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Equities Commentary, April 2020

Please find below a summary of performance, activity and outlook from our Portfolio Managers.

James Rutherford, Portfolio Manager

Market and Performance Review

European Equity markets rebounded in April with the MSCI Europe Index returning 6.12% amid signs that the coronavirus outbreak was peaking and as talk turned towards an easing of lockdown restrictions. The Fund outperformed the benchmark index in the period as contributions from selection in Energy, Financials and Health Care alongside our overweights in Information Technology and Health Care offset the detraction from selection in Information Technology.

Lundin Energy, Valeo and Bayer were the three largest individual contributors to our relative performance in April. Lundin Energy benefited from the oil price increase in the latter half of April (oil prices clawed back losses earlier in the month amid a collapse in demand caused by the coronavirus pandemic). The company also reported strong operational performance, which mitigated part of the impact from the lower oil price.

In addition, it has taken sensible steps to strengthen its balance sheet by reducing both its dividend and capital expenditure. Valeo reported earnings ahead of expectations, driven by its new technology platform. It also partially cut its dividend, which further bolsters its financial position. Bayer reported better-than-expected and earnings, driven by improving margins.

The company also reiterated guidance for 2020.

Wirecard, Edenred and Siemens Gamesa detracted the most in April.

Wirecard fell after KPMG said it was unable to obtain all of the data it needed to complete its audit of past revenues. Edenred’s results highlighted a significant impact on its employee benefits business in France, Italy, Brazil and Mexico. Siemens Gamesa traded sideways in April on little specific news.

Outlook

The debate over whether the recent rally is a false dawn continues to rage but with European Equity markets over 20% lower this year (in Euro terms) and ultra-low interest rates offering a lack of attractive alternatives, there is good reason to believe that the worst is behind us. It is, however, unlikely to be a smooth ride: plans to ease lockdown restrictions are just starting to take shape and, while uncertainty abounds, a preference towards higher quality companies and those directly benefiting from the virus or the lockdown is likely to continue in the near-term.

If the economy returns to any semblance of normality over the next 12 months, those companies that have seen the biggest downgrades could see some exceptional earnings growth. This is particularly true in the more economically sensitive areas of the market, which are likely to have the easiest comparisons. The opposite is true in the more defensive areas, so we could see a cyclical value rally at some point. We are wary, however, that short-term trends are often extrapolated over a longer period and investors will have to discern the permanent from the transitory. Flexible working might be a permanent change in the developed world, but stockpiling food from your local supermarket is more likely to be transitory.

Looking further ahead, crises tend to accelerate existing trends. An obvious example is the shift to online activities, such as a surge in e-commerce or the number of people working from home. A less obvious example is the likely increase in clean energy infrastructure as fiscal spending expands. The Fund is well positioned in this respect and, for patient investors, opportunities to invest in companies facilitating these trends at an attractive price remain.

Gary Greenberg, Portfolio Manager

Market and Performance Review

The benchmark MSCI Emerging Markets Index rose 9.16% in April. Markets rebounded strongly in April as some countries saw daily new infection rates start to fall and are planning to gradually reopen their economies.

Governments and central banks introduced very significant stimulus measures to reduce the damage caused by the economic shutdown, restoring some positive sentiment to markets. Several emerging market central banks cut rates to support their economies, including South Africa and Turkey contributing to weaker currencies, which reached new lows against the Dollar. China’s economy has been gradually reopening. Firstquarter real GDP declined by 6.8% year on year (-5.2% for the service sector). However, since March, there has been a recovery in production, retail sales and investment. The People’s Bank of China increased its monetary stimulus, cutting the one-year targeted medium-term lending facility (TMLF) rate by 20 basis points (bps) to below 3% and the one-year and five-year prime rate loans (PRL) by 20bps and 10bps respectively.

Social financing data showed an acceleration in loan issuance, reducing liquidity risks. Commodity-sensitive markets including Russia and Saudi Arabia recorded double-digit returns given optimism oil prices can recover as supply is constrained to meet lower demand.

The Fund underperformed the benchmark index over the month. Stock selection detracted the most to relative returns, notably stocks held in South Africa, South Korea and Indonesia, eclipsing stronger stocks in India and Taiwan.

Shares in Accton Technology, a Taiwanese manufacturer of high-speed 100G and 400G switch solutions, rose on strong March sales which indicate the smooth resumption of production in China and as an increase in data traffic is expected to drive demand for more networking bandwidth long-term. Hero Motorcorp, an India manufacturer of two-wheelers, rose given more resilient rural demand, valuation support (9.4x Financial year PE, a 20% discount to history) and strong free cash flow generation. Delta Electronics, a Taiwanese global leader in switching power supply solutions, rose despite weak Q1 2020 results impacted by coronavirus, as management expects a seasonal improvement in both revenue and margins in Q2 2020 (as China production normalises).

