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Monthly Fund Commentary, May 2019

Please find below a summary of performance, activity and outlook for May 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 asset allocation, notably our overweight China, which underperformed, and associated exposure to the renminbi which depreciated, and our underweight India, which outperformed, eclipsing positive contribution from selected names in China.

Non-exposure to Tencent, China’s leading social media company, contributed as the company reported soft Q1 2019 gaming revenue and negative sentiment the China-US trade dispute might turn into a protracted tech war. Cosco Shipping Ports, a Chinese port operator, rose after reporting Q1 2019 results in line (adjusted for one off items). The company-maintained guidance on total throughput for 2019 (low doubledigit growth), thanks to more port calls from Ocean Alliance and capacity expansion in Abu Dhabi and Singapore. MediaTek rose as the Taiwan chip supplier launched their first 5G-enabled chips. MediaTek is expected to be a beneficiary of the Huawei ban as Chinese smartphone makers speed up the pace reducing US-made technologies in the supply chain amid a heated trade dispute.

Shares in Baidu, China’s leading internet search provider, fell during the month following disappointing Q1 results and weaker-than-expected Q2 guidance as growth stalled despite a sharp increase in customer acquisition costs. Weibo, one of China’s leadings social media networks, detracted despite in line Q1 2019 results due to its cautious Q2 2019 revenue guidance on slowing advertiser demand amid macro uncertainty and stiff competition from news-aggregation and short-video platforms. ASE Technology, a Taiwan semiconductor testing and assembly company, fell on negative sentiment as Huawei accounts for about 10% of ASE’s sales.

Portfolio activity

Baidu results were disappointing. Although on a sum of the part’s basis, Baidu’s core operation (following the fall in the stock price) are trading on a PE multiple of less than ten times (reduced) normalised earnings, we believe these normalised earnings might take longer than expected to reveal themselves given that management continues to invest aggressively (although slightly less aggressively than before these results) in traffic acquisition. As a result, although cheap on a sum of parts basis, our level of conviction has fallen. We have therefore cut our position. We also trimmed Samsung C&T and SL Corporation, adding to Samsung Electronics Sinopharm and China Mobile on recent stock price weakness.

Outlook

We are bottom up stock pickers, concerned almost exclusively about the pricetovalue 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 longendured stylistic headwinds turn into tailwinds, 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

Equity markets fell as the US announced tariff increases on US imports from China. China was the worst performing market amid fears the reemergence of trade tensions will impact the growth outlook, causing the renminbi to fall 2.5% against the Dollar. Elsewhere, India outperformed as its six-week long general election concluded with a surprise super-majority for incumbent Narendra Modi and his Bharatiya Janata Party (BJP). The victory removes a major overhang for the economy and market, providing some clarity on the policy outlook and hope for continuing reform progress.

The benchmark MSCI Emerging Markets Index fell 7.26% in May. All sectors were in negative territory during the month, Consumer Discretionary lagging the most and Utilities outperforming.

The Fund underperformed the benchmark index over the period in relative terms. The overweight in China which underperformed, and associated exposure to the currency which depreciated, detracted the most to relative returns offsetting positive stock selection within the country. Selected names in Taiwan and the United Arab Emirates also detracted.

HDFC, India’s largest private bank, rose following the election result and analysts’ upbeat assessment of the next leg of growth. Notre Dame Intermedica, one of Brazil’s largest private healthcare providers, rose after reporting solid Q1 2019 results driven by further vertical integration, improved cost controls and synergies from its GreenLine acquisition. Nonexposure to Baidu aided returns as China’s major search provider reported weak Q1 results and soft Q2 guidance.

Shares in NMC Health, the UAE-based healthcare provider, fell because of rising short interest, absent any newsflow. Tencent, China’s leading social media platform, fell on seemingly soft Q1 2019 mobile gaming revenue which was largely due to temporary issues such as revenue recognitions and content launch timing and concern that the China-US trade dispute might turn into a tech war. Samsonite, a global luggage provider, fell as the US tariff increase to 25% is expected to impact earnings.

