Ranmore's global equity fund is seeing opportunity in beaten-down software
Ranmore's global equity fund boasts a 150% five-year return for investors
A neutral weighting on the U.S. in a global equity fund is around two thirds. When a value investor holds just a quarter of his fund in U.S. stocks, it's obvious that they don't see much value inherent in the stock market.
What's more surprising, though, is the fund manager in question, Andrew Lapping, the chief investment officer of U.K.-based Ranmore Funds and co-manager of its flagship global equity fund, owned even fewer American stocks, until recently as little as 15%.
Andrew Lapping is the CIO of Ranmore Funds, which has about $2.3 billion under management.
The recent increase in the U.S. weighting is owing to his more constructive approach on software stocks. Their valuations declined in the sell-off this year triggered by a concern that AI adoption could disintermediate them. Maybe at peak valuations these stocks were trading on a price-earnings multiples of 30-40 times, Lapping observes, but not after the winnowing caused by AI fears:
"Conversely, you look at some of these software businesses, which 18 months ago or a year ago, people thought were the greatest thing ever. They were happy to pay 30 or 40 times earnings for them because they had huge moats, lots of customers, subscription-type revenue. And then suddenly people thought, 'No, with AI these business models are going to disappear,' which may be true, but I think you've always got to balance the risk and the reward. And with some of these softwares selling down to 10, 11, or 12 times earnings, you've got to say, 'Actually, maybe they're not as shocking businesses as you think.'"
Lapping cites examples of stocks in that sector like Intuit $(INTU)$, Adobe $(ADBE)$ and Wolters Kluwer (NL:WKL) as names that have garnered his attention recently. As well as becoming cheaper, another thing to consider is that "surely a lot of these businesses will be able to save a lot of costs through using AI internally," he adds.
If he likes reasonable valuations then surely semiconductor stocks SOX, particularly since their recent degringolade, must be on his radar? Lapping has a different view. His main reservation is the inherent cyclicality of their businesses: "How long are they going to make these obscene profits for?"
He prefers to make a longer-term analysis of valuations and concludes that memory chip businesses tend to spend too much in good times.
Cyclical businesses don't tend to revert to normal, often reverting to losses, and so he argues, "the time to buy a cyclical business is when they're making losses, not when they're making super profits."
Moreover, when discussing the highly topical issues of record-beating earnings from SK Hynix (KR:000660) and Samsung (KR:005930), Lapping points out that "memory is a commodity market." And China, once it decides to focus on a particular commodity, has a habit of destroying the margins on that business.
"The Chinese work twice as hard as everyone else for a fifth of the pay. Look at the number of graduates coming out of Chinese universities. If they want to solve a problem, they will solve it, it's just a matter of time," he said.
He cites recently-debuted CXMT. (CN:688825) "A year ago, people laughed at them. Now they're producing 6-8% of the world's memory."
Away from the bashed-up software sector, Lapping has also been recently attracted to Meta Platforms (META), drawn to its "network effect" and the strength of its moat: "It's a very powerful thing to break its grip on WhatsApp, Instagram, FaceBook and so on," he said, adding that he would be attracted to the stock at a valuation perhaps below 20 times earnings.
He acknowledges that there are some well-established societal downsides to overuse of Meta's social-media, especially among young people, but he appreciates "at least there's no cloud in their revenue." Cloud is another business Lapping deems ripe for disintermediation by China.
Meta isn't making returns in China that can be corroded like Amazon (AMZN) and Alphabet $(GOOG)$ and, Lapping speculates, "at some stage Meta could turn around and say 'We're going to start renting out our capacity.'"
So, if Lapping is underweight in the U.S. what is he overweight?
"We've got quite big exposure to China, Southeast Asia, places like that." Consumer stocks are a focus for the CIO, a view that hurt performance somewhat in the second quarter when oil price fears shook expectations for Asian consumer behavior. "People are very negative on the Chinese consumer who is in a funk."
Lapping firmly believes over the next decade there is more upside to Chinese consumption than to the American variant as it's coming off a lower base." As an example, he contrasts a stock he favors at present, Anta Sports (HK:2020) to one he doesn't: Nike $(NKE)$.
"It (Anta) pays out a big dividend yield, and it's growing rapidly on that valuation. Then you go and look at something like Nike or similar on a much higher valuation having made numerous missteps. If you buy Nike, you've got to say you're expecting a real turnaround, when actually you've got people like Amer and all these other people coming for Nike's lunch.
In common with many value investors, Lapping prizes patience. He's prepared to wait several years for a stock's performance and operations to turn, particularly if there's a decent dividend yield to reward him while he waits.
The process is clearly working. Ranmore's global equity fund has returned 14% over the last year, 71% over three years and 150% over five years.
-Jules Rimmer
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