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Monthly Fund Commentary, March 2019

Please find below a summary of performance, activity and outlook for March 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 disappointing stock selection in China as well as Taiwan eclipsing positive contribution from selected names in Korea.

Weibo, one of China’s leading social media networks, rose as key account customer advertising spend is expected to offset softening SME expenditure. Shares in Wuliangye Yibin, a leading liquor maker in China, continued its outperformance due to strong Q1 result and anticipation of ex-factory price hike. ASE Technology, a Taiwan semiconductor packaging and testing services company, rose as management reiterated its nearterm business guidance, while addressing key market concerns including competition from China/TSMC and synergy with SPIL.

Cosco Shipping Ports, the China and overseas port operator, detracted the most after reporting Q1 2019 net profit declined due to one-off items but results in line once adjusted. The company maintains its 2019 throughput guidance given great synergies with Ocean Alliance and capacity expansion in Abu Dhabi and Singapore. Non exposure to Tencent, China’s leading social media company, detracted as the company’s gaming revenue has started to reaccelerate with pipeline approval. Beijing Enterprises fell as China gas utilities have underperformed year to date due to concerns on regulatory risks and investors` flight to cyclical sectors amid looser macro policies.

Portfolio activity

We initiated a position in Sinopharm, the largest wholesaler and retailer of pharmaceutical products and medical devices in China. Multiple changes and reforms to China’s healthcare policy created various short-term challenges for incumbents, combined with a general liquidity squeeze resulting in higher funding costs and pressure on Sinopharm’s earnings in 2018. The stock has substantially de-rated as a result, and is now trading close to its own historical trough multiples since listing in 2009. Sinopharm should benefit from healthcare spending growth, industry consolidation and easing liquidity. We trimmed Wuliangye Yibin following strong year to date performance and added to names where we see more value.

Outlook

Although the last quarter of 2018 hinted at changes in style leadership, which coincided with that quarter’s high market volatility as trend following or discovering quantitative funds traded more frequently and aggressively, in the first quarter of 2019 the now familiar style leaders re-emerged. So Mega Cap again outperformed Large Cap, which again outperformed Mid Cap, which again outperformed Small Cap; and Growth again outperformed Value. The valuation differential between the cheapest and most expensive stocks continued to make records on some measures caused by the continuing outperformance of the most expensive stocks, in turn partly caused by rising margins in many growth companies, which in some cases themselves reached records.

We are bottom up stock pickers, concerned almost exclusively about the priceto- 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 portfolio 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 strategy’s stylistic differentiation relative to the market is now at a record. We are now substantially overweight stocks that are ‘value’, smaller than average and contrarian. Our aggregate outperformance over the last few years has been despite these intensifying stylistic headwinds.

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

Emerging Markets ended the first quarter up 9.92%, buoyed by more dovish central banks and hopes for a truce on trade between the US and China.

The benchmark MSCI Emerging Markets Index returned 0.84% in March. China outperformed, supported by policymaker’s stimulating domestic demand with a package of tax cuts, infrastructure investment and measures designed to support bank credit growth. India rallied, up 9.23%, on optimism that the current coalition government would return to power in upcoming elections. At the sector level, Real Estate outperformed, and Industrials lagged the most.

The Fund outperformed the benchmark index in relative terms over the month. Stock selection in China contributed the most to relative returns. Selected names in Taiwan also contributed positively, while holdings in the United Arab Emirates, Brazil and South Africa detracted.

Nari Technology, a power grid automation services provider, rose on strong revenue growth driven by power grid distribution automation, new UHV line related products, information communication equipment, cloud services and wireless communication. HDFC Bank and ICICI Bank rose in line with the India market which outperformed. HDFC continues to see healthy consumer demand and now sees growth in some pockets on the corporate side, which is helping maintain steady net interest margins, despite an increase in funding costs. ICICI Bank’s asset quality continues to improve as new non-performing loan ratios will taper further in fiscal 2020. Under its new CEO, the bank is focused on growth, improving operating profits and taking near-term ROE to 15% by June 2020.

NMC Healthcare, a UAE-based private hospitals and pharmaceutical distributor, was weak for technical reasons including short selling. Ultrapar, a Brazilian fuel distributor, fell as fierce regional competition is expected to limit margin recovery. KB Financial, a Korean bank, moved lower given the challenging macro backdrop, the adverse read through for loan growth, constraints from a regulator-imposed pricing cap, higher funding costs and a flat margin outlook that assumes no rate hikes in 2019.

