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Monthly Fund Commentary, June 2019

Please find below a summary of performance, activity and outlook from June 2019 from our fund managers.

Jonathan Pines Portfolio Manager

Market and Performance review

The Fund underperformed the benchmark on a relative basis over the month. The underperformance resulted primarily from our stock selection, notably from selected names in China. Our underweight India contributed as the market underperformed.

Shares in Wuliangye Yibin, a leading liquor maker in China, continued to outperform due to strong quarterly results and anticipation of ex-factory price hike. Chow Tai Fook, a leading jeweller in China, Hong Kong and Macau, rose after reporting solid March 2019 financial year results and announcing a special dividend. Management guided strong revenue growth in the upcoming financial year, driven by healthy same store sales growth as well as network expansion in China. Non exposure to Reliance Industries benefitted as the Large-Cap Indian petrochemical, refining and consumer tech conglomerate, fell due to slowing profit growth and as the India market underperformed.

Shares in Kunlun Energy, the natural gas distribution arm of PetroChina, underperformed amid ongoing uncertainty surrounding the creation of a national pipeline champion and the impact on its pipeline assets. China Blue Chemical, one of the largest urea and methanol producers in China, fell as the recent methanol price weakness is expected to impact H1 2019 earnings. Sinopharm, China’s leading distributor and supply chain service provider for pharmaceutical and healthcare products, also fell on no stock specific news.

Portfolio activity

We continued to reduce our Baidu position, trimmed Kunlun Energy and PetroChina and initiated a position in Ctrip. Ctrip is the world’s largest online travel agency (OTA) by gross merchandise value (GMV) and dominant player in China with 57% market share. Competition and regulation related risks in domestic market (65% revenue) have peaked, furthermore, investments in software and infrastructure are mostly done.

Ctrip should continuously grow at steady rate in China, driven by rising penetration, especially in lower tier cites and improving transportation infrastructure. This stock is now trading at low end of its own historical multiples and looks particularly attractive on Enterprise Valuation (EV)/ GMV versus global peers.

Outlook

We are bottom up stock pickers, concerned almost exclusively about the price to value proposition at the stock level. Over the last few years, given the unusually dogged persistence of outperforming styles, and our contrarian and bottom up philosophy, our Fund has developed and then intensified stylistic emphases that, with the passage of time, have become increasingly at odds with outperforming styles. On several measures, our Fund’s stylistic differentiation relative to the market is now at a record. We are now substantially overweight stocks that are ‘value’, and contrarian. We are however comfortable, indeed reassured, by our current non-consensus positioning and look forward to future periods when at least some of the long endured stylistic headwinds turn into tail winds, and the impact that any such reversal might have on relative performance.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Gary Greenberg, Portfolio Manager

Market and Performance Review

The benchmark MSCI Emerging Markets Index returned 6.24% in June.

Emerging Markets moved higher in June, ending the first half of 2019 up 10.2%, buoyed by the prospect central banks will move to avoid a downturn in the form of rate cuts and monetary stimulus. The G20 meeting resulted in the US and China agreeing to keep talking about trade, with no escalation in tariffs but also no significant signs of progress in addressing the key sticking points in the negotiations. New benchmark entrant Argentina was the best performing market, posting 26.60%, while Pakistan lagged the most, dropping 10.75%. At the sector level, Consumer Discretionary outperformed, and Health Care lagged the most.

The Fund outperformed the benchmark index in relative terms over the period. Stock selection in China and our overweight the country which outperformed, contributed the most to relative returns. Selected names in India, Taiwan and Korea also contributed positively, offsetting our overweight India which underperformed.

