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Equities Commentary, July 2020

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

Jonathan Pines Portfolio Manager

Market and Performance review

The benchmark MSCI All Countries Asia ex Japan Index returned 8.49% in July. The Fund outperformed the benchmark over the month. This was primarily due to stock selection in Korea and Hong Kong, which offset weaker relative returns in China and India.

MediaTek, a Taiwanese chip supplier, rose on positive momentum following its Q2 2020 results after the US moved to tighten restrictions on Huawei. MediaTek, viewed as an alternative supplier, is seen as a beneficiary of the restrictions. Kunlun Energy outperformed, driven by a strong recovery in demand for gas and an expected positive resolution for the sale of its pipeline assets. Tingyi, an Asian-based food and beverage maker and market leader in instant noodles, continued its strong performance driven by a steady demand for its instant noodles and an optimistic the second half of 2020 outlook.

Sinopharm, which provides pharmaceutical services, fell in July, having outperformed previously after clinical trials were approved for its Covid19 vaccine candidate. Powertech Technology, a Taiwan-based company that packages and tests memory and logic chips, retreated after management offered muted guidance for Q3 2020 following a strong performance in the previous quarter. Hon Hai Precision Industry, a Taiwanese electronics contract manufacturer, fell after a smaller competitor Luxshare Precision Industry announced it would acquire two companies in China and start assembling iPhones.

Activity

We have added to mainly economically sensitive stocks with strong balance sheets that have been hit hard and continue to seek new opportunities where stocks have adjusted inappropriately in response to the changing economic landscape.

We sold Kinsus Interconnect and Rohm, and trimmed MediaTek, while adding to our position in JD.Com. We initiated positions in Vietnam Dairy and Naspers. Naspers has an indirect holding in Tencent that comprises substantially more than 100% of Naspers’ value. In the last year Naspers has appreciated in Dollars a modest 10% versus Tencent’s 43%, enabling us to access Tencent’s earnings growth at a multiple below 20x forward earnings.

Outlook

Ecommerce, Mega Cap, Growth and Quality stocks have risen to record valuations as a result of an improved relative industry positioning and still lower interest rates. While the valuations of some of these companies are potentially justified in view of these new dynamics, others have in our view risen too much. While we are not calling a bubble in the largest benchmark names, there are some slightly smaller companies that are trading at valuations that are hard to justify given even optimistic assumptions. The market is highly focussed on opportunities among the fastest growing companies, while it ‘looks away’ from other stocks, which have the potential to rerate from depressed levels despite a less rosy outlook. It is in this second category that we believe there is better potential for outperformance over a medium-to-long term horizon.

James Rutherford, Portfolio Manager

Market and Performance Review

European equities declined in July as fears over a second wave of coronavirus, following an increase in the number of cases in Spain, hit sentiment and the MSCI Europe Index returned -1.37%. The Fund outperformed the benchmark index in the period, driven by successful selection in Health Care, Financials, Industrials, Consumer Discretionary and Materials and our overweight in Information Technology. These gains offset detractions from selection in Information Technology and our underweight positions in Consumer Staples and Utilities.

Siemens Gamesa, Lonza and Swedbank were the largest individual contributors. Siemens Gamesa reported earnings that were below expectations, but its order backlog hit a record high and the share price increased on the basis of its perceived future prospects under its new Chief Executive. Lonza Group increased following positive trial results of Moderna’s coronavirus vaccine trial. It also posted better-than-expected earnings, driven by improving margins. Swedbank reported results that beat expectations on revenues, costs and provisions.

The largest detractors were Bayer, ASML and Amadeus. Bayer fell after agreeing an $11bn settlement of the Roundup class action lawsuit. ASML reported quarterly earnings slightly below consensus expectations. Additionally, Q2 bookings were disappointing, although the company continues to have a strong order backlog. Amadeus declined during July in-line with other travel exposed companies, as the prospect of return to international travel looks more distant.

Activity

New positions in Soitec and Schneider Electric were added to the Fund in July. Soitec makes wafers for the semiconductor industry and is experiencing growing demand due to the increasing complexity of smartphones. This growing demand is likely to be driven by its Silicon on Insulator (SOI) wafers, which consume less power, making them an attractive component. After a period of heavy M&A and disposals of unattractive assets, Schneider Electric has transformed itself into a company with exposure to two significant structural growth trends: Energy efficiency and Industry 4.0.

Outlook

Risk appetite is correlating with the resumption of activity in Europe and the gradual re-opening of economies. Economic data has come in better than feared, while the Covid-19 fatality rate is running at approximately 1% of the peak level earlier in the year. Europeans are returning to work and there appears to be some encouraging progress in the race to find a vaccine. Corporates have adjusted quickly to the crisis, and while aggregate earnings are down sharply, analysts are upgrading their estimates given the improving fundamental trends. If we continue to see incrementally positive earnings data, we would expect a further catch-up among laggard stocks and thus a broadening in market leadership. Clearly this is not without risk, and uncertainty remains the byword.

