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Monthly Fund Commentary, January 2019

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

Jonathan Pines Portfolio Manager

Market and Performance review

The Fund outperformed the benchmark (in US Dollar terms) over the month. Country allocation contributed positively, notably our overweight China which outperformed and underweight India which underperformed. This offset stock selection in China, which detracted.

Shares in Wuliangye Yibin, a leading Chinese liquor maker, rose in anticipation of rising demand ahead of the Lunar New Year. Not owning Taiwan Semiconductor contributed, given share price weakness for semiconductor stocks due to the sudden (Q4 2018) demand shortfall from smartphone customers, and cryptocurrency. Hyundai Steel rose despite posting weak Q4 2018 earnings on a cheap valuation. Although steel spread contraction seems inevitable in the near-term, we expect a recovery from H2 2019.

Youngone, a Korean apparel manufacturer, fell given slower-than-expected improvement in Original Design Manufacturer (ODM) market conditions. Beijing Capital International Airports (BCIA) fell as the Civil Aviation Authority of China released its transition plans to allocate some of BCIA’s airline slots to Beijing Daxing International Airport. Shares in Kunlun Energy, a Chinese integrated energy company, fell due to lower oil prices.

Portfolio activity

We have trimmed a number of names that are nearing our assessment of fair value and added to some under-performers that offer good value.

Outlook

We remain encouraged on a prospective basis about the absolute and relative value in our stocks, particularly after recent weakness in the benchmark.

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 8.77% in January. Both Developed and Emerging market equities saw a healthy rebound from the collapse at the end of the year, boosted by signals from the US Federal Reserve that it would be more patient with further rate rises, as well as a trade ceasefire between the US and China, which is set to last until at least the 1st of March. China outperformed although concerns of a slowdown have not dissipated. Fourth Quarter GDP came in at 6.4%, the lowest level recorded since the global financial crisis. Chinese authorities responded through additional stimulus measures, including the People's Bank of China announcing 100bps cuts in the reserve requirement ratio through January. Conversely, India fell 1.93%, the only market to record a negative return, reversing the gains from December 2018 following results of key state elections.

At the sector level, Consumer Discretionary outperformed and Materials lagged the most.

The Fund underperformed the benchmark index in relative terms over the month. Our overweight India, which underperformed, and stock selection within the country detracted the most. Stock selection in Taiwan helped offset the negative impact from select positions in China and South Africa.

Brazilian stocks, BB Seguridade, an insurance and pension provider, and Notre Dame Intermedica, a health care provider, rose amid positive momentum as the Bolsonaro government began to define its fiscal and pension reform agenda. Sberbank rose, given the constructive valuation, as US sanctions moved to the back burner and the strong dividend story.

Four out of the top five detractors were Indian stocks, including Hero Motorcorp, HDFC Bank, Motherson Sumi and Container Corporations. Investors worried about the forthcoming election, and concerns around the fiscal deficit target for FY19 and FY20. The budget was announced subsequently in February, keeping the fiscal deficit target flat, assuaging concerns of any significant shift to reckless populist measures. Hero Motocorp fell ahead of December quarter results, due to expectations of a weak outcome as two wheeler sales slowed due to external factors including insurance policy changes, a spike in oil prices and liquidity concerns associated with the collapse of a non-banking financial company. The stock has since recovered as the management highlighted an improving trend in January and successful launch of premium scooters. Hero is also perceived as a prime beneficiary of the recently announced support for the farm sector in India. HDFC Bank fell despite strong quarterly results and rising loan growth, while Motherson Sumi fell due to weak end markets in China, Europe and North America.

The team trimmed ICICI Bank, Notre Dame Intermedica and Techtronic Industries following recent moves higher and added to a number of names following recent weakness, including Autohome and NMC Health. The team added to Samsung Electronics given the potential for further dividend increases in H2 2019 and expectation earnings to improve from Q3 2019.