Baozun, a Chinese e-commerce solutions provider, rose after reporting strong Q1 results and guiding good Q2 2019 outlook. Highlights included Gross Merchandise Value (GMV) increase of more than 58% year on year, total revenue increase by nearly 40% year on year and the addition of 15 new brand partners in the quarter. Techtronic Industries, the Hong Konglisted manufacturer of power tools and floor cleaning equipment, moved higher given a minimal impact from the recent tariff increase (from 10% to 25%) and efforts to mitigate its tariff exposure via new suppliers and factories overseas. AIA rose as the insurer continues to expand profitably, especially in its core Hong Kong and China markets, despite a gradual economic slowdown and lower yield environment in the region.

Tech Mahindra, the Indian IT services provider, fell on softer revenue growth outlook on uncertainty related to 5G rollouts following the Huawei ban and cost pressure related to a tight labour market in the US. Shoprite, a South African retailer, fell amid financial year 2019 earnings concerns as management prioritises sales momentum. Shares in HDFC Bank, the largest private bank in India, fell on no stock specific news in line with the market which underperformed.

Outlook

After enjoying a second positive quarter, Emerging Markets have recovered much of the ground lost last year to US economic bellicosity. China’s transition to a consumer led economy, however, a transition which matters to the rest of the world given its size both in absolute levels of demand and world trade, has been made much more difficult by protectionist moves by the US. Global trade volumes have suffered accordingly, as have Purchasing Managers Indices (PMIs), both in Developed and Emerging Markets. As the world economy is in the late stages of the economy recovery from the economic crisis ten years ago, the vulnerability exhibited by economies from Mexico to Korea must be taken seriously. The prospect of a series of rate cuts from the Federal Reserve provides hope for some relief, but it is unlikely that the US will avoid recession in the coming 18 months, and this prospect will weigh on risk assets. Emerging Markets came into 2019 depressed, at cheap valuations, but earnings revisions have been negative, offsetting this. Declining PMIs unfortunately do not point to what the markets have been hoping for, a reversal of this trend. Lower interest rates would help, but what the world needs right now is progress towards resolution of trade tensions (US-Europe, US-China, US-Mexico).

Progress here would lead to the gradual repairing of policy certainty, which in turn would improve corporate confidence, their propensity to invest, and the visibility of growth, something both the bond and the equity markets are finding in short supply now. Longer-term, the US China rivalry will certainly continue, but this need not be fatal to China’s investment case, and to some extent could be said to be reflected in current pricing.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Gary Greenberg, Portfolio Manager

Market and Performance Review

The benchmark MSCI Emerging Markets SMID Net Total Return Index returned 4.81% in June. Emerging markets moved higher in June buoyed by the prospect central banks will move to avoid a downturn in the form of rate cuts and monetary stimulus. The G20 meeting at the end of the month resulted in the U.S. and China agreeing to keep talking about trade, with no escalation in tariffs. New benchmark entrant Argentina was the best performing market, posting 23.67%, while Pakistan lagged the most, dropping 12.97%. At the sector level, Utilities outperformed, and Health Care lagged the most.

The Fund outperformed the benchmark index in relative terms over the month. Stock selection in China and our overweight to the country which outperformed, contributed the most to relative returns. Selected names in Taiwan and India also contributed positively.

Baozun, a Chinese e-commerce solutions provider, rose after reporting strong 1Q results and guiding good Q2 2019 outlook. Highlights included total revenue increase by nearly 40% year on year and the addition of 15 new brand partners in the quarter. Techtronic Industries, the Hong Konglisted manufacturer of power tools and floor cleaning equipment, moved higher given a minimal impact from the recent tariff increase (from 10% to 25%) and efforts to mitigate its tariff exposure via new suppliers and factories overseas. Shenzhen International, a Chinese logistics infrastructure facilities and services provider, rose as high occupancy rates for its logistic parks and monetisation from its land bank is expected to support strong FY 19 earnings growth and dividend yield.

