Northcape Capital’s Fleur Wright is still kicking herself for not owning market darlings Nvidia and Novo Nordisk, the maker of the weight loss wonder drug Ozempic, before shares of those companies rocketed in 2023.

They were already on the money manager’s radar.

In Nvidia’s case, the global equities team owned the stock at the launch of the fund in 2019 at around $US4 apiece. But it sold in 2023 just before the chipmaker’s big announcement on generative artificial intelligence that turned out to be a watershed movement for the company (and the sharemarket).

It was a valuation call – Nvidia was already trading at around 60 times earnings – and while the team got back in soon after in the third quarter, the sale still weighs heavily despite riding its surge since then.

“It wasn’t easy at the time,” Wright tells The Australian Financial Review of buying back Nvidia’s shares. “But I think it made it easier because we’ve got three different people questioning the decision, and you’re making a call.”

Wright manages the global equity fund with two other portfolio managers, Theo Maas and Wendy Herringer, and senior analyst Calvin Lim.

“Nvidia has still been our number one contributor since inception,” she says. “I don’t like a share price that’s gone up a lot – I grew up on a farm, so I like to get a bargain – but you have to go away and do the work and take a long-term view, and then I think that allows you to take advantage of the opportunities.”

Still, being under exposed to the Magnificent Seven US tech stocks has cost it performance. The fund has underperformed the benchmark for the past 18 months or so.

“We didn’t have enough of those mega seven stocks when they were really ramping. It’s annoying because there are some good businesses there, but they are quite correlated,” Wright concedes. “We wanted to have more diversified exposure.”

Northcape has since closed its underweight to a more neutral position and is bullish on the next stages in AI’s development.

“If you think that ChatGPT was only launched in November 2022, we are still in 1995 by internet terms so it’s super exciting because there’s just so much out there,” Wright adds.

A tantalising miss

It also owns Microsoft, Google parent Alphabet – “we still think it’s got a lot of IP in that business, it will be one of the winners” – and US software giants Salesforce and Adobe. “We’re still looking for that killer application in software for AI.”

Novo Nordisk was another tantalising close call.

Not least because Wright met with the drugmaker just before the fund launched in 2019 and had even scribbled in her notebook that “if they get this obesity thing right, this will be amazing”.

But the fund sat-out the initial explosion in demand for the weight-loss drugs known as GLP-1s after successful drug trials of Ozempic in 2023.

“Annoyingly we missed that, but again I’m not too concerned,” she says. “It’s never too late for these things. You hear about these amazing ideas, and you’ll get the opportunities, and they’ll continue to grow.”

The fund has even been buying up more Novo Nordisk shares in the pullback.

“It’s not dissimilar to AI,” she says of the Ozempic phenomenon. “The opportunity is just so, so big, it’s staggering – 45 per cent of Americans are obese.”

Novo Nordisk, she adds, is a direct play on the thematic with just 1 per cent of the potential population using the GLP-1 drugs today.

“You don’t even need to have much imagination, it could get to 8 per cent or something if the forecasts are right... I don’t want that to be the case, but you only need a fraction of that to see value in the shares.”

For all the missed opportunities in AI and Ozempic (at least at the beginning), there have been other trends where the Northcape team have been in the right place at the right time.

Like investing in America’s ailing stormwater and sewage systems and owning stocks exposed to the $US2 trillion of investment that the government has earmarked for infrastructure, green energy projects and the local semiconductor industry.

It’s what Wright refers to as America’s “industrial renaissance” with investments in the mega projects only just starting to break ground now.

So it bought US-listed Advanced Drainage Systems which makes plastic pipes for stormwater drains and septic systems.

Since Northcape bought the stock in 2023 the share price has almost doubled and has much further to run, according to Wright, as concrete pipes fast coming to the end of their life are replaced and new roads, schools and communities are built that need such plumbing.

“We see them as a direct play on that capex growth that’s happening in the US,” she adds.

Another good call has been investing in United Rentals, the largest rental equipment company in the US that first came on to its radar in 2019. Northcape bought the stock in 2020 and has watched the shares rocket more than 700 per cent from a low in the pandemic.

According to Wright, smaller companies will struggle to provide the equipment needed to build big infrastructure projects like roads and data centres, so she expects United Rentals to keep stealing market share. It already stands at 17 per cent of the market.

“It’s a great opportunity there, and the stock is trading well below the market multiple.”

Wright is confident that the fund is back on track after 18 months of catch-up. Now that it has built up exposure to the US mega caps, it is looking for companies that are flying under the radar particularly in the mid-cap part of the market.

As the US continues to cut interest rates, the sharemarket will start to broaden out so Northcape has been adding to its approved list of stocks.

Online vehicle auction services provider Copart is the latest addition – the shares have more than doubled in the last five years – but it has not started buying shares. Yet.

“They are another random company that many people won’t have heard of, but they completely dominate in that space,” Wright says.

“There are a lot of opportunities in the mid-caps because everyone has been focused on the large caps, so it is nice to look in that area,” she adds.

Wright is among the lineup at this year’s Sohn Hearts & Minds investment conference in November, which will be held in Adelaide for the first time. The Australian Financial Review is a media partner of Sohn Hearts & Minds.

‍

This article was originally posted by The Australian Financial Review here. 

Licensed by Copyright Agency. You must not copy this work without permission.

Disclaimer: This material has been prepared by the Australian Financial Review, published on 30 September 2024. HM1 is not responsible for the content of linked websites or content prepared by third party. The inclusion of these links and third-party content does not in any way imply any form of endorsement by HM1 of the products or services provided by persons or organisations who are responsible for the linked websites and third-party content. This information is for general information only and does not consider the objectives, financial situation or needs of any person. Before making an investment decision, you should read the relevant disclosure document (if appropriate) and seek professional advice to determine whether the investment and information is suitable for you.