Outlook

We believe Emerging Markets are broader, and better overall, than the crisis-stricken economies that have dominated the news. We see reasonable growth, low interest rates, and sensible economic policies in most countries in the index, indicating the business environment is more robust than the headlines suggest. Overall, free-cash-flow is solid and rising, and forecast earnings-per-share growth is stronger across Emerging Markets than in the US. In our view, many Emerging Market companies are seeing robust business prospects but are trading at depressed valuations. The highs and lows of 2018 have reaffirmed one of our key convictions: Emerging Markets are not a destination for short-term trades, but for long-term investment in high-quality, sustainable companies. Both All Cap and SMID benchmarks are trading, on consensus estimates, near one standard deviation below their 10 year averages on Price Earnings and Price to Book (Bloomberg).

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

Encouraging signals from the US-China trade talks, the recovery in the oil price and dovish comments from the US Federal Reserve Chair, Jerome Powell, all combined to ensure global equity markets had a strong start to the year. All regions advanced with the US a notable performer; the S&P 500 Index had its strongest January since 1987. Signs that investors’ appetite for risk was returning was highlighted by the outperformance of the more cyclical areas of the market, although all sectors increased over the month. Against this backdrop, the MSCI World Index returned 7.78% in US Dollar terms in January.

The Fund modestly underperformed the benchmark index over the period. Stock selection was successful, but offset by allocation. From a sector viewpoint, selection in the majority of sectors added value with notable success in Consumer Discretionary, while Communication Services detracted. From a regional perspective, there was a significant contribution from selection in Europe, which was partially offset by the detractions from North America.

Hess, Weyerhaeuser and Brighthouse Financial were the largest individual contributors. Hess benefited from the increasing oil price and was given a further boost at the end of the month after reporting strong cash flow generation, driven by Bakken oil production. Weyerhaeuser increased steadily in January on little specific news. However the stock pays a dividend yield of 5.1%, which looks attractive amid increasingly dovish central bank rhetoric. Brighthouse Financial rebounded following a difficult Q4, although there was little specific news.

Kao Corp, AstraZeneca and Delta Air Lines were the largest detractors, although Facebook, which is not held in the Fund was the largest individual detractor. Kao Corp underperformed as investors rotated back towards more cyclical areas of the market. AstraZeneca fell after announcing that Chief Medical Officer, Sean Bohen, will leave the company as the company transitions to its new structure. Delta Air Lines reported lower-than-expected revenue and ESP guidance for next quarter, although the company reiterated its full year guidance.

Outlook

Despite the apparent increase in risk appetite over the month, our message is largely unchanged and we continue to expect investors to remain cautious. This means quality companies with a high degree of earnings visibility are likely to prevail. Investors are likely to remain sensitive towards valuation, so we expect a continuation of weakness in Growth and relative outperformance from Value over the near future. Our approach seeks to identify companies with attractive combinations of long-term, time-tested fundamentals at an attractive price. This should stand the Fund in good stead in 2019.

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

European equity markets rebounded in January as US-China trade tensions eased, oil prices recovered and US Federal Reserve Chair, Jerome Powell, turned more dovish. Every sector, with the exception of Telecommunications, increased last month. However, the more cyclical areas of the market led the way, with the benchmark index returning 6.5%. Stock selection was particularly successful, notably in Oil & Gas, Health Care, Financials and Consumer Services alongside the underweight in Telecommunications. This gain was partially offset by a detraction from our overweight position in Health Care.

Lundin Petroleum, ASOS and Adidas were the largest individual contributors. Lundin continues to generate strong cash flows, which led to an increase in its dividend yield. Indeed, this should grow over time as the company grows – it is waiting for the Johan Sverdrup and Edvard Grieg fields to come on line. Lundin also benefited from the rising oil price.  Meanwhile, there was little company-specific news from ASOS and Adidas, but both stocks performed well alongside the wider Consumer Discretionary sector.

