Portfolio Adviser • Portfolio Adviser October 2024 • Fund manager profile

J Stern & Co has an impressive pedigree in European banking and the World Stars Global Equity fund is part of its success story. Fund manager Christopher Rossbach talks to Cherry Reynard about the opportunities the team is exploiting in the global economy to achieve growth

The Stern family may not have the same name recognition as the Rothschilds or the Mellons, but they have been an important force in European banking for more than two centuries. In fact, Sterns are embedded in the history of blue chips such as BNP Paribas in France or Germany’s Deutsche Bank.

In its current incarnation, J Stern & Co originates from the family office of members of the French branch of the family. It runs bespoke global equity portfolios and private office services, while the fund management arm of the group is based on the investment convictions they have built up over the years. These have been honed over a decade or more by the four senior investment partners at the firm.

The J Stern & Co World Stars Global Equity fund is one of three offered by the group, alongside a multi-asset and an emerging debt fund. It gives concentrated exposure – around 30 holdings – to a range of global companies “with enduring competitive advantage and a long runway of growth”, according to manager Christopher Rossbach.

Identifying pockets of structural growth is the tricky bit. The team doesn’t start out by looking for themes, but instead look for industries that are doing well, and companies that are doing well within them. At the moment, they are finding three fruitful sources of ideas within the global economy. The first is around computing capacity.

“AI and the metaverse are drivers of global economic growth and we need to look at how we benefit from it – and not just by buying Nvidia,” says Rossbach, though Nvidia remains the largest holding in the fund at over 8%.

A second source of opportunity is the expansion of the public and private global asset base, through infrastructure development and the energy transition. He believes the current environment is akin to Eisenhower’s America. Eisenhower presided over vast infrastructure projects, including the Interstate Highway System.

Rossbach adds: “We’ve developed a lot of the technology that we need to increase capacity, but also with greater efficiency and at much lower environmental impact. We see huge opportunities in industrial companies in particular. This is a huge differentiator for the fund because almost no one who invests in quality growth companies – as we do – invests in this part of the market because they can be capital intensive and cyclical.”

Rossbach is careful to focus on industrial companies that are driven by intellectual property, engineering-type businesses that have developed technologies, software and systems that help address the need for expanded infrastructure in a sustainable way. He gives the example of Sika, a £50bn Swiss firm that is a global leader in mixtures for concrete and waterproofing membranes.

“It can build buildings that are much lower impact and that last much longer. This is useful in cities such as Tokyo, which is in a flood zone, prone to earthquakes and built on landfill next to the sea. In Australia, the company helped to renovate the tallest tower in Sydney. It managed to preserve the concrete core, add another 10 floors, double the floor space, save 30% of the construction cost and 12,000 tonnes of carbon.”

Companies like Sika often don’t score highly on conventional sustainability metrics, which struggle to measure carbon saved. Only a certain percentage of its revenues go directly into renewables. “Yet 70% of its business is refurbishment of buildings. It is a driver and beneficiary of more sustainable construction,” says Rossbach.

This is the third opportunity, around sustainability. He says: “We are looking for companies that can benefit by providing these solutions. These problems are going to be solved by enterprise, innovation and technology. There are many companies beyond the big tech names.” Power management business Eaton is a major holding and a significant player in the shift to low-carbon fuels.

Quality is a “gateway” characteristic for Rossbach. A company can look cheap, but if it doesn’t meet the group’s quality criteria, they won’t invest. That said, neither is the group price agnostic; they want to buy at prices that allow for long-term compound growth.

‘Quality’ requires companies to be in a strong and sustainable competitive position, in a growing industry. They also need to have the ability to grow, but in a sustainable way. The management team should have a strong record of value creation, plus a balance sheet able to weather any significant adversity.

They do a lot of fundamental research. “We have strong views on the overall need for computer capacity, for example, and strong views on Nvidia’s position in terms of its entire ecosystem. It is the Apple of the semiconductor industry. Just as Apple is not only making phones, but developing an entire ecosystem around what its doing, Nvidia makes systems, software, a programming language, which gives it a unique position.”

Price is always a question, particularly with highgrowth companies such as Nvidia. “The main reason we sell is for fundamental reasons. We have absolute valuation targets and if a stock has hit those targets, we will reassess. We will also sell if there is a change to the investment thesis or a significant externality that impacts that thesis. The third reason would be for portfolio management and risk reasons.”

It has had to sell Nvidia three times to keep it within the portfolio’s parameters. This capital went into companies that were showing strong growth, but were cheaper. At the time, it included ASML, plus “left behind” consumer and industrial companies such as Honeywell, Nestlé, LVMH and Diageo, which is the only UK stock in the fund.

It has been a year of mounting political risks, likely to culminate in a fractious and divisive US presidential election in November. Rossbach says this creates noise and needs to be addressed. “There is risk in terms of the business companies are engaged in. A lot of that is around global trade. Having open global trade and a stable regime benefits everyone. To the extent to which there is global trade conflict – which we already have and we may have more of – it is a concern and something we have to take into account. That’s mostly related to the US, EU and China, which are engaged in disputes.”

He says there will also be single-country risk, as there was around the French parliamentary elections earlier this year. The best mitigation, he believes, is to have a decent geographic spread. As it stands, the portfolio has around 66% in the US and 31.5% in Europe by listing, but 42% US, 24% Asia and 20% Europe by sales. That said, he is clear the volatility that comes with geopolitical disruption can be an opportunity for long-term investors.

The group continues to learn from its mistakes, to try and understand how it could have done better in certain situations and by adapting, refining and improving its process. This has continued over the past decade, and helps them act quicker and more decisively.

The most difficult period was during ‘the great rotation’. This was the normalisation of interest rates following the re-emergence of inflation after the pandemic. It happened over six months, was sudden and created significant market volatility. “It led to a sell-off in assets that were perceived to be longer duration and higher growth, and therefore more exposed to interest rates. We saw a significant downturn in our strategy and underperformance relative to the market,” explains Rossbach.

The fund has recovered and is 11% ahead of the IA global sector average over three years, and 15.5% ahead over five years. Nevertheless, it led to a period of reappraisal. “We had to question what we were doing. We were being questioned by investors. We re-emphasised the fundamental analysis. We looked at our portfolio risk analytic systems and ultimately recognised that the rotation was almost entirely factor-driven. It really was inflation and interest rates, and how they got translated into short-term market positioning.”

More recently, this factor element has flatlined. “The market is moving and broadening out from the ‘magnificent seven’,” he says. He owns four of the seven – Meta, Nvidia, Alphabet and Amazon, but has been trimming his positions as valuations have moved higher – particularly for Nvidia. Instead, he is finding opportunities amid some of the luxury goods companies. Rossbach believes the consumer could be due a recovery and that may refocus investor attention on the growth in areas such as spirits and luxury goods.

The strategy is now $1.6bn (£1.2bn) strong, with investors across the UK, US and Europe. It launched in the UK in 2019, but the principles that inform it have a far longer pedigree and have been keeping European bankers wealthy for generations.

Christopher Rossbach is a co-founder, managing partner and chief investment officer of J. Stern & Co, a private investment partnership based in London and Zurich. He is also the portfolio manager of the firm’s World Stars Global Equity fund.