Outlook

The current dispute with China is, in our view, the beginning of a long-term rivalry between the two superpowers and the US is unlikely to pivot back to the constructive stance it held toward China during the prior two centuries. However, a full-fledged trade war should cut China’s real GDP growth rate to 5.8% this year and 5.6% in 2020 (from around 6% in both years in a base case). China’s slowdown, should it happen, will affect economies all over the world.

Economic surprises in Emerging Markets, as businesses react cautiously to this possibility, have been missing expectations recently. The Chinese stock market is trading at its long-term average (Bloomberg consensus) earnings multiple as of this writing, largely ignoring the recent improvements in profitability in Chinese corporates in recent years. We agree that the risks are evenly balanced: a deal would spark a rerating, “no deal” probably a derating in the short-term. Looking further out, we think China has found an invaluable and powerful new source of motivation towards economic and technological self-sufficiency and that the country will find a way to overcome this obstacle and emerge stronger, in economic, technological, and geopolitical terms, than it is today.

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

The impressive rise of Global Equity markets ground to a halt in May as an escalation in the US-China trade tensions spooked investors as risk aversion spiked and the MSCI World Index fell 5.77% in US Dollar terms, led by cyclical areas of the market. From a factor viewpoint, sentiment was rewarded while investors avoided the cheaper areas of the market.

The Fund modestly underperformed the benchmark index in May. From a sector viewpoint, the Fund was in the right areas of the market, highlighted by contributions from allocation in nine of the 11 sectors. However, these were offset by detractions from selection in Energy and Materials. From a regional perspective, there were no meaningful contributions, but there was a notable detraction from selection in Europe.

The largest individual contributors were Adidas, American Water Works and American Tower. Adidas reported above-consensus earnings driven by an increase in its gross margin, while sales in Russia and Asia Pacific were particularly strong. American Water Works benefitted from its defensive characteristics, while its domestic focus was also rewarded amid the rising US-China trade tensions. American Tower reported results ahead of expectations due to strong domestic revenue growth.

Broadcom, Marathon Oil and Marathon Petroleum were the largest detractors. Broadcom declined alongside the semiconductor sector as investors became increasingly defensive and avoided more cyclical areas of the market. Marathon Oil reported Q1 2019 earnings that were broadly in line with expectations, but ultimately declined alongside the oil price. Marathon Petroleum reported weaker than expected earnings, driven by disappointing revenues from its retail division.

Outlook

Trade continues to dominate the headlines. President Trump took aim at Mexico, but most important is the ongoing US-China trade dispute, which the US reignited in May. In an increasingly heated exchange, the US accused China of “backpedalling” on previous agreements, while China spoke of “economic terrorism”. This rhetoric suggests any deal is far from imminent, although we continue to believe that it remains most likely that a deal will be struck. After all, it is in both countries interests to resolve this situation.

On the face of it, these disputes would appear to be politically motivated, but their effects are already being felt; global trade has collapsed and the potential impact that this could have on the global economy has led to more dovish comments from the Federal Reserve with two rate cuts now expected in 2019. Low rates should provide some support for equities, although whether that is enough should the trade dispute continue over the summer and beyond remains to be seen. We will, of course, be closely monitoring developments and maintain that the best way to negotiate these markets is to identify a diverse range of attractively priced companies that are well run, have proven growth and a strong balance sheet to weather any downturn.

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

An escalating trade dispute between the US and China, as well as declining global growth expectations, ensured that the market rally ground to a halt in May with the FTSE All-World Europe falling by 4.56%, in Euro terms. All sectors declined, but there was a clear pattern: Defensive sectors, such as Utilities, Health Care and Staples (part of the Consumer Goods sector) outperformed, while cyclicals, such as Basic Materials, Industrials, Financials and Technology, underperformed. The Fund marginally underperformed the benchmark index. The main contributions came from selection in Industrials and Consumer Goods, alongside our overweight position in Technology. These were offset by detractions from selection in Oil & Gas and Health Care.

The largest individual contributors were Adidas, Deutsche Boerse and Wirecard. Adidas reported forecast-beating earnings, driven by an increase in its gross margin whilst sales in Russia and Asia Pacific were particularly strong. Deutsche Boerse reiterated its medium-term guidance during an Investor Day, citing a combination of its index, FX and Fund Services businesses. The company is also benefitting from stronger derivative volumes. Wirecard reported strong Q1 2019 earnings due to growing transaction volumes, which led to strong organic revenue growth.