The largest detractors were Reckitt Benckiser, Lonza and Swedbank. Reckitt Benckiser fell after its CEO, Rakesh Kapoor, announced his retirement, which coincided with weak earnings from peer Henkel. This has prompted concern of a ‘margin reset’ under his as-yet, unannounced successor. Meanwhile, Lonza’s CEO, Richard Ridinger, also unexpectedly announced his departure. He will be succeeded by Marc Funk, the COO of Lonza’s pharma biotech division. The company also released lower-than-expected margin guidance. Elsewhere, Swedbank reported net interest income that was consistent with expectations, but this was offset by weaker fee income and higher loan losses.

Activity was limited to the active management of existing positions in the Fund over the month. Most notably, the position in Reckitt Benckiser was trimmed following the aforementioned concerns.

Outlook

While the market move in January may suggest otherwise, uncertainty remains high as we await a breakthrough in the US-China trade spat and as the Brexit deadline looms. For the moment, however, attention has turned towards the earnings season, which could offer some useful insights into the health of the European corporate sector. At the time of writing, around one-third of companies have reported, and while it is too early to draw conclusions,
earnings growth expectations have been trimmed in Q1. That said, the market is still expecting about 7% year-on-year growth in 2019. As ever, outlook comments are key. One area of particular focus is China following high profile disappointments in the autos and technology sectors. Thus far, the overall commentary on China has been more benign. But given Europe’s sensitivity to Chinese demand, this is a potential area for upside surprise.

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 rose 11.51% in US Dollar terms in January. Equity markets delivered strong performance in January after a very weak end to last year, buoyed by the truce between the US and China, which is set to be active until at least the 1st of March, and signals by the Federal Reserve that it would be more patient with further rate rises in 2019. The US government started the year partially closed. A funding impasse over border security led to the 35-day government shutdown, the longest in history.

The Fund underperformed the benchmark index on a relative basis over the month. Underperformance was driven by stock selection, notably Financial Services, Health Care and Materials & Processing.

Woodward (aerospace and energy controls) rose on strong quarterly results with all business segments delivering above expectations and Management reaffirming FY 2019 guidance for strong earnings growth. Signature Bank (New York-based full service commercial bank) rose after reporting Q4 2018 EPS above expectations, primarily driven by net interest income and lower provision expense than forecasted. The fourth quarter was solid with the positives being robust average loan growth at a 13% annualised pace and average deposit growth at a 6% annualised pace.

Alleghany (property & casualty insurance) fell as investors sought returns from higher risk areas and expectations that the pricing market will be flat for January renewals. RPM International (manufactures paints and protective coatings) fell after reporting lower than previously forecast operating margins due to higher raw material costs, a higher tax rate and lower investment income. Community Bank Systems (upstate New York community bank) fell despite reporting solid Q4 and FY 2018 results.

We trimmed Snap-On, Wabco, and Wabtec, later-cycle names which have performed well, and sold Superior Energy. These proceeds were reinvested in names where we felt there was greater valuation upside, namely AO Smith, Kirby and Aptar Group.

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

Encouraging signals from the US-China trade talks, the recovery in the oil price and dovish comments from the Chair of the Federal Reserve, Jerome Powell, all combined to ensure global equity markets had a strong start to
the year. All regions advanced, but the US was the strongest performer as the S&P 500 had its strongest January since 1987. Signs that investors’ appetite for risk was returning was highlighted by the outperformance of the more cyclical areas of the market, although all sectors increased over the month. Against this backdrop, the MSCI ACWI Index returned 7.90% in US Dollar terms in January.

The Fund modestly outperformed the benchmark index over the period as successful stock selection was offset by detractions from allocation and currency. From a sector viewpoint, selection was particularly successful in Materials, Energy, Consumer Discretionary and Information Technology, which outweighed the detraction from Communication Services. Allocation detracted, although there were no significant influences from the Fund’s sector positions. From a regional perspective, contributions from selection in Europe, North America and Japan more than offset the detraction from Emerging Asia.