Tech Mahindra, the Indian IT services provider, fell on softer revenue growth outlook on uncertainty related to 5G rollouts following the Huawei ban and cost pressure related to a tight labour market in the US. IRB Brasil, a leading reinsurance company, fell amid speculation some major IRB shareholders will use the government's planned divestment of its stake as an opportunity to also sell their shares in the reinsurer. Shares in SITC, a marine shipping services and logistics provider, fell as volumes and average selling prices are expected to be flat near-term. Due to the China-US trade dispute, customers were cautious on taking inventory, which caused a slowdown in trade volume within the region. However, at the same time they saw a speeding-up of manufacturing migration away from China, which would help on the trading volume in the ASEAN region.

Fund Activity

We trimmed Baozun after a strong move higher year to date and added to several names with attractive upside including NMC Healthcare, Motherson Sumi, Oberoi Realty, Delta Electronics, Advantech and Accton Technology.

Outlook

After enjoying a second positive quarter, Emerging Markets have recovered much of the ground lost last year due to strident U.S. economic policies.

China’s transition to a consumer-led economy, however, a transition which matters to the rest of the world given its size and role in world trade, has been made much more difficult by U.S. protectionist moves. Global trade volumes have suffered accordingly, as have Purchasing Manager’s Indexes (PMIs), both in Developed and Emerging Markets. As the world economy is in the late stages of recovery from the economic crisis ten years ago, the vulnerability exhibited by economies from Mexico to Korea must be taken seriously.

The prospect of a series of rate cuts from the Federal Reserve provides hope for some relief, but it is unlikely that the U.S. will avoid recession in the coming 18 months, and this prospect will weigh on risk assets. Emerging Markets came into 2019 depressed, at cheap valuations, but earnings revisions have been negative, offsetting this. Declining PMIs unfortunately do not point to what the markets have been hoping for, namely, a reversal of this trend. Lower interest rates would help, but what the world needs right now is progress towards resolution of trade tensions (e.g., U.S.-Europe, U.S.-China, U.S.-Mexico).

Progress here would lead to the gradual repair of policy uncertainty, which in turn would improve corporate confidence, their propensity to invest, and the visibility of growth, something both the bond and the equity markets are finding in short supply now. Longer term, the U.S.-China rivalry will certainly continue, but this need not be fatal to China’s investment case, and to some extent could be said to be reflected in current pricing.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Geir Lode, Portfolio Manager

Market and Performance Review

Global Equity markets recovered their poise in June as the escalating tensions between the US and China dissipated, while the Federal Reserve and ECB both signalled rate cuts giving markets a further boost. The Alpha model highlighted a market environment that rewarded attractively priced companies with strong Growth characteristics and ignored balance sheet strength. Against this backdrop, the MSCI World Index returned 6.59% in US Dollar terms.

The Fund outperformed the benchmark index in June as successful selection in Health Care and Financials outweighed a detraction in Materials. None of the Fund’s regional exposures had a meaningful impact, as contributions from selection in North America, Asia Pacific and Japan more than offset the detraction from Europe.

Weyerhaeuser, Marathon Petroleum and Valeo were the largest contributors to relative returns. Weyerhaeuser increased after Canfor, a British Colombia-based sawmill operator, announced that it was cutting production, while a thawing in US-China trade tensions was viewed positively for the wider lumber market. Marathon Petroleum advanced in June after the oil price increased following the attack on an oil tanker in the Gulf of Oman raised tensions between the US and Iran. Valeo increased following strong Chinese auto data, rumours that the Chinese government would stimulate demands and a de-escalation of the US-China trade tensions.

The largest detractors were Vonovia, American Tower and Caltex Australia.

Vonovia fell after Berlin’s administration announced a five-year rent freeze to stem concerns over affordable housing. American Tower fell alongside the US Real Estate sector in the second half of June. Caltex Australia, the Australian refiner, fell after reporting disappointing earnings due to weak refining and retail fuel margins.

