The firm, meanwhile, has worked overtime to retain clients who understand what Leckie described as Walter Scott’s patient approach to identifying companies that can grow in any market environment, to build concentrated portfolios of roughly 50 stocks apiece for its two big strategies.
The two portfolios have considerable overlap — both count Denmark-based pharmaceutical giant Novo Nordisk, Paris-based luxury goods maker LVMH Moet Hennessy and Taiwan Semiconductor Manufacturing Co. among their top 10 holdings — leaving Walter Scott’s team focused on less than 100 stocks at any one point in time.
In absolute terms over longer time periods, Leckie said, Walter Scott’s global and international equity strategies have continued to deliver solid gains of roughly 10% a year even as returns relative to their MSCI benchmarks have trailed in recent years.
Data on Walter Scott’s website showed the firm’s global equity strategy delivering annualized returns of 7.6% for the three years through March 31, a full percentage point below the MSCI World index’s 8.6% return. Walter Scott’s international equity strategy, meanwhile, logged annualized returns of 2.8% for the three years through March 31, 2 percentage points below the 4.8% return for the MSCI EAFE index.
Leckie cited the dominance of the Magnificent Seven U.S mega-cap growth stocks and deep pessimism about China’s near-term economic prospects as factors behind that recent underperformance.
Not holding Magnificent Seven stocks such as artificial intelligence chipmaker Nvidia has accounted for a large part of the global equity strategy's underperformance, Leckie said. Still, even if Walter Scott’s decision to shy away from the company every time it was researched, discussed and proposed has proven to be a bad one until now, “I don’t think I’ve ever felt more comfortable than today in not owning it,” he said. “I feel the competition risk is massively underappreciated,” with valuation risk as well.
The sell-off of stocks with considerable exposure to China's economy, meanwhile, has absolutely hammered portfolio constituents such as AIA Group and Prudential PLC, two companies with great businesses at the heart of the growing Chinese savings, life insurance and pension growth dynamic, Leckie said.
The underweight in Magnificent Seven stocks — Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla — and the performance of those China-related holdings have accounted for 90% or more of Walter Scott’s performance shortfall in recent years, he said.
Leckie said while he appreciates Japan’s steady, gradual improvement in corporate governance in recent years, he believes the recent surge in enthusiasm for that market’s prospects feels a bit overdone. Currently, he said, his team is more likely to hunt for bargains in China-related stocks than add to its Japanese holdings.
Meanwhile, if recent returns for Walter Scott's global and international equity portfolios have trailed their passive benchmarks, “we’ve actually done a lot better than most of our peer group,” and the team has worked hard to keep clients abreast of what they’re seeing and doing in the market, Leckie said.
The team, meanwhile, remains confident that it will deliver alpha over the coming two or three years and on the whole, clients remain “incredibly supportive.”
“Interestingly, our client numbers are growing … and quite a few longer-standing clients have been adding, which always gives us a wee bit of confidence,” Leckie said.
On May 7, the Massachusetts Pension Reserves Investment Management Board's investment committee approved a recommendation that the board of the $104.2 billion Boston-based fund hire Walter Scott to manage $400 million in international equities at its next meeting, scheduled for May 30.
Even so, Walter Scott saw modest net outflows in 2022 and 2023 as some clients rebalanced their portfolios, adding fixed income at the expense of equities, Leckie said.
Leckie said his own confidence that Walter Scott’s portfolios will return to delivering alpha over the coming two or three years doesn’t rest on any particular scenario playing out for interest rates or the odds of a soft economic landing.
The economy is beyond Walter Scott’s control but it can control what stocks it owns and what price it pays for them, Leckie said. And "this time next year, Keyence in Japan is going to be selling more sensors, Novo Nordisk is going to be selling more of its blockbuster weight-loss drug GLP 1 (also known as Ozempic and Wegovy), LVMH is going to be selling more overpriced handbags, and so on and so forth,” he said.