This approach is particularly important to its World Stars Global Equity strategy. The strategy – a relatively concentrated one with 29 stocks – was launched in 2012 and has been available as a UCITS fund since 2019. Since the inception of the fund, it has chalked up a cumulative performance of 86.4 per cent after fees, against the MSCI World Index of developed countries’ stocks, of 84.61 per cent (source: J Stern & Co). 

The underlying economy, considering the “tremendous shocks” it has sustained (Covid-19, Russia/Ukraine, changing supply chains, etc) has been functioning relatively well. J Stern & Co’s team is “optimistic” about how business can adapt via innovation, entrepreneurial foresight and risk taking, Christopher Rossbach, chief investment officer and portfolio manager of the fund, said. He is a co-founder and managing partner in the business. Rossbach spoke alongside Katerina Kosmopoulou, deputy portfolio manager on the strategy, partner, and global equity analyst.

About 40 per cent of the strategy stocks are exposed to the “digital transformation” story, whether in cloud computing, for example, or in cloud-related software businesses such as Salesforce; or American Tower, a US real estate investment trust which owns, develops and operates wireless and broadcast communications infrastructure. 

Some 20 per cent of the strategy is in consumer stocks and 16 per cent in healthcare, Rossbach continued. 

But perhaps surprising for a strategy that invests in quality stocks is that 24 per cent of the strategy is currently in industrial stocks. That is because, as a general rule, J Stern & Co avoids capital-intensive business sectors but likes specialised industrial companies that provide solutions to big problems such as energy, construction or water management.

Use cases and capacity gaps
The world economy is having to deal with how the use cases for AI, for example, are outstripping available computing power. With the use cases, the economy is still in an early stage of development, and that means areas such as semiconductor fabrication are and will remain a key growth area, Rossbach said. 

At a time when there is much talk about the supposed extraordinary high valuations of the US “magnificent seven” big tech stocks, Rossbach argued that talk of a bubble around such valuations is overblown and mistaken. (The seven stocks in question are Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla and Meta platforms.)

“You have to differentiate between stocks but I don’t think we are in a kind of tech bubble…I don’t see valuations as unsustainable,” he said, citing the case of advanced chipmaker Nvidia, which trades on a forward price-earnings ratio of 30 times. “These are reasonable multiples,” he said, given the rapid growth prospects of many such firms. 

Interest rate hikes in the past two years have, among other effects, taken some heat out of valuations anyway. “A few firms are trading below [their] average trading ranges,” Rossbach said. “The growth is sustained because they [these firms] are transforming the economy…there is a cash-on-cash return for the growth that they are generating.”

Rossbach said the strategy stands out because it looks for companies which are able to adapt to unfolding opportunities – as seen by the emphasis on industrials; another differentiator is long holding periods, evidenced by a five- to 10-year holding period and a low (circa 10 per cent) turnover rate since the strategy’s inception. In fact, the team would like to be able to hold firms for 20 to 25 years if possible, he said. 

The firm, which has more than $1.5 billion in assets under management in this strategy, has roots in Europe and the US. 

Pragmatic ESG
Kosmopoulou, talked about the World Stars Global Equity Fund’s approach to ESG investing, an area that has seen ups and downs in terms of political and financial support and criticism. A crucial point, she said, is that ESG is meant to be a long-term approach, and is not about quarterly reporting cycles. 

“ESG is here to stay because there is a business case for it,” she said, arguing that ESG is becoming institutionalised in the same way in which international accounting standards had historically.

J Stern & Co carries out its own internal analysis of companies, such as the financially material aspect of ESG issues, to conclude whether a firm is effectively managing these, she said. J Stern & Co adopts a “traffic light” system – green for “good” and red for “bad”; and the carbon intensity of its overall portfolio is 80 per cent below that of the MSCI World Index, Kosmopoulou said.

As an example of how the strategy approaches these issues, Kosmopoulou cited Switzerland’s Sika Group, which focuses on materials technology, such as high-end building materials: waterproofing, sealants and concrete additives. Flaws in buildings and infrastructure can make or break a project, meaning that Sika’s products are critical for its customers. Equally, the construction sector accounts for over 35 per cent of global greenhouse gas emissions and Sika offers extensive solutions for addressing environmental performance. “This is important to solve for net zero,” she said. 

Another reason for explaining this “key holding,” Kosmopoulou said, is that J Stern & Co engaged as a shareholder, warding off a hostile takeover by Saint-Gobain during 2014 to 2018 and developed a “deeply embedded” relationship with the firm. This illuminates the broader investment stance.

The strategy steers clear of resource-based industries, and regulated industries (such as power utilities), but it does see value in companies that supply power generation sectors, such as those making transformers, for example. 

There is a “huge reshoring” of manufacturing into the US, and there are companies that are benefiting from that, she said. Asked about worries of high equity valuations, Kosmopoulou said that, unlike the late 1990s dotcom period, the big tech firms often discussed are “generating huge amounts of cash-flow.”

Away from the US, companies such as Switzerland’s Nestlé has rationalised its product lines and is trading at a 15 per cent discount compared with its historical levels. Similarly, UK drinks conglomerate Diageo, which has been working through inventory problems post-Covid, is trading at a discount of over 10 per cent. “These [Nestlé, Diageo] are stocks we have been adding to.”

The organisation oversees assets for the 200-year-old Stern dynasty, with 20 per cent of assets in the World Stars Global Equity strategy from the Stern family and its partners. It traces its origins to a wine merchant family which transformed its business into a bank in 1805 on the counsel of their neighbours, the Rothschild family, who had gone through that transition a few years earlier (coincidentally, the same year that Swiss private bank Pictet was founded). The family flourished, operating across Europe. During the Second World War, the French branch of the family represented by J Stern & Co fled to New York in 1940.  

Whilst in New York, Maurice Stern created an investment strategy of long-term quality stock picking. In 1946, he returned to Paris to rebuild the banking business in Europe, including an asset management business. After being run for two generations, the business, called Banque Stern, was sold in 1988 to Swiss Bank Corporation (now known as UBS). The family created a family office in Geneva for the Stern family. J Stern & Co founded in London in 2012, builds on that legacy. Today, it has offices in London (2012), Zurich (2014), New York (2023) and Malta (2021).

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