Outlook

As has been the case for much of the year, there are two major factors that are currently affecting investor behaviour; US-China trade tensions and central bank activity. While the frosty relationship appears to have thawed for the time being, the trade dispute between the US and China continues to dominate the headlines and remains the single biggest headwind to global growth. These tensions have undoubtedly led to central banks becoming more dovish. The market is now expecting two rate cuts in the US this year. In Europe, ECB President Mario Draghi signalled a willingness for more rate cuts (possibly as early as September) and a new round of quantitative easing citing “prolonged uncertainty, driven largely by trade tensions”, which means the “downside risks to growth and inflation have now materialised”.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Hamish Galpin, Portfolio Manager

Market and Performance Review

The MSCI World Index returned 5.81% in US Dollar term in June. The increase in the market in June was driven by supportive comments from central banks in the US and Europe. The Fund narrowly underperformed the benchmark over the period.

Dutch Industrial Aalberts was the top contributor to relative returns in June.

The stock recovered its share price decline experienced in May as it is exposed to GDP trends and hence also responded to a prospective lower rate environment. RPM International, the US-listed specialty chemical company, increased as trade tensions eased and was given a further boost after acquiring joint sealant business Schul International, which is expected to be earnings accretive. Health care supplier, Steris also outperformed as it showed good progress in both the product and services sides of its business.

The largest detractor was Diversified Gas & Oil, which fell in early June in anticipation of the ending of the lock-up period following its share sale in April and adverse online comments about the company. Yaoko, the Japanese supermarket fell on little news, but suffered as a defensive stock in a risk-on month. The rotation away from defensive stocks also affected Japanese real estate company Relo Group.

Outlook

Declining economic growth has been a recent concern for the market, exacerbated by the tariff dispute. We remain of the view that we are in a structurally low growth environment (and a flat yield curve one), which may mean occasional “recessions” in key markets, as defined by two quarters of negative GDP. This does not mean, however, that a material recession is imminent despite the longevity of the current economic expansion. Altogether, this is a favourable backdrop for active managers searching for price anomalies (and by contrast, a less favourable one for index-driven ETFs).

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

James Rutherford, Portfolio Manager

Market and Performance Review

The FTSE All World Europe Index rose by 4.52% in June as the US-China trade dispute eased. The Fund performed well, outperforming the benchmark index in June. Both allocation and stock selection contributed to the excess return in June. The largest contributions came from our overweight position in industrials and stock selection in Health Care, Financials and Consumer Goods. These more than offset detractions from our underweight position in Basic Materials and selection in Technology and Consumer Services.

Valeo, Bayer and Sika were the largest positive contributors. Valeo shares were boosted by strong Chinese auto data, rumours that Beijing would stimulate demand and the de-escalation of US-China trade tensions. Bayer rose after the company bolstered its response to the Roundup lawsuits, raising hopes that a reasonable settlement could be reached. Sika benefited from several positive broker reports which cited its leading position in construction chemicals and the corresponding growth opportunities.

ASOS, Nokia and Worldpay detracted the most from the Fund’s performance. ASOS shares fell after it appeared that recovery in sales growth, following a difficult final quarter of last year, might be slower than expected. Nokia also fell modestly in June, although there was no specific impetus behind this. Worldpay Group traded sideways after the completion of its acquisition by FIS, a US fintech company.

There were two new additions to the Fund in June: Barratt Developments and Johnson Matthey. Barratt Developments is a leading UK housebuilder that is trading on heavily depressed valuation metrics. It has a P/E ratio of 8x, an 8% dividend yield and £800m in cash on its balance sheet. The UK homebuilding sector remains an oligopoly with rational behaviour, improving build quality and pent-up demand from years of undersupply.

We are confident in Barratt’s strategic plan that aims to improve margins, which remain among the lowest in the sector.

Johnson Matthey is a speciality chemicals company. Its primary business is manufacturing auto catalysts; it holds around a third of the global market and about 45% of the heavy-duty diesel market. We see this area as a growth opportunity; the truck replacement cycle is just getting started and is driven by new emissions regulation. The company also has a stronghold in other growth areas, including stationary emissions controls, where it designs emission-reduction systems for power-generation plants and factories. In addition, the company has developed catalysts for fuel-cell systems and Electric Vehicle (EV) battery materials and is stepping up its production of eLNO, its new type of cathode material.

