Sasfin Innovation Portfolio - Quarterly Review - Q4 2022

Having declined for three consecutive quarters, global equity markets ended 2022 on a positive note. Gains in global stocks can largely be ascribed to participants in the equity markets anticipating a more subdued hawkish approach by central banks going into 2023.

As exceedingly high levels of inflation continue to be the scourge of central bankers, particularly those in the developed markets, the pattern of rate hiking persisted during the final quarter. The most influential central bank of them all, the US Federal Reserve (Fed), increased its lending rate twice during the quarter, firstly by an increment of 75 basis points and later by a smaller increment of 50 basis points. The 25-basis point reduction in its most recent rate hike, combined with what appears to be a plateauing of inflation, elevated hope among some that the Fed might reduce its hawkish stance, possibly even pivot towards the doves, resulting in a renewal in confidence for stocks. For others, this may have just been a bear market rally, only time will tell.

Wording from the Fed suggests that the central bank remains concerned over inflation noting that further evidence would still be required to support the idea that inflation is headed back down and that additional rate increases would still be appropriate. Positive reads from the most recent economic data points added further murkiness to the interest rate picture. US third quarter GDP was revised upwards, and the US labour market continues to show signs of resilience as recent jobless claims came in lower than expected. Both data points would count against the Fed pausing, let alone reversing its process of hiking interest rates.

While the Fed will remain concerned over tackling inflation with higher interest rates, markets appear to have moved onto what the implications may be under an increasingly restrictive interest rate environment. The “R-word” is likely to be the hot topic in 2023 as recession fears loom large. Corporate earnings and household balance sheets will be closely monitored for signs of deterioration, particularly in an environment of higher interest rates.

 Against this backdrop, the Sasfin Innovation Portfolio managed to eke out a small gain in the fourth quarter. While the portfolio experienced a significant decline over the year, it was pleasing that it managed to consistently outperform its benchmark, the Russell Small Cap Completeness Growth Index. The risk of the portfolio has also been in line with the benchmark when measured in terms of its standard deviation but compares favourably when looking at the Sharpe and Sortino Ratios. Holding Weight Global X Lithium & Battery Tech ETF 11.4 iShares Automation & Robotics ETF 9.5 iShares Global Clean Energy ETF 9.2 iShares Healthcare Innovation ETF 8.0 First Trust NASDAQ Cybersecurity ETF 7.4 Sasfin.

In order to navigate the highly challenging trading environment the investment team actively reviewed and managed the portfolio. The following holdings were sold during the quarter: Digital Realty Trust, Elastic and Stratasys. The proceeds of these sales were used to add two new stocks to the portfolio: Nvidia and InMode.

With a market capitalisation of nearly $400 billion, Nvidia is the largest company held in the portfolio currently by a large margin. Nvidia specialises in the design of graphic processing units (GPUs). GPUs were originally designed for the rendering of 3D graphics which made them particularly useful for gaming as well video and image editing by professionals. However, the ability of the GPU to perform multiple computations simultaneously meant that they are well-suited to the realm of artificial intelligence and its subsets, including machine learning and deep learning. In addition, cryptocurrency “miners” also make use of GPUs when mining for Bitcoin and Ethereum.

Historically, gaming has been the predominant end-use for Nvidia’s GPUs but as cloud computing and AI have grown in prominence, so has the demand for Nvidia’s GPUs particularly in the data centre space where Big Tech companies such as Alphabet, Amazon and Microsoft make extensive use of Nvidia’s products. Nvidia also operates in the automotive space providing infotainment to a host of customers as well as autonomous driving through its Drive PX platform, which is a deep learning tool used by over 300 partners.

InMode is a medical device company that was founded in 2008. The company designs, develops, manufactures and markets nonand minimally invasive aesthetic medical products that target an array of procedures including permanent hair reduction, facial skin rejuvenation, wrinkle reduction, cellulite treatment, skin appearance and texture and superficial benign vascular and pigmented lesions. It has eight patented technologies across 10 product families.

Holding a leading position in the non-invasive medical aesthetics market, InMode has consistently delivered strong revenue and profit growth since listing through product innovation and customer acquisition. Its business model includes both one-time, as well as recurring revenue drivers along with sustainable cost advantages making its long-term business fundamentals robust. The company headquarters are in Yokneam, Israel, with subsidiaries in the US, Canada, and Spain, and joint ventures in the UK and China.

Looking ahead, and as stated in our third-quarter review, the best defence that the management team of the Sasfin Innovation Portfolio has during highly uncertain times like these is to make sure that each investment instrument in the portfolio can justify its inclusion on an ongoing basis. New holdings are brought into the portfolio only on the back of a strong investment case and that investment case is regularly reviewed and tested with the publication of quarterly results and often additionally between results dates. The investment case of even the best company can sometimes falter and that’s why ongoing diligence (but not necessarily trading) is a prerequisite. The investment team will continue to manage the portfolio on this basis, making sure that the portfolio holdings represent the best longer-term investments into the exciting world of innovation.

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