Hess, Weyerhaeuser and Aker BP were the largest individual contributors. Hess benefited from the increasing oil price, and was given a further boost at the end of the month after reporting strong cash flow generation, driven by Bakken oil production. Weyerhaeuser increased steadily in January on little specific news. However, the stock pays a dividend yield of 5.1%, which looks attractive amid increasingly dovish Central Bank rhetoric. Aker BP also benefited from the rising oil price, while at it Capital Markets Day, the company received a further boost after announcing an increase to its 2019 dividend.

Hyundai Marine & Fire Insurance, Delta Air Lines and Henkel were the largest detractors. Hyundai Marine & Fire Insurance fell on concerns that any insurance companies will incur losses from auto insurance products due to the higher cost of car repairs. In response to this, the company have raised their auto premiums. Delta Air Lines reported lower-than-expected revenue and EPS guidance for next quarter, although it reiterated its full year guidance. Henkel reported lower-than-expected like-for-like growth in its Q4 earnings and reset margin expectations as it invests €300m in its key products and markets to support future top-line growth.

Outlook

Despite the apparent increase in risk appetite over the month, our message is largely unchanged and we continue to expect investors to remain cautious. This means quality companies with a high degree of earnings visibility are likely to prevail. Investors are likely to remain sensitive towards valuation, so we expect a continuation of weakness in Growth and relative outperformance from Value over the near future. Our approach seeks to identify companies with attractive combinations of long-term, time-tested fundamentals at an attractive price. This should stand the Fund in good stead in 2019.

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

European equity markets rebounded in January as US-China trade tensions eased, oil prices recovered and the US Federal Reserve Chair, Jerome Powell, turned more dovish. Every sector, with the exception of Telecommunications, increased last month. However, the more cyclical areas of the market led the way, with the benchmark index returning 6.13%. Against this backdrop, the Fund outperformed the benchmark index. Stock selection was particularly successful, notably in Oil & Gas, Consumer Goods, Industrials and Technology. This gain was partially offset by a detraction from selection in Basic Materials.

Lundin Petroleum, Sartorius and Siemens Gamesa were the largest individual contributors. Lundin continues to generate strong cash flows, which led to an increase in its dividend yield. Indeed, this should grow over time as the company ramps up production at its Johan Sverdrup field. Lundin also benefited from the rising oil price. Meanwhile, Sartorius reported solid results ahead of expectations, driven by higher than expected margins in both its Bioprocess and Lab Products divisions. Siemens Gamesa reaffirmed guidance for 2019 with expectations underpinned by more than 90% of its expected revenue covered by its existing order backlog.

The largest detractors were Barrick Gold, Bankinter and Novo Nordisk from stocks held. Barrick Gold fell following the completion of its takeover of Randgold, while the gold price underperformed the broader market as investors moved away from defensive areas. Bankinter reported consensus-beating earnings driven by stronger fees and lower provisions that highlighted its high asset quality. Novo Nordisk traded sideways over the month as Health Care underperformed following a strong Q4 2018.

Outlook

While the market move in January may suggest otherwise, uncertainty remains high as we await a breakthrough in the US-China trade spat and as the Brexit deadline looms. For the moment, however, attention has turned towards the earnings season, which could offer some useful insights into the health of the European corporate sector. At the time of writing, around one-third of companies have reported and, while it is too early to draw conclusions, earnings growth expectations have been trimmed in Q1. However, that being said, the market is still expecting ~7% year-on-year growth in 2019. As ever, outlook comments are key, and one area of particular focus is China following high profile disappointments in the autos and technology sectors. Thus far, the overall commentary on China has been more benign, but given Europe’s sensitivity to Chinese demand, this is a potential area for upside surprise, particularly if any semblance of a deal can be reached thus allowing delayed investment decisions to start flowing again.

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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