SGH Medical Technology Fund – Quarterly Update
December quarter 2023
Key performance drivers for the SGH Medical Technology Fund in the December quarter?
For the SGH Medical Technology Fund, the major drivers of performance in the quarter were our mid cap exposures.
You recall that the fund is split into three segments – mature growth companies, developing growth companies and seed stage companies. It was really the larger developing growth companies that we have in the portfolio that drove performance during the quarter.
That was driven by capital flows into the sector, in particular into the larger end of the sector on the back of economic data, which showed that central banks globally are making significant progress towards their inflationary goals.
How is the portfolio positioned and has the positioning changed over the quarter?
The positioning hasn’t really changed in terms of our exposure to mature growth companies, developing growth companies and seed stage companies. We have taken some profits from those positions which have had really strong runs over the past few months.
Our view is that markets had a really strong rally over the past two to three months and are set to take a little bit of a breather. On the back of that, we’ve taken those profits, built our cash position to reload and be ready to take advantage of some tactical opportunities in the shorter term.
Why should investors consider the fund now?
A lot of what we’ve spoken about from a macro perspective and a data perspective over the past 12 months is really starting to play out.
Inflationary numbers have rolled over and now undershooting expectations, in particular Central Banks’ expectations. That’s why we’re seeing those capital flows into larger growth companies and not yet seeing the capital flows in the smaller growth companies where we’ve got 50% of portfolio exposure.
The market is not willing to ascribe value to companies which have strong IP positions and strong positions in their in their particular markets, and that will change. We are still seeing valuations at the smaller end of the market under significant pressure. However, we’re starting to see some valuation multiple expansion at the larger end of the market where the institutional capital flows. Those stocks are now starting to look expensive. And that’s typically when we start to see the trickledown effect into smaller stocks.
And whilst we are yet to see the smaller stocks actually participate in this market rally, a more durable market rally which we expect over the next 12 months, will mean that you see some trickle down into these smaller stocks.
That means that we will see valuation multiple expansion, as well as the significant growth in those smaller stocks, which will lead to a strong performance.
The text has been edited for clarity.
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