James Rutherford Martin Todd

James Rutherford and Martin Todd, Co-Portfolio Managers

Market and Performance Review

European equities were broadly flat in July in a month when COVID newsflow continued to set market direction. The Fund outperformed the benchmark index in July with the excess return driven by stock selection.

Siemens Gamesa, Orsted and KION Group were the largest individual contributors. Siemens Gamesa reported earnings below expectations, but its order backlog hit a record high and the new CEO started to outline his turnaround strategy. Orsted shares rose after the utility signed the world’s largest ever offshore wind power deal in Taiwan. KION Group released preliminary figures that highlighted strength in its Supply Chain Solutions division.

The largest detractors were ASML, ASM International and Amadeus. ASML reported quarterly earnings slightly below consensus expectations. Additionally, Q2 bookings were disappointing, although the company continues to have a strong order backlog. ASM International reported better than expected earnings, however, shares fell after Intel reported delays in developing their new technology, which impacted sentiment towards the sector. Amadeus reported a loss in Q2, although this was in line with expectations and there are signs that bookings are starting to recover. However, fears of a second wave of Coronavirus hit sentiment.

Activity

New positions in Alcon and Schneider Electric were added to the portfolio, which were partially funded by the closure of the position in Barrick Gold, which had enjoyed a great run driven by the rising gold price. Alcon is most commonly known for its contact lenses, but it is a leading medtech business, specialising in equipment for eyecare specialists and surgeons. Schneider Electric has transformed itself into a company with exposure to two significant structural growth trends: Energy Efficiency and Industry 4.0.

Outlook

Risk appetite is correlating with the resumption of activity in Europe and the gradual re-opening of economies. Economic data has come in better than feared, while the Covid-19 fatality rate is running at about 1% of the peak level earlier in the year. Europeans are returning to work and there appears to be some encouraging progress in the race to find a vaccine. Corporates have adjusted quickly to the crisis, and while aggregate earnings are down sharply, analysts are upgrading their estimates given the improving fundamental trends. If we continue to see incrementally positive earnings data, we would expect a further catch-up among laggard stocks and thus a broadening in market leadership. Clearly this is not without risk, and uncertainty remains the byword.

Gary Greenberg & Kunjal Gala, Co-Portfolio Managers

Market and Performance Review

Emerging Market equities rallied in July and continued their recovery for a fourth consecutive month. Positive economic data from China and the sell-off of the US Dollar, which recorded its worst month in over a decade, supported investor sentiment despite a resurgence in coronavirus outbreaks and elevated US-China tensions. The increase in new cases in Brazil and India continued in July, while recent outbreaks in Hong Kong have seen the reintroduction of some restrictions. China’s official Purchasing Managers’ Index readings for July were positive and new orders rose boosted by a surge in exports. Taiwan was the best performing market pulled higher by chipmaker and index heavyweight, Taiwan Semiconductor Manufacturing (TSMC). Turkey was the worst performing country amid fears the US might impose sanctions against Turkey for purchasing Russian military hardware. Investors were also concerned that Turkey’s central bank is depleting its foreign exchange reserves to help stabilise the lira in the currency markets.

The Fund outperformed the benchmark MSCI Emerging Markets Index over the month. The outperformance was driven primarily by stock selection, notably in Taiwan and Russia.

TSMC, the semiconductor manufacturer, rose sharply after US chipmaker Intel announced it may look to third parties to help manufacture its chips containing 7-nanometer transistors. TSMC, which is a foundry business, is seen as a contender for winning some of the outsourced business. Delta Electronics, a Taiwanese global leader in switching power supply solutions, rose as earnings for its power business are expected to jump, driven by strong PC/server demand momentum. The company’s leading position in power should ensure it keeps benefiting from increasing cloud applications and telecom infrastructure upgrades. Its Industrial Automation (IA) business should also benefit from ongoing supply chain relocation and increasing automation. China Mengniu Dairy, a leading dairy producer in China, rose on expectations for strong H1 2020 results and continued sales growth driven by an accelerated demand for healthier foods.

AIA fell due to investor concerns that the insurers’ Hong Kong offshore sales will be negatively impacted by US-China tensions surrounding the HK national security law, rising social unrest, as well as the US announcement on eliminating special treatment to Hong Kong. NC Soft, a Korean online gaming company, retreated after the stock had performed well on strong prospects for its existing hit titles, the overseas launch of its L2M (Lineage 2M) game and the release of Blade & Soul 2 which are expected to further propel earnings. HDFC Bank, an Indian financial services company, underperformed after the Reserve Bank of India released a financial stability report which spooked investors. In stress-testing different scenarios, they estimated NPL's could rise to the highest level in over 20 years (14-14.5%), negatively impacting sentiment which resulted in a sell-off across the segment.

