Weekly Investment Update (11/19/2021)
This Week’s Highlights
Our next Weekly Investment Update will be published on Friday, December 3. We wish you and your families a warm and healthy Thanksgiving.
- Supply chains: Supply-chain pressures may be easing.
- Company splits: Well-known conglomerates announce they will split into multiple businesses in an attempt to increase shareholder value.
- Small-cap performance: Large-cap factor performance differs from small-cap year to date.
- Electric vehicles: Growing consumer and government interest; our teams are finding attractive long-term opportunities along the supply chain.
Signs Emerging That Supply Chain Bottlenecks May Be Peaking
Over the past few months, tight supply chains have been felt all around the world and across numerous markets, including semiconductors, gas, and cotton. While it seems unlikely that supply-chain constraints will be resolved before 2022, we are starting to see signs that pressure may be easing, including improvement in raw material cost pressure, normalization in shipping costs, and resumption of factory production.
Shipping costs have started to normalize, especially in the important Shanghai to Los Angeles corridor, where the cost per 40-foot container recently decreased nearly 20% relative to two months ago. The Baltic Dry Index, which tracks the average prices paid for the transport of dry bulk materials across more than 20 routes, collapsed by more than 50% in the past month as congestion eased at Chinese ports. With over 80 container ships anchored off the coast of California, the Los Angeles port chief recently indicated that bottlenecks are improving with a nearly 30% reduction in the number of containers sitting on docks that were preventing ships from offloading cargo. Furthermore, the recent Empire Manufacturing report showed shipments increasing more than new orders in addition to improved delivery times, all signs of supply and demand normalization.
Recent reports have also indicated that factories are reopening around the world and semiconductor chip supply is increasing, especially in the auto sector. The Purchasing Managers Index (PMI) manufacturing backlogs of work in the U.S. and Asia have reversed in recent weeks, and the latest ISM report revealed an uptick in goods inventories. U.S. industrial production in October showed total factory output increasing 1.6% from September after a 1.3% decrease in September, when semiconductor chip shortages hurt vehicle production.
Company commentary is further supportive of improving supply chains. Both Honda and Toyota noted their factories in Japan would return to full production in December for the first time in months; meanwhile, General Motors did not close any factories in North America due to silicon shortages in November for the first time in eight months. Additionally, Cisco indicated that its supply chains were stabilizing with better visibility regarding when suppliers could make deliveries of component parts. Given the impact that supply-chain pressures have had on inflation in recent months, the easing of supply-chain constraints is a notable development and one that we will be watching carefully in the months ahead.
Large Conglomerates Split in Hope to Create Shareholder Value
Over the past few weeks, several well-known companies, including General Electric (GE) and Johnson and Johnson (JNJ), have announced that they will break up their respective conglomerates into multiple businesses. Over the next few years, GE will separate into three businesses focused on aviation, healthcare, and energy, respectively. JNJ, on the other hand, will split into two, one focused on pharmaceuticals and medical devices, and the other on consumer health, with both companies looking to boost shareholder returns. By simplifying their businesses and letting investors own the higher-growth areas of each business rather than the entire conglomerate, JNJ and GE are looking to position themselves to better serve customers and create value for shareholders, similar to the approaches taken by Honeywell in 2016 and DowDuPont in 2019.
Bessemer’s All Equity portfolio maintains positions in both GE and JNJ. Bessemer equity portfolio managers believe that these breakups have strategic merit as they allow each company to be more focused, streamline its balance sheet, and deploy capital more appropriately to optimize the value of each entity. GE’s and JNJ’s businesses hold leading positions in attractive markets and have strong management teams, and we will continue to monitor them and reevaluate our position when the split happens with a focus on the highest-quality aspects of the business.
Small-Cap Factor Performance Differs Markedly From Large-Cap Performance Year to Date
In a year where reflation beneficiaries — commodities and financials, for example —are leading the year-to-date gains, there are stark differences among factor performance when comparing small- and mid-cap stocks to large-cap stocks. As one would expect given the reflation narrative, the small-cap value factor has outperformed the small-cap growth factor by 18.5 percentage points (pp) year to date. However, somewhat surprisingly, the large-cap growth factor has outperformed the large-cap value factor by four pp year to date. We would attribute this difference to the scale and pricing power possessed by large-cap growth companies, especially technology companies, to weather rising input costs. This stands in opposition to small-cap growth companies, which are unlikely to possess the scale to pass on rising input costs.
Digging deeper, small-cap energy has outperformed the index by 68 pp year to date, and small-cap financials have outperformed the index by 26 pp year to date. This compares to large-cap energy outperforming the index by 30 pp and large-cap financials outperforming the S&P 500 by 10 pp. Bessemer large-cap portfolios have benefited from growth factor outperformance while small- and mid-cap portfolios have struggled to keep pace with benchmark returns given the large moves in sectors we tend to be underweight (energy and financials). We remain confident in our approach to the small- and mid-cap space and see room for recent trends to subside as growth forecasts are no longer being revised higher continuously as was the case earlier in the year.
Electric Vehicle Market Continues to Gain Traction, Though Current Infrastructure May Present Some Obstacles
Last week, the electric vehicle company Rivian had the largest IPO of 2021 after shares rose by over 50% and its market cap exceeded $100 billion, surpassing that of Ford and General Motors. Tesla remains the largest U.S. automaker, worth over a trillion dollars. Rivian’s IPO speaks to investors’ strong appetite for thematic investments, especially those that possess favorable ESG qualities.
Part of investors’ appetite for electric vehicles is fueled by changes in consumer preferences and government financial support. According to a survey by Pew Research Center, only 7% of U.S. adults currently own an electric or hybrid vehicle, but 72% would consider an electric truck or car for their next purchase. President Biden signed an executive order that sets a target for half of all new vehicles sold in the U.S. to be zero-emissions by 2030, and federal tax credits are available.
However, there remain significant obstacles to broadscale adoption. The most notable challenge is the country’s existing infrastructure. Most existing charging options are slow, and the more high-powered options are significantly more expensive. More public-use charging stations will need to be constructed to meet the rising demand, particularly the high-powered versions that cost $10,000 to $40,000 for a single port plus $4,000 to $51,000 for installation. The infrastructure bill passed on Monday includes $7.5 billion for charging stations for electric vehicles, though more investment in this space will likely be required. Additionally, while coming down in recent years, electric vehicle costs are still a barrier for many.
Bessemer portfolio managers have found attractive long-term opportunities along the electric vehicle supply chain. This includes investments in semiconductor companies such as ASML and Taiwan Semiconductor Manufacturing Co. and electric content suppliers like Aptiv. Bessemer’s All Equity model portfolio also maintains some direct exposure to automakers, including Tesla via an external manager. For more on Bessemer’s view on this space, please read our recent Investment Insights “Electric Vehicles – Rising Demand and Relevance.”
— Bessemer Investment Team
Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situations, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indexes in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index.