Outlook

We expect the divergence between high and low-quality companies to continue for the time being, albeit with occasional fluctuations. What will it take for more meaningful change to occur? Looking back to 2016-2017 offers perhaps the best indication. Quality stocks underperformed in this period, which was characterised by synchronised global growth, rising inflation and a normalisation of interest rates. These three ingredients are conspicuously absent today.

Sceptics continue to write off Europe: There is an almost constant flow of investor funds away from the region. Despite this, European markets have returned over 17% this year in Euro terms. As we have said before, the time to worry is when investors are euphoric. However, that still looks a long way off in Europe.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Mark Sherlock, Portfolio Manager

Market and Performance Review

The Russell 2500 rose 7.10% in US Dollar terms in June. Equity markets delivered a strong performance in June after a very weak May, buoyed by the prospect of lower interest rates. The G20 meeting at the end of the month resulted in the US and China agreeing to keep talking about trade, with no escalation in tariffs but also no significant signs of progress in addressing the key sticking points in the negotiations.

The Fund outperformed the benchmark index on a relative basis over the month. Outperformance was driven by stock selection, notably Technology, Financial Services and Consumer Discretionary.

Axalta Coating Systems rose after it announced a comprehensive review of strategic alternatives to maximise shareholder value. The scope of the review includes a potential sale of the company, changes in capital allocation, and ongoing execution of the existing strategic plan. Fortune Brands (home and security products) rose following solid Q1 results led by improved execution in Cabinets and Security and improving demand in March and April, while reiterating 2019 guidance. Cognex (machine vision systems) rose despite disappointing 2019 guidance as long-term catalysts remain, notably global automation that has a long runway in many end markets.

Alleghany (property & casualty insurance and reinsurance) lagged the market after a strong run in April and May on the expectation of a rising premium pricing. Weingarten Realty Investors fell on concern over retail store closures despite having divested weaker assets. Alimentation Couche-Tard (24-hour convenience stores) fell as investors booked profits after the share price reached a 24 year high in May.

Outlook

The overall market appears reasonably priced, but in certain areas we are seeing pockets of overvaluation, with individual stock prices decoupling from fundamentals. However, we are still finding value in many parts of the market and remain focused on investing in high-quality companies that should benefit if the market moves higher but protect investors’ capital during any pullback.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Lewis Grant, Portfolio Manager

Market and Performance Review

Global Equity markets recovered their poise in June as the escalating tensions between the US and China dissipated, while the Federal Reserve and ECB both signalled rate cuts giving markets a further boost. The Alpha model highlighted a market environment that rewarded attractively priced companies with strong Growth characteristics and ignored balance sheet strength. Against this backdrop, the MSCI All Country World Index returned 6.55% in US Dollar terms.

The Fund outperformed the benchmark index in June as successful selection in Health Care and Industrials outweighed a detraction from selection in Information Technology. From a regional viewpoint, the contribution from selection in North America was the only significant influence.

Valeo, Hess and Weyerhaeuser were the largest contributors to relative returns. Valeo increased following strong Chinese auto data, rumours that the Chinese government would stimulate demands and a de-escalation of the US-China trade tensions. Hess advanced in June after the oil price increased following the attack on an oil tanker in the Gulf of Oman which raised tensions between the US and Iran. Weyerhaeuser increased after Canfor, a British Colombia-based sawmill operator, announced that it was cutting production, while a thawing in US-China trade tensions was seen as a positive for the wider lumber market.

The largest detractors were Vonovia, Caltex Australia and American Tower.

Vonovia fell after Berlin’s administration announced a five-year rent freeze to stem concerns over affordable housing. Caltex Australia, the Australian refiner, fell after reporting disappointing earnings due to weak refining and retail fuel margins. American Tower fell alongside the US Real Estate sector in the second half of June.

