Consistently outperforming the market over prolonged periods of time is a rare and invaluable attribute. To accomplish it, a company is likely to possess inherent advantages – such as superior technology, robust barriers to entry or a favourable regulatory environment. Plain luck is scarcely a factor.
For each of the past 21 years, we have compiled a mechanically selected portfolio of proven outperformers for the following 12 months. Since we started compiling the ‘10-Year Growth Oscars’ in March 2001, the portfolio, which is rebased just once a year, has risen 491% in euro terms – which represents an 8.8% CAGR, excluding dividends and dealing costs. That represents a significant outperformance against the FTSEurofirst 300 Index, which has grown at a CAGR of just 1.7%.
These ‘once-a-year’ Pan-European equity portfolios have beaten the index 16 times and lagged it on just four occasions – with one tie. The performance of the 2021-22 crop of Oscars was unfortunately one of the rare instances of underperformance. Our Oscars selection over the year to 1 March 2022 rose 8.1% in absolute terms, a lag of 3%. The dislocation caused by Russia’s invasion of Ukraine, which led to a seven-percentage point reversal in the relative performance of our Oscars selection in January and February, was the primary cause of the detraction.
A company must overcome high hurdles to be invited onto our red carpet. After all, only exceptional stocks can maintain superior returns over the long haul. To be granted an Oscar, a stock needs to have a decade of listed price history and outperformance against the market of at least 50% over 10 years.
It also needs a relative price level within 30% of its 10-year high against the market and a 10-year relative low of no later than March 2017. Additionally, it must display better-than-median earnings revisions, as most long-term winners tend to receive far more upgrades relative to the market than downgrades.
For the 12 months ahead, 267 stocks qualified as Oscars, a healthy rise on the 200 making it onto the red carpet last year. This marks a considerable rebound in the number of Oscar-worthy stocks, after our 2021 batch suffered a sharp drop from the 317 red carpet companies of the previous year. Of this year’s 267, 58 roll forward from 2021, while a further 118 are returning past Oscar winners. The remaining 91 are untested new recruits.
At the industry level, this year’s Oscars selection is meaningfully overweight transportation, industrial services, electronic technology, technology services, distribution services and commercial services. On the other side of the coin, none of our Oscar recipients that are also Stoxx Europe 600 constituents are to be found in the health services or the communication sectors. Our basket is also underweight utilities, retail, energy and non-energy minerals.
One of the portfolio’s most significant industry overweights this year is in electronic technology, with double the weighting relative to the Stoxx Europe 600. Moreover, the number of related companies qualifying for an Oscar in the space stepped up sharply this year – from six to 29. Following analysis of these businesses, we have identified several compelling thematic drivers.
Most of the electronic technology Oscars are aligned to the ongoing semiconductor shortage and capacity constraint theme, accentuated by strong post-Covid demand and supply chain disruption. In addition, we also identify two other notable themes within electronic technology, namely defence and automation.
While the number of stocks within defence is relatively limited, the theme has taken on major significance recently, given the intensifying geopolitical tension in Europe and accelerating defence commitments. The five red carpet stocks focused on defence have collectively amassed an impressive 22 Oscars.
Meanwhile, an automation theme also seems to underpin the high number of Oscars awarded to the electronic technology and technology services sector– another of the portfolio’s significant overweights. While the automation theme is a long-running one, the heightened inflationary environment is driving a need for greater efficiency, while global supply chain disruption has injected new life into the near versus offshoring debate.
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