On opportunities arising, and negative beta

The last three calendar months have seen a repeat of a familiar pattern in the market. Some questions arise on AI spending, the market drops and the portfolio rises. Then within a few days an exciting piece of AI news emerges, the moves reverse and normal service is resumed. It is not just us who have noticed this. Recently the unusual structure of the equity market has been highlighted by, amongst others, Goldman Sachs, who note that a record number of stocks in the S&P 500 index are exhibiting something known as ‘negative beta’ⁱ. This is where a stock price goes down when the broader index goes up, or vice versa. We have been talking about this for some time in different way with the portfolio’s beta having declined significantly over the last couple of years, so the recent observation by market commentators absolutely rings true with our lived experience. The obvious cause is the warping of the market by the sheer size of the trade around AI.

There has definitely been a shift in market mood though. Part of this shift has meant some of the portfolio’s holdings in digital service companies deemed to be on the wrong side of the AI debate have recovered, notably Microsoft, SAP and Accenture. However, valuation opportunities continue to present themselves. Some of these are in interesting new areas for the portfolio, such as GTT in liquefied natural gas transportation design, and Honeywell International in industrial process control and building automation. Others are familiar ground. We have re-bought global eyewear market leader EssilorLuxottica, building a small position at a valuation under half of where it peaked in 2025. The stock had been bid up on excitement around its smart glasses tie-up with Meta, which we thought had got ahead of itself, so we sold the position. Now market excitement has turned to scepticism, and the ‘Succession’-like shenanigans with the Del Vecchio heirs who own a chunk of the business is also weighing on the stock. We think the family dynamic is largely a sideshow, and the valuation means we can pick up the enviable frames and lenses business at a discount and get any upside from smart glasses into the bargain.

The broad point is that there is plenty of value to be had in this market across many names, which has led us to hold a record 48 companies in the portfolio. The valuation of an individual company may be driven by idiosyncratic matters as with EssilorLuxottica, thematic factors as with digital service businesses, or macro concerns as arguably applies to consumer goods companies. This is all likely augmented by the negative beta phenomenon. Whatever the reason, the portfolio’s 16x forward price/earnings multipleⁱⁱ and free cash flow yieldⁱⁱⁱ of over 6%^iv are very cheap compared to our expectations for these excellent businesses.

The current valuation environment in our investable universe of quality companies is reminiscent of the post-Great Financial Crisis period, an amazing statement given the bull market that has driven global indices to record highs. That quality businesses rarely get fully valued is in fact one of the attractive features of the investing style over the long term, but the discrepancy to the market is now pretty extreme.

The generation of cash from capital efficient businesses that compounds over time is not sexy or spectacular, and thanks to the mathematics of the economics does not necessitate high growth in revenues. Thus investors rarely put full value on those characteristics, generally preferring high growth rates, particularly in times of rising markets. In our estimation, our version of quality in general got somewhere close to being fairly valued in the early 2020s (and we communicated as such at the time), but the snap back over the last few years has led to a yawning valuation opportunity.

We should note that some areas of the portfolio, mainly consumer goods companies, did see their earnings growth rates moderate after the covid pandemic. All the same, we think that the negative sentiment indicated by current valuations is overdone and no heroic assumptions are required for the portfolio’s valuation to be more than justified from here. We are not sure the same can be said elsewhere.

For the portfolio, combining attractive operational and financial characteristics with low valuations creates a margin of safety, but also future value creation potential. We’re not saying that the portfolio can’t get cheaper, anything is possible. But if the valuation headwind abates, as it has somewhat in recent months, then the fundamental cash returns to shareholders will make themselves known in a positive way. That we have been able to broaden the portfolio to 48 companies adds diversification of idiosyncratic risks.

It is difficult to predict when the quality style headwind and/or the negative beta phenomenon will abate. Absent a highly unlikely permanent change to market behaviour compared to history, we think this is one of those occasional times when Mr Market is weirdly willing to sell great assets at a steep discount.

Ben Peters

25 September 2026

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