Outlook

As has been the case for much of the year, there are two major factors that are currently affecting investor behaviour; US-China trade tensions and central bank activity. While the frosty relationship appears to have thawed for the time being, the trade dispute between the US and China continues to dominate the headlines and remains the single biggest headwind to global growth. These tensions have undoubtedly led to central banks becoming more dovish. The market is now expecting two rate cuts in the US this year. In Europe, European Central Bank President Mario Draghi signalled a willingness for more rate cuts (possibly as early as September) and a new round of quantitative easing citing “prolonged uncertainty, driven largely by trade tensions”, which means the “downside risks to growth and inflation have now materialised”.

Whether these actions will boost economic activity remains unclear, but it should provide support for equities. The reality is, however, that a resolution of the trade dispute is required for global growth to return. For the time being, the fundamental backdrop remains uncertain and this leads us to the conclusion that Global equity markets are likely to remain range-bound as sentiment swings around.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Tim Crockford, Portfolio Manager

Market and Performance Review

The FTSE World Europe ex UK Index rose by 5.12% in June as the US-China trade dispute eased. The Fund performed well, outperforming the benchmark index in June. Both stock selection and allocation contributed to the excess return in June. The largest contributions came from our overweight position in industrials and stock selection in Industrials, Basic Materials and Oil & Gas and there were no meaningful detractors.

Barrick Gold, TKH Group and CIE Automotive were the largest contributors.

Barrick Gold increased alongside the gold price in June. TKH Group hosted a Capital Markets Day in which they increased their medium-term targets and announced that they will seek to sell-off its low margin, limited opportunity businesses. CIE Automotive was boosted by an easing of he US-China trade tensions, while the company expects an uptick in margin after it integrates Inteva, a US auto supplier and group revenue growth to continue outperform the market.

Ubisoft Entertainment, Bankinter and Cerved Group were the largest detractors. Ubisoft fell after major shareholder, Guillemot Brothers, reduced their stake in the company, reversing the stockpiling they had executed to defend a hostile takeover from Vivendi. Bankinter fell after the ECB signalled that rates would be lower-for-longer, fueling worries that spread compression could continue to squeeze net interest margins.

Cerved Group underperformed over the month, as Banca Monte dei Paschi di Siena exercised a right to withdraw from a ten-year credit servicing agreement.

Outlook

We expect the divergence between high and low-quality companies to continue for the time being, albeit with occasional fluctuations. What will it take for more meaningful change to occur? Looking back to 2016-2017 offers what is perhaps the best indication. Quality stocks underperformed in this period, which was characterised by synchronised global growth, rising inflation and a normalisation of interest rates. These three ingredients are conspicuously absent today.

Sceptics continue to write off Europe: there is an almost constant flow of investor funds away from the region. Despite this, European markets have returned over 17% this year in Euro terms. As we’ve said before, the time to worry is when investors are euphoric. That still looks a long way off in Europe.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Tim Crockford, Portfolio Manager

Market and Performance Review

An easing of the trade tensions alongside a more dovish stance from the Federal Reserve and European Central Bank ensured global equity markets recovered in June with the MSCI All-Country World IMI Index returning 6.43%. Stock selection was the main influence on relative returns via contributions from Health Care, Information Technology and Real Estate.

Allocation also added value in the month as contributions from the underweight positions in Consumer Staples and Communication Services and the overweight stance in Health Care offset the detraction from the underweight in Information Technology.

The largest individual contributors were Illumina, Emergent BioSolutions and Ansys. Illumina increased after a survey of genetic core labs highlighted higher than expected demand for its Novaseq gene sequencing system.

Emergent BioSolutions after announcing a contract with the US government to continue supplying smallpox vaccines over the next 10 years. Ansys increased alongside the Information Technology sector.

LivaNova, Autolus Therapeutics and Duerr were the largest detractors.

LivaNova traded sideways over the month on little specific news. The fundamentals for Autolus Therapeutics remain positive, but the share price has been weak due to a large forced seller of the stock. Duerr declined in June after Biesse, a rival of Duerr’s Homag furniture division, reduced guidance citing a cooling of demand.

