Geir Lode, Portfolio Manager
Market and Performance Review
The MSCI World Index returned 2.65% in June as global equity markets continued their recovery, completing a clean sweep of positive monthly returns over Q2 2020. Returns have been dramatic; the S&P 500 had its best quarterly return since Q4 1998. Interestingly, we saw a divergence between the drivers of regional markets in June. In North America, the alpha model was ineffective across most factors; In Europe and Asia Pacific, there was a clear preference for valuation, while quality and growth factors performed well in Japan.
Over the month, the Fund underperformed the benchmark index, although the strong performance of the US market on the final day of the month ensured that the midday pricing of the fund had a significant impact on performance. Using close of business prices, the fund outperformed. From a sector viewpoint, selection in information technology and energy was successful, outweighing the detraction from communication services. All regions added value in June, with the most notable contribution coming from selection in Japan.
ASML, AIA Group and Prudential were the largest individual contributors. ASML continued its strong momentum, outperforming the market alongside the semiconductor sector. AIA Group increased alongside the Hong Kong stock market at the start of the month as fears that there would be reprisals from the US, following China’s imposition of the National Security Law, receded. This also boosted sentiment towards Prudential which has a significant presence in Hong Kong. In addition, Athene took an 11% stake in Prudential’s US business, Jackson National Life Insurance.
The largest detractors from stocks held were Duke Energy, Lockheed Martin and Walt Disney. Tesla, which is not held in the fund, also detracted significantly. Duke Energy tracked the US utilities sector, which underperformed in the period. Lockheed Martin underperformed alongside more defensive areas of the market. Walt Disney initially increased after its Shanghai resort reopened, but it fell as the number of coronavirus cases in the US increased.
Among the most notable trades in June were the opening of a new position in Tate & Lyle and the closure of the position in Pfizer. Tate & Lyle is an attractively valued, cash generative business that is well-managed and operationally efficient. Although Pfizer was cheaper than its peers and continued to score well on profitability, it’s Quality and Sentiment metrics had drifted lower. The position was closed as part of a rebalance that increased the beta of the Fund.
Although Global Equity markets were particularly strong in Q2 2020, it is worth remembering that markets have still declined so far this year. As such, we would not be surprised if they continued to rally, supported by an abundance of liquidity and signs that the economic recovery could be quicker-than-expected. All eyes remain on the US and the latest data shows consumer sentiment recovering strongly, while retail sales and manufacturing have also rebounded well, adding weight to those that believe in a v-shaped recovery.
We are positively inclined towards equities currently, but recognise that there are several potential risks that could create a huge amount of uncertainty. The accelerating number of coronavirus cases in the US is, save for a couple of exceptions, in direct contrast to most other regions. However, the largest increases seem to be concentrated mainly in States that have less of an impact on the US economy, although there is always a risk that it could spread. Meanwhile, politics continues to be influential and is likely to become more so ahead of the US elections, creating another source of potential volatility.
We remain of the belief that diversification, alongside a preference for companies with durable business models that are attractive from multiple perspectives, will be key in negotiating the market environment in the coming months.