Outlook

Economies around the world have slumped due to slowing Chinese domestic demand, trade disputes, capital outflows from Emerging Markets, and idiosyncratic shocks such as in the auto sector last year and the tech sector early this year. The global economy is thus vulnerable to a new negative shock, but absent this, corporate sentiment should recover, central banks are less hawkish, and thus we believe a recovery should start soon. PMI surveys across Asia rose in March and importantly Chinese trade has already begun to show signs of life.

Overall, valuations remain reasonable. The Growth style and Large Caps have outperformed Small and Mid-Caps so far this year which fits with a shift to a more neutral stance on behalf of the world’s central banks and thus a benign macroeconomic backdrop for Emerging Markets companies. While oil prices and US wages represent potential headwinds, we think the overall environment is supportive for further gains in the Fund this year.

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 continued to rise in March as the MSCI World Index returned 1.31%. One of the key features over the month was central bank activity in the form of the Federal Reserve Chair’s newly dovish stance, alongside stimulus in China and the Eurozone. The market moved towards more defensive areas in March, highlighted by the outperformance of Real Estate and Consumer Staples and the underperformance of Financials and Industrials. Meanwhile, our factor analysis showed investors rewarded sentiment, profitability and balance sheet strength at the expense of valuation.

Over the period, the Fund underperformed the benchmark index, driven by stock selection. From a sector viewpoint, all sectors, bar the detraction from Health Care, had a marginal influence on relative returns. From a regional viewpoint, there were detractions from selection in North America and Asia ex Japan.

American Tower, Lonza and Costco Wholesale were the largest individual contributors. American Tower’s CFO issued an upbeat assessment of the company’s growth prospects for 2019 as global market trends remain positive, due in part to new network bands for 5G. Lonza updated its midterm guidance, which saw margins slightly below consensus. Crucially, this was due to the company investing to add to its manufacturing capacity. This suggests that the future growth prospects of the company, which are tied to the shift towards biologic drugs, remain intact. Costco Wholesale continues to take market share and benefitted further from higher profitability in its gas stations, which drove overall margins higher and led to better than expected earnings.

Biogen, SAS and Abiomed were the largest detractors. Biogen fell after a disappointing trial of its Alzheimer’s drug, which was subsequently halted. SAS reported a slight decrease in passenger numbers from the previous year, which was in line with expectations, but fell as the oil price increased. Abiomed fell due to concerns about increased competition from a rival heart pump.

Outlook

After narrowly escaping the clutches of the bear market at the end of 2018, investor sentiment has swiftly returned to ‘risk-on’ mode. Paradoxically, concerns over slower growth have been the trigger for this about-turn. These concerns led the Federal Reserve to abandon its rate hike pathway, while Europe, following weak economic data in Germany, and China announced stimulus packages aimed at boosting economic activity.

It should also be noted that several temporary headwinds that affected global growth have now passed, which has also contributed to the rise in markets so far this year. These include a recovery in US output following the government shutdown and a recovery in European auto production following its collapse after the EU’s Worldwide Harmonised Light Vehicle Test Procedure (WLTP) emissions regulations were implemented late last year.

Meanwhile, earnings expectations have been revised downwards to more realistic levels and with central banks in accommodative mode and an increasing possibility of a breakthrough in the US-China trade discussions, there appears to be plenty of support for equities. Of course, it will be important to be selective and we will continue to seek a diverse range of well-managed companies with a combination of attractive long-term fundamental characteristics.

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

Gridlock over Brexit in the UK Parliament and softening economic data in the region failed to prevent European equity markets from continuing their rise in March as the FTSE All World Europe Index returned 2.05%. The Fund underperformed the benchmark index in March with stock selection the main influence on relative returns due to detractions from Consumer Goods and Financials companies, which outweighed success in Industrials. Allocation modestly added value as contributions from the underweight in Financials and overweight in Health Care more than offset the detraction from the underweight in Consumer Goods.