Valeo, Lundin Petroleum and Siemens Gamesa were the largest detractors in May. Valeo declined alongside the autos sector as the escalation of trade tensions weighed heavily on sentiment. Lundin Petroleum reported sales, earnings and production that were marginally below expectations. Siemens Gamesa reported solid earnings and maintained guidance, but average selling prices, which were lower-than-expected due to China, weighed on sentiment.

Our activity was limited to the active management of existing positions. We topped up Edenred, a recent addition to the Fund, and reduced our positions in Adidas and Wirecard following a period of strong performance. As such, the broad structure of the Fund was similar to the previous month.

Outlook

The trade dispute between the US and China continues to dominate the headlines and remains the single biggest headwind to global growth. Our base case remains that a deal is likely to be reached eventually, but the increasingly heated exchange suggests that it is far from imminent and, with global trade collapsing, the impact is already being felt. This has undoubtedly led to central banks becoming more dovish. The market is now expecting two rate cuts in the US this year while European Central Bank President Mario Draghi signaled a willingness for more rate cuts and a new round of quantitative easing. The effect this will have remains unclear, but for the global economy to improve, it is clear that a resolution of the trade dispute is required. For the time being, the fundamental backdrop remains uncertain. As such, the “risk-on” / “risk-off” environment is likely to persist. Meanwhile, growth continues to be scarce, which is supportive of our investment approach that seeks to identify companies that will grow regardless of the economic environment.

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 Index fell 7.12% in US Dollar terms in May. Equity markets broadly fell as the US announced tariff increases on imports from China. Markets are concerned an escalation in the trade wars will temper global growth and lower investment due to the ongoing trade uncertainty. Recent comments from policymakers suggest the Federal Reserve would be willing to cut rates if the data indicated a material deterioration in the economic outlook.

The Fund outperformed the benchmark index on a relative basis over the month. Outperformance was driven by our sector overweight and underweight positions. Stock selection in Materials and Processing contributed, although gains were offset by weak Consumer Discretionary, Producer Durables and Financial Services stocks.

Shares in Alimentation Couche-Tard (24-hour convenience stores) reached new highs amid speculation that a major Eastern seaboard convenience store retailer could be for sale, and broker estimates that any such acquisition could be 4% accretive to EPS. Aptar Group (value-added dispensing systems) rose following a strong start to 2019, posting betterthanexpected first quarter earnings, particularly in the Pharmaceutical segment. Allegheny, a property & casualty insurer, rose amid expectations that the 2019 pricing environment will improve.

Recent purchase 2U, the online education services provider, fell despite strong Q1 2019 results, as management lowered its 2019 guidance, citing lower expectations for admission rates across a portion of their portfolio.
Shares in AO Smith (residential and commercial water heating and treatment equipment) traded lower following the issuance of a short report questioning the access to the cash that AOS has in China and the relationship with UTP, its distribution partner. While this creates an overhang, we believe the bigger issue ultimately is the overall weakness in China and investors' confidence in hitting numbers against this backdrop. Ingredion (sweeteners and starches) fell on disappointing Q1 2019 results, as well as management lowering 2019 EPS guidance.

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

The impressive rise of Global Equity markets ground to a halt in May. An escalation in the US-China trade tensions spooked investors as risk aversion spiked and the MSCI ACWI fell 5.93%, in US Dollar terms, led by cyclical areas of the market. From a factor viewpoint, sentiment was rewarded while investors avoided the cheaper areas of the market.

The Fund underperformed the benchmark index in the month, driven by stock selection. From a sector viewpoint, contributions from Utilities and Communication Services were more than offset by detractions from Financials, Materials and Industrials. From a regional perspective, selection was successful in Emerging Asia, but offset by detractions in Europe, North America and Japan.

The largest individual contributors were China Resources Gas , American Water Works and The Travelers Companies. China Resources Gas maintained its guidance of 20% year-on-year gas sales volume driven by its industrial division. American Water Works benefitted from its defensive characteristics while its domestic focus was also rewarded amid the rising US-China trade tensions. The Travelers Companies increased alongside US insurers over the month and benefited from its primarily domestic focus.