Shares in Shoprite, a South African retailer, fell as currency weakness and the oil price volatility is expected to negatively impact customers’ purchasing power in key markets such as Angola and Nigeria. We further reduced our position in a move to raise our underweight to South Africa given the double whammy of a sovereign credit downgrade alongside the crisis effects on growth and global risk aversion which creates a toxic return cocktail for local equities. Nari Technology, a mainland China smart grid equipment supplier, underperformed the rebound in April, following strong relative outperformance in the first quarter. NC Soft, a Korean online gaming company, fell as its Lineage 2M game gross revenue ranking slipped to number two for the first time since its release in November 2019 raising concerns users are boycotting the game, owing to its aggressive monetisation strategy. We believe the ranking should change again once L2M introduces an update on April 29.

Outlook

The corporate landscape that evolves after the COVID-19 pandemic will be different to what came before. Amid the economic damage, there will be innovation and progress, and many businesses will become stronger as a result.

The team believe that the Emerging Market structural-growth story remains intact, driven by an aspiring, growing middle class, rising digitisation, reforms and infrastructure development. As industries consolidate, companies with strong balance sheets and capabilities will benefit from these structural drivers.

Overall, we view the current environment not as a threat, but as an opportunity to increase our exposure to excellent, quality companies that are now available at discounted prices.

Geir Lode, Portfolio Manager

Market and Performance Review

Global Equity markets posted impressive gains in April amid signs that the coronavirus outbreak was starting to slow and plans to exit the lockdown were being discussed. Sentiment was further bolstered by significant stimulus packages across the globe. Cyclicals, which had been weak since mid-February, led markets higher in the period. The Alpha Model showed that investors still preferred companies with strong cashflows, while almost all growth metrics worked. Following a record month in March, Capital Structure was weak, as was Sentiment, reflecting the mean reversion at play in the market. Against this backdrop, the MSCI World Index returned 10.92% in US Dollar terms.

Over the month, the Fund performed in line with the benchmark index.

From a sector viewpoint, selection in Energy and Materials was successful, but offset by detractions from selection in Consumer Discretionary and Financials. From a regional perspective, the contribution from selection in Europe was offset by a detraction from selection in Pacific ex Japan.

Barrick Gold, Hess and West Pharmaceuticals were the largest individual contributors. Barrick Gold increased alongside the gold price in April. Hess rebounded strongly alongside the Energy sector after President Trump pledged support for the US oil industry after oil prices briefly turned negative. West Pharmaceutical reported strong earnings driven by revenue growth in both its proprietary products and contract manufacturing businesses and an improvement to margins. The company also bucked the current trend and raised guidance.

Zurich Insurance, American Water Works and Delta Air Lines detracted the most. Facebook, which is not held in the Fund, was also a significant detractor. Zurich Insurance underperformed on little specific news. There was little specific news on American Water Works, which underperformed alongside the more defensive names that had been preferred recently.

Delta Air Lines continued to be impacted by the collapse in global travel.

Outlook

The number of coronavirus cases is starting to plateau in certain regions and talk is now turning to the lockdown exit plan. However, US macro data points are mostly confirming the negative sentiment around the US consumer and the overall economic slowdown. This is being illustrated at the corporate level with earnings reflecting the anticipated slowdown. Buybacks and dividends are being slashed, but it is guidance cuts or the absence of any guidance that is having the biggest impact.

Meanwhile, government fiscal and monetary policy – long independent levers of stimulus – have now been married to combat the downturn in unison.

Investors of a certain age may now be fearful of the dreaded Phillips curve – inflation as the undesired consequence of driving down unemployment although younger investors may be mystified by this concern, having never known inflation.

In this environment, we believe investors should maintain exposure to companies with strong sustainable business models and be less concerned with short-term valuations. As long as interest rates remain low and the Phillips curve remains incapacitated, a long-term investment horizon and sustainable stocks, even at high valuations, offers investors the most attractive risk return profile.

Lewis Grant, Portfolio Manager

Market and Performance Review

Global Equity markets posted impressive gains in April amid signs that the coronavirus outbreak was starting to slow and further bolstered by significant stimulus packages across the globe. Cyclicals, which had been weak since mid-February, led markets higher in the period. The Alpha Model showed that investors still preferred companies with strong cashflows, while almost all growth metrics worked. Following a record month in March, Capital Structure was weak, as was Sentiment, indicating the mean reversion at play in the market. Against this backdrop, the MSCI ACWI returned 10.71% in US Dollar terms.