The largest individual contributors were Worldpay, Lonza and Merck. Worldpay increased after announcing a merger with Fidelity National Information Services, a US-listed financial services company. Lonza updated its mid-term guidance, announcing further investment in manufacturing capacity. Despite the near-term impact on margins, it displays confidence on the long-term growth prospects. In a similar vein, Merck reported strong top-line results but slightly softer net margins as it ramped up investments into pharmaceutical R&D as well as marketing, sales and ecommerce for its life sciences business.

Bayer, Wirecard and Swedbank were the largest detractors over the month. Bayer fell after losing another court case in the US that linked its Roundup weedkiller with cancer. Wirecard continued to be volatile following allegations reported in the Financial Times last month concerning potentially fraudulent activities in its Singapore office. Encouragingly, Rajah & Tann – the independent law firm investigating the allegations – found that the issues were not material, although some employees in Singapore may face criminal proceedings. However, the newspaper subsequently published an article examining the company’s relationships with third parties. Swedbank fell after allegations that the company breached money laundering rules in Estonia.

The number of positions in the Fund increased by one in March following the purchase of Edenred, the French-listed payment solutions company that specialises in employee benefits and loyalty rewards across the globe. The company has made significant investment to digitise its platform, which has increased the scalability of its offering and expanded its market to SMEs, creating an exciting growth opportunity. It should also benefit as investment normalises following a period of significant capital spending.

Outlook

The lack of desire to confront the debt problem means that yields are likely to remain lower for the foreseeable future, assuming inflation remains subdued. This should provide support for equities as many alternative assets face a more difficult environment. Meanwhile, the increasing scarcity of growth should provide a great opportunity for active investors as we see increasing divergence between winners and the losers. Companies that can demonstrate their ability to deliver consistent growth will attract a valuation premium, while those that can’t will inevitably attract a discount.

This is supportive for our investment approach that seeks companies in which we have a high degree of conviction that they will grow consistently over the medium to long-term, regardless of the underlying economic 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.

Mark Sherlock, Portfolio Manager

Market and Performance Review

The Russell 2500 Index fell 0.82% in US Dollar terms in March. The further maturing in the U.S. and global business cycles heightened uncertainty, including in the policy arena where monetary conditions have become less favourable. This was reflected in mixed results at the sector level as cyclicals, including Materials & Processing and Financials Services lagged and defensives outperformed, led by Utilities.

The Fund outperformed the benchmark index on a relative basis over the month. Outperformance was driven by stock selection, notably Materials and Processing, Producer Durables and Health Care.

Bio-Rad, which provides life science research products, moved higher after posting solid Q4 2018 results given strong demand across many of its key product lines which led to growth across geographical areas. WEX, a fleet card payment processing and services company, moved higher after management delivered better-than-expected guidance for 2019 revenue growth, due in large part to the conversions of the Chevron and Shell fleet fuel card portfolios and the integration of recent acquisitions. They also announced the acquisition of Go Fuel Card, based in the Netherlands, which expands its presence in Europe. Eagle Materials (aggregates) rose amid speculation an activist investor has built a 9% position in a push to break up the company.

John Wiley fell sharply on worse-than-expected performance in its core journals and book businesses amid a transition to a new revenue model. We used the overreaction to top up this defensive, cash-flow generative core business which is investing into growth in the education segment. Wintrust Financial and Community Bank System fell as financials were negatively affected by the Federal Reserve pivot to holding the line on further interest rate hikes.

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 provide a degree of downside protection and benefit if the market moves higher.

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 continued to rise in March as the MSCI ACWI returned 1.26%. One of the key features over the month was Central Bank activity in the form of the Federal Reserve Chair’s newly dovish stance, alongside stimulus in China and the Eurozone. The market moved towards more defensive areas in March, highlighted by the outperformance of Real Estate and Consumer Staples, and the underperformance of Financials and Industrials. Meanwhile, our factor analysis showed investors rewarded Sentiment, Profitability and balance sheet strength at the expense of Valuation.

The Fund outperformed the benchmark index over the period due primarily to successful stock selection. From a sector viewpoint, selection added value in most sectors, but particularly in Health Care and Financials, offsetting a detraction from Information Technology. From a regional viewpoint, there were significant contributions from selection in Japan and North America and no meaningful detractors.