Valeo, Hudbay Minerals and Hyundai Marine & Fire Insurance were the largest detractors. Valeo declined alongside the autos sector as the escalation in trade tensions weighed heavily on sentiment. Hudbay Minerals reported below-consensus earnings due to lower copper production in Manitoba, lower metal prices and lower sales of copper, zinc and gold. Hyundai Marine & Fire Insurance results were below expectations driven primarily by increasing healthcare claims following President Moon Jae’s healthcare reform plan.

Outlook

Trade continues to dominate the headlines. President Trump took aim at Mexico, threatening a 5% tariff on Mexican goods entering the US if the country failed to curb migration from Central America. Most important, however, is the ongoing US-China trade dispute, which the US reignited in May. In an increasingly heated exchange, the US accused China of “backpedalling” on previous agreements, while China spoke of “economic terrorism”. This rhetoric suggests any deal is far from imminent, although we continue to believe that it remains most likely that a deal will be struck. After all, it is in both countries interests to resolve this situation.

On the face of it, these disputes would appear to be politically motivated, but their effects are already being felt; global trade has collapsed, and the potential impact that this could have on the global economy has led to more dovish comments from the Federal Reserve with two rate cuts now expected in 2019. As we mentioned in last month’s newsletter, low rates should provide some support for equities, although whether that is enough should the trade dispute become prolonged remains to be seen. We will, of course, be closely monitoring developments and maintain that the best way to negotiate these markets is to identify a diverse range of attractively priced companies that are well run, have proven growth and a strong balance sheet to weather any downturn.

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 escalating trade dispute between the US and China as well as declining global growth expectations ensured that the market rally ground to a halt in May, with the FTSE World Europe ex UK Index falling by 4.40%, in Euro terms. There was a clear pattern over the month: Defensive sectors, such as Utilities, Telecommunications, Health Care and Staples (part of the Consumer Goods sector), outperformed whilst cyclicals, such as Basic Materials, Industrials, Financials and Technology, underperformed. The Fund underperformed the benchmark index in the month with stock selection the main influence. Selection in Financials was the only major contributor, which was more than offset by detractions from selection in Consumer Goods, Oil & Gas and Health Care.

The largest individual contributors were Adidas, Euronext and Wirecard. Adidas reported forecast-beating earnings driven by an increase in its gross margin, while sales in Russia and Asia Pacific were particularly strong. Euronext reported above consensus revenues and earnings driven by higher margins in cash trading and investor services while its post trade, market data and indices divisions were also slightly ahead of expectations. Wirecard reported strong Q1 2019 earnings due to growing transaction volumes, which led to strong organic revenue growth.

Duerr, KION Group and Umicore were the largest detractors in May. Duerr saw strong orders in its paint and final assembly systems division and overall results were broadly in line with consensus. However, investors were avoiding cyclical areas of the market which weighed on sentiment. KION Group was also affected by the avoidance of cyclicals, while Jungheinrich, one of KION’s main competitors, issued a cautious update. Weakness in Umicore’s share price continued in May after releasing below consensus guidance at the end of April, which was compounded by investors becoming increasingly defensive in May.

Trading activity was limited over the month as we modestly reduced the cash position by topping up positions in Amadeus, CIE Automotive and Wirecard. As such, the broad structure of the Fund was similar to the previous month.

Outlook

The trade dispute between the US and China continues to dominate the headlines and remains the single biggest headwind to global growth. Our base case remains that a deal is likely to be reached eventually, but the increasingly heated exchange suggests that it is far from imminent and, with global trade collapsing, the impact is already being felt. This has undoubtedly led to central banks becoming more dovish. The market is now expecting two rate cuts in the US this year, while European Central Bank President Mario Draghi signaled a willingness for more rate cuts and a new round of quantitative easing. The effect this will have remains unclear, but for the global economy to improve, it is clear that a resolution of the trade dispute is required. For the time being, the fundamental backdrop remains uncertain. As such, the “risk-on” / “risk-off” environment is likely to persist for the foreseeable future.

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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