Over the month, the Fund outperformed the benchmark index. The excess return was driven by stock selection. There were no meaningful detractors from a sector viewpoint, but notable success from selection in Consumer Discretionary, Financials and Energy. From a regional perspective, selection in Europe and Emerging Asia was partially offset by our overweight in Europe.

Hess, Giant Manufacturing and Amazon were the largest individual contributors. Hess rebounded strongly alongside the energy sector after President Trump pledged support for the US oil industry after oil prices turned briefly negative. Giant Manufacturing benefited from the easing of the lockdown in Asia. Longer-term, the bicycle manufacturer should also be a beneficiary of changing commuting habits when normality returns.

Amazon benefited from positive sentiment towards online retailers.

Delta Air Lines, NTT and The Travelers Companies detracted the most.

Delta Air Lines continued to be impacted by the collapse in global travel.

There was little specific news on NTT, which underperformed alongside the more defensive names that had been preferred previously. The Travelers Companies reported lower-than-expected earnings, driven by higher catastrophe losses following a spate of tornadoes in Tennessee in March.

Outlook

The number of coronavirus cases is starting to plateau in certain regions and talk is now turning to the lockdown exit plan. However, US macro data points are mostly confirming the negative sentiment around the US consumer and the overall economic slowdown. This is being illustrated at the corporate level with earnings reflecting the anticipated slowdown. Buybacks and dividends are being slashed, but it is guidance cuts or the absence of any guidance that is having the biggest impact.

Meanwhile, government fiscal and monetary policy – long independent levers of stimulus – have now been married to combat the downturn in unison. Investors of a certain age may now be fearful of the dreaded Phillips curve – inflation as the undesired consequence of driving down unemployment although younger investors may be mystified by this concern, having never known inflation.

In this environment, we believe investors should maintain exposure to companies with strong sustainable business models and be less concerned with short term valuations. As long as interest rates remain low and the Phillips curve remains incapacitated, a long-term investment horizon and sustainable stocks, even at high valuations, offer investors the most attractive risk return profile.

Hamish Galpin, Portfolio Manager

Market and Performance Review

The Fund underperformed the benchmark index return of 13.43%. Stock selection drove the underperformance, whereas sector allocation was supportive to relative returns. Underperformance was mainly concentrated in Consumer Staples and the US.

Evolution Mining was the largest contributor to relative performance in the month. The Australian gold exploration company benefited from an increase in the gold price and held its full-year earnings expectations.

Cargojet contributed as the shares rose following broker upgrades and Amazon bid speculation. The air cargo transportation company has been taking capacity from the grounded passenger jets and helping with shipments of Personal Protective Equipment. Brunswick Corp also contributed to relative performance; having fallen sharply in March, and underperforming on a relative basis, the company’s shares rebounded in April recovering almost all the relative performance. The stock was also helped by competitor boating retailer MarineMax releasing better-than expected second quarter results.

AMN Healthcare shares fell in April, after strong relative performance in the first quarter, due to concerns that demand for nurses and healthcare services could be falling as less non-COVID activity takes place in hospitals.

After strong share price performance in March, WD-40’s shares also fell in April. During the month, the company released Q2 results that were slightly below expectations, mainly due to weakness in Asia, and a hedge fund released a negative report on the stock. Japanese supermarket and drugstore operator Yaoko detracted from relative performance. Having seen positive performance in Q1, the company’s shares remained fairly flat in April and therefore underperformed the market bounce.

Outlook

We will continue to keep close watch on stocks in the Fund that have a higher risk profile in the current economic environment. It is clear, though, that large parts of the market have been sold down heavily on fears of the impact of COVID-19. This will generate some very attractive buying opportunities into well positioned businesses for investors such as ourselves with long-term horizons. Furthermore, a return, finally, to more normal levels of volatility once the current situation has settled down is very favourable to active managers and their prospects for beating their benchmarks. Smaller companies’ indices are well below their long-term trend levels, which is not the case for large caps, which bodes well for the asset class.

Martin Todd and Mark Sherlock

Martin Todd and Mark Sherlock, Co-Portfolio Managers

Market and Performance Review

Global equities rose in April with optimism that some countries were showing a reduction in infection and death rates from the Covid-19 virus and therefore business activity could resume.

The Fund outperformed the benchmark index in the period. Stock selection and currency exposure contributed to relative performance, whereas asset allocation detracted.