Outlook

The trade dispute between the US and China continues to be the single biggest headwind to global growth and despite a recent thawing of the tensions, any deal appears to be far from imminent. This has undoubtedly led to a more dovish stance from the central banks, but whether this action will have much of an impact, beyond providing some support for equity markets, is unclear.

Against this uncertain backdrop our investment approach remains unchanged.

We continue to look for new companies that we believe will benefit from the emerging growth opportunities arising from countries’ need to meet the 2030 Sustainable Development Goals. Such firms should be less exposed to geopolitical and macroeconomic risks over the longer-term. If growth expectations recede, they should attract a premium valuation as they are less reliant on the cycle. If growth picks up, however, the markets’ failure to correctly price in these emerging growth opportunities should help them deliver earnings ahead of expectations. We believe this will help the Fund achieve positive relative returns over time, regardless of the prevailing style preferences or the macroeconomic backdrop.

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

Hamish Galpin, Portfolio Manager

Market and Performance Review

The MSCI All Country World SMID Index benchmark returned 6.05% in June, reversing a similar scale decline in May, as the market reacted positively to supportive comments from central banks in the US and Europe. Developed and Emerging Markets SMID stocks rose in tandem, with each index rising 5.3%. The outcome was also similar across the market cap spectrum with Large Caps in Developed Markets returning 5.3% and Emerging Markets moderately ahead of that at 6.0%. Interestingly, SMID stocks outperformed Large Cap in the US for the first time since February (the Russell 2500 Index 5.8% versus the S&P500 Index 5.5%).

Techtronic Industries, Fortune Brands and Aalberts were the largest individual contributors in June. Techtronic, as a predominantly US-based (but Hong Kong quoted) power tool business with material Chinese manufacturing, is exposed to the US/China trade dispute. Fortune Brands stock rose alongside US housebuilders in response to lowered interest rate expectations and reduced shorting activity in the sector. Aalberts recovered its share price decline experienced in May as it is exposed to GDP trends and hence also responded to a prospective lower rate environment.

The largest detractors were Yaoko, Abu Dhabi Commercial Bank and Relo Group. There was no news on Yaoko, the Japanese supermarket business, which suffered as a defensive stock in a risk-on month. Japanese Small Caps as a whole rose less than 1% over the month (in local currency). There was no stock-specific news on Abu Dhabi Commercial Bank, although banks generally were impacted by a flattening yield curve. The comments above for Yaoko equally apply to Relo Group.

The position in Samsonite was increased after a meeting with the Chairman of the company. Like Techtronic, the stock has been impacted by the tariff dispute, but we feel the stock is valued too low compared with its longterm prospects and strong market position. Wintrust and AMN, both of which have meaningful engagement opportunities and objectives, were also topped up during the month. The Cooper Companies was scaled back after it had risen above 3% of the Fund. Snap-On was similarly scaled back after a poor meeting with Management and a perceived diminution of engagement prospects. Abu Dhabi Commercial Bank was also reduced as its three-way merger since the launch of the Fund has limited engagement activity to date, and a reassessment of engagement potential needs to be undertaken.

Outlook

Declining economic growth has been a recent concern for the market, exacerbated by the tariff dispute. We remain of the view that we are in a structurally low growth environment (and a flat yield curve one), which may mean occasional “recessions” in key markets, as defined by two quarters of negative GDP. This does not mean, however, that a material recession is imminent despite the longevity of the current economic expansion. Altogether, this is a favourable backdrop for active managers searching for price anomalies (and by contrast, a less favourable one for index-driven ETFs).

Fund performance returns are in base currency of the Fund and are calculated at close of business, gross of management fees. Fund performance returns at a Share Class level are calculated at midday and are net of management fees. Share Class performance returns can be found on the relevant factsheet. Source: Northern Trust.

The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other Hermes 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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