Lonza, Novo Nordisk and Baxter International were the largest individual contributors. Lonza updated its mid-term guidance, which saw margins slightly below consensus. Crucially, this was due to the company investing to add to its manufacturing capacity. This suggests that the future growth prospects of the company, which are tied to the shift towards biologic drugs, remain intact. Novo Nordisk increased alongside the European Health Care sector. Health Care supplier Baxter International increased after the CEO reiterated his confidence that the company’s medication delivery division has stabilised which, alongside several other avenues of growth, should ensure growth accelerates over the next couple of years.

Biogen, M&T Bank and SAS were the largest detractors. Biogen fell after a disappointing trial of its Alzheimer’s drug, which was subsequently halted. M&T Bank fell alongside the US banking sector after the Federal Reserve Chair’s dovish comments removed the likelihood of any interest rate rises in 2019. SAS reported a slight decrease in passenger numbers from the previous year, which was in line with expectations, but fell as the oil price increased.

Outlook

After narrowly escaping the clutches of the bear market at the end of 2018, investor sentiment has swiftly returned to ‘risk-on’ mode. Paradoxically, concerns over slower growth have been the trigger for this about turn. These concerns led the Federal Reserve to abandon its rate hike pathway while Europe, following weak economic data in Germany, and China announced stimulus packages aimed at boosting economic activity.

Also, several temporary headwinds that affected global growth have now passed which has also contributed to the rise in markets so far this year. These include a recovery in US output following the Government shutdown, and a recovery in European auto production following its collapse after the European Union’s Worldwide Harmonised Light Vehicle Test Procedure (WLTP) emissions regulations were implemented late last year.

Meanwhile, earnings expectations have been revised downwards to more realistic levels, and with Central Banks in accommodative mode and an increasing possibility of a breakthrough in the US-China trade discussions, there appears to be plenty of support for equities. Of course, it will be important to be selective, and we will continue to seek a diverse range of well-managed companies with a combination of attractive long-term fundamental characteristics.

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

Gridlock over Brexit in the UK Parliament, and softening economic data in the region, failed to prevent European Equity markets from continuing their rise in March as the FTSE World Europe ex UK Index returned 1.90%. The Fund outperformed the benchmark index in March with stock selection the main influence on relative returns due to contributions from Health Care, Basic Materials and Financials. The underweight stance in Financials also provided a boost to relative returns. The only notable detraction came from stock selection in Industrials.

The largest individual contributors were Ubisoft, Lonza and Merck. Ubisoft increased due to an excellent initial reception for The Division 2, while Google’s announcement that it would launch a streaming service for gamers, including Ubisoft’s Assassins Creed Odyssey, could dramatically expand its addressable market. Lonza updated its mid-term guidance, announcing further investment in manufacturing capacity. Despite the near-term impact on margins, it displays confidence on the long-term growth prospects. In a similar vein, Merck reported strong top-line results but slightly softer net margins as it ramped up investments into pharmaceutical R&D as well as marketing, sales and ecommerce for its life sciences business.

AMG, Wirecard and KION Group were the largest detractors from stocks held: Novartis, which is not held in the Fund, was also a significant detractor. AMG reported 2018 results ahead of expectations, but guidance for 2019 looked light, although the company is typically cautious in its outlook statements. However, the main influence on the share price has been weaker Vanadium and Spodumene / Lithium pricing. Wirecard continued to be volatile following allegations reported in the Financial Times last month concerning potentially fraudulent activities in its Singapore office. Encouragingly, Rajah & Tann, the independent law firm investigating the allegations, found that the issues were not material, although some employees in Singapore may face criminal proceedings. However, the Financial Times subsequently published an article examining the company’s relationships with third parties. KION Group drifted lower despite solid earnings that were in-line with expectations and management guidance.

Outlook

In this environment of low growth, low yields and low inflation, we feel reasonably positive. Low yields and low inflation should mean central banks continue to err on the side of caution, and this in turn should provide support for equities as many alternative assets face a more difficult environment. The increasing scarcity of growth should provide a great opportunity for active investors as we see increasing divergence between the winners and the losers. Companies that can demonstrate their ability to deliver consistent growth will attract a valuation premium, while those that cannot will inevitably attract a discount. This is supportive for our investment approach that seeks companies where we have a high degree of conviction that they will grow consistently over the medium-to-long-term, driven by the emergence of new product areas rather than being reliant on the underlying economic 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.

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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