On an individual stock basis, green energy finance company, Hannon Armstrong, was the largest contributor. Having seen significant share price falls in March the company saw a sharp rebound with market sentiment turning more positive. The company also successfully issued $400m of green bonds in the month. Health care companies Emergent BioSolutions and Dexcom also contributed. Shares in Emergent BioSolutions rose following the announced partnership with Johnson & Johnson to support the manufacture of their Covid-19 vaccine candidate. Dexcom shares increased after releasing first quarter results ahead of expectations and receiving broker upgrades.

Positions in Siemens Gamesa Renewable, Bank Rakyat Indonesia and Qiagen detracted from relative performance during April. Siemens Gamesa Renewable had seen a large rebound in the share price in March and failed to gain further with the market in the month. Bank Rakyat Indonesia saw share price weakness alongside the financial sector. Qiagen’s share price, having risen in March with the takeover bid from Thermo Fisher, rose less than the market in April.

Outlook

We expect volatility to persist as the real economic impact of the ongoing COVID-19 crisis begins to show in earnings updates, and are wary that earnings expectations are still on the optimistic side. As such, we are keeping a higher than usual cash position to be deployed, once we feel macro data and earnings reality starts to be reflected.

Nevertheless, we remain confident of the long-term outlook for our strategy; impactful companies are essential to help service the unmet needs of the environment and society and are therefore exposed to enduring sources of demand. One of our investments theses is that we will increasingly see governments transfer funds to the private sector to address these pressing needs, which has proven true during this crisis. We note that in a situation where entire industries may need government support, companies with a purpose (or positive impact) will more likely get fresh equity from investors or benefit from fiscal spending.

Mark Sherlock, Portfolio Manager

Market and Performance Review

The Russell 2500 Index returned 14.55% in US Dollar terms in April. Equity markets rebounded sharply in April with US markets leading the major indices. Equity markets rose on the significant stimulus measures introduced to help reduce the damage caused by the economic shutdown.

Sentiment also improved on early signs of containment of the coronavirus and on plans to gradually reopen global economies. The US economy contracted at an annualised pace of 4.8% in the first quarter of the year while the number of jobless claims has increased by 30m in the last six weeks. The oil price remained volatile amid weak demand and issues with storage despite an agreement on production cuts. Value continued to underperform Growth with Financial and Industrial stocks underperforming over the period.

The Fund underperformed the benchmark index over the month.

Underperformance was driven by stock selection in the Health Care and Materials & Processing sectors. Our underweight to Energy detracted, offsetting strong stock selection in Financial Services.

Abiomed (miniature heart pumps) rose sharply after announcing better-than-feared Q4 results and a small ancillary acquisition broadening its existing product application. Brunswick (recreational marine products) rose on the prospect of the economy reopening having been sharply lower in March alongside other Consumer Discretionary stocks. ServiceMaster (residential and commercial services) outperformed following indications that social distancing is not significantly impacting the residential pest control business.

AMN Healthcare (healthcare staffing services) fell after reports of Envision Healthcare contemplating a bankruptcy filing were seen as a read-across for AMN Healthcare and negatively affected the share price. Fairfax Financial Holdings (insurance services) underperformed due to reduced earnings power in a lower-rate environment. Cubic Corporation (transport payment systems) detracted, behaving as a transport stock rather than a technology company with long-term contracts and an improving cash flow profile.

Outlook

The aim of the US government at present is to contain the Covid-19 virus whilst trying to mitigate the financial distress caused by the slowdown which accompanies a population largely isolating themselves. The measures taken, most notably a $2tn stimulus package, were swiftly passed through Congress and are targeting the areas of the economy which are most affected by this sharp downturn; consumers and small businesses. The monetary stimulus from the Federal Reserve is unprecedented too with the balance sheet increasing by 25% in a matter of weeks. This has mitigated stress in the credit markets to some extent. Despite the US moving into a recession this year, we believe that markets tend to bottom four to six months ahead of the economy and believe that the cyclical part of the market largely discounts the negative impact to earnings this year. Assuming that the coronavirus is contained, earnings should rebound to near 2019 levels next year. We believe that the Fund is very well positioned for the current environment with broad exposure to high-quality companies with strong cashflow generation and robust balance sheets. Furthermore, we are seeing value emerge in large swathes of the market which has been harder to come by in recent years.

Note: the equities commentaries above are as of 30 April 2020. For coronavirus-related updates, please visit our dedicated webpage.

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications, strategies or products.

Past performance is not a reliable indicator of future performance. The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. It should be noted that any investments overseas may be affected by currency exchange rates.


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