On Wednesday morning, I was going through the results of Novo Nordisk, a Danish pharmaceutical company that specialises in treatments for diabetes and obesity. In the third quarter, to the end of September, sales and net profit far exceeded expectations. Management also raised guidance for the fourth quarter. The share rose 4.5%, lifting its gain for the year to more than 13%.
We had bought Novo Nordisk, many years ago, on the suggestion of a foreign portfolio manager, who rated it as one of his best buys.
Looking back over the decade during which we have held the share, I never felt truly roused by its performance and place in our portfolios. It was one of those businesses that clients owned that just seemed to plod along.
Yet, comparing Novo Nordisk’s return over the past 10 years with the S&P 500, the drug manufacturer wins hands down as $100 in Novo Nordisk is now worth $353 versus $273 if invested in the S&P 500.
We started investing clients’ funds offshore in earnest in 2011, when the government began easing exchange controls for individuals. At the time, clients questioned us intensely about our knowledge of global businesses. Understandably so. But with the help of analysts and strategists at UBS and other offshore institutions, we were able to construct portfolios that included a collection of well-known international brands with strong fundamentals and attractive prospects. Investment 101.
We chose to invest in a selection of shares rather than tracker funds or exchange-traded funds, a strategy that we continue to follow today. Our philosophy was that our clients preferred to have some insight into the companies they owned. It gave them a more meaningful understanding of what regulated their wealth.
I always worried whether we were doing the right thing and whether it would have been more judicious to have simply bought a fund that tracked the index.
So, I extracted a list of 25 companies that we have included in portfolios over the past 10 years and compared their performances to the S&P 500. I was heartened by the outcome.
I am the first to admit that this exercise is open to a lot of criticism. Though the S&P 500 is a constant, our portfolios were not. Still, we hardly traded stocks. We only switched out of a holding if a company no longer fulfilled the promise for which we originally bought it.
Nevertheless, even considering the variations that arise when managing a portfolio of individual stocks, the result is reassuring, demonstrating that a medley of good quality businesses, held over a long period, can offer higher returns than simply hugging an index.
An equal investment in the 25 companies listed in the chart above would have returned 292% compared with a 173% return in the S&P 500. Or put another way, $100 in the above portfolio would be worth $392, compared with the index fund’s $272.
The outcome reasserts our steadfast investment mantras that it’s not about timing the market, but about time in the market. What’s more, buying shares raises your interest in the market, while buying the index simply provides you a market return. The message? Be bold, do your homework and buy good quality shares.
• Shapiro is chief global equity strategist at Sasfin Wealth.
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