Activity

The team sold Notre Dame Intermedica following a strong performance and change to the company valuation. They initiated a position in Epiroc, a Swedish-listed mining tools and equipment company which derives most of its revenue from Emerging Markets countries. Epiroc is the highest quality metals and mining capital goods company in the market and stands to benefit from a number of existing trends including increased automation, electrification and the broader application of software to improve mining productivity. The team also feel that the company offers exposure to the materials sector without compromising on ESG standards.

Outlook

Emerging Markets have rallied strongly from the March bottom, initially driven by unprecedented central bank and government monetary and fiscal stimulus, subsequently from a gradual relaxation of lockdowns as markets anticipate an economic recovery in the second half of 2020. The broadening out of the recovery has extended investor interest to more value sectors, sensitive to the economic recovery and trading at low valuations (at one-point trading close to GFC levels). Market sentiment has improved, and the focus has shifted to a sharp rebound in economic activity.

However, investors must weigh the possibility of further economic damage if there is a second wave and economies move towards lockdown again. Also, the timing and efficacy of vaccines under development is far from clear, the business/consumer sentiment remains low and tensions between the US and China are rising over Huawei and Hong Kong. Crucially, the team believe that the world is likely to remain in a slow growth environment after the initial rebound. Hence, the Fund remains focused on Quality Growth and marginally, adding to cyclicality where they feel that there is enough margin of safety and the company benefits from medium/long-term catalysts.

Gary Greenberg & Kunjal Gala, Co-Portfolio Managers

Market and Performance Review

The benchmark MSCI Emerging Markets SMID (net TR) Index rose 8.45% in July. Emerging Market equities rallied again in July and continued their recovery for a fourth consecutive month. Positive economic data from China and the sell-off of the US Dollar, which recorded its worst month in over a decade, supported investor sentiment, despite a resurgence in Coronavirus outbreaks and elevated US-China tensions. The increase in new cases in Brazil and India continued in July, while recent outbreaks in Hong Kong have seen the reintroduction of some restrictions. China’s official Purchasing Managers’ Index readings for July were positive and new orders rose boosted by a surge in exports. Peru was the best performing market, pulled higher by a precious metal mining company which outperformed significantly over the month. Turkey was the worst performing country amid fears the US might impose sanctions against Turkey for purchasing Russian military hardware. Investors were also concerned that Turkey’s central bank is depleting its foreign exchange reserves to help stabilise the Lira in the currency markets.

The Fund underperformed the benchmark index over the month. Stock selection in China and Korea detracted, offsetting strong relative returns in Taiwan and Russia.

Delta Electronics, a Taiwanese global leader in switching power supply solutions, rose as earnings for its power business are expected to jump driven by strong PC/server demand momentum. The company’s’ leading position in power should ensure it keeps benefiting from increasing cloud applications and telecom infrastructure upgrades. Its Industrial Automation (IA) business should also benefit from ongoing supply chain relocation and increasing automation. Eugene Technology rose due to increasing prospects of sales of its Wafer Deposition equipment to Samsung, Micron and Hynix. Korean memory manufacturers are now localising their supply chain, and Eugene Tech is the only Korean equipment maker that can replace the Japanese vendors in the LPCVD BATCH space. Duratex, a Brazilian manufacturer of wood panels, sanitary fittings and building materials, rose after the company’s Q2 2020 results beat expectations and signalled an impressive recovery in June and optimistic outlook for Q3 2020.

NC Soft, a Korean online gaming company, retreated in July after the stock had performed well on strong prospects for its existing hit titles, the overseas launch of its L2M (Lineage 2M) game and the release of Blade & Soul 2 which are expected to further propel earnings. NC Soft has benefitted from increased traffic and favourable dynamics as a result of stay at home arrangements. Landmark Optoelectronics, a Taiwan-based manufacturer and distributor of wired communications machinery and electronic components, fell after reporting disappointing Q2 2020 sales results due to a subpar performance in shipments of 100G silicon photonics products. However, the company expects the second half of 2020 operations to rise fuelled by 5G applications. SITC International, which offers marine shipping services, underperformed amid renewed US-China tensions and supply chain disruptions.

Activity

The team initiated a position in Sunny Friend Environmental Technology, an industrial infectious waste disposal company which operates medical and industrial waste treatment plants. The company uses technology to handle various types of hazardous waste and collects, incinerates, solidifies, and develops solutions to streamline the disposal. The company recovers materials from waste, recycle resources, and conducts environmental tests to discover innovative solutions. Sunny Friend is the only listed medical and industrial hazardous waste company and is well-placed for an ongoing expansion into China.

The team also initiated a position in Tokai Carbon Korea, a subsidiary of Tokai Carbon Japan. The company manufactures silicon carbide rings (SiC) that are widely utilised during the etching process in the NAND market and produces single silicon crystal and purified graphite products mostly for the semiconductor industry in Korea. Tokai Carbon also makes LED susceptors that are designed to improve wear and chemical resistance when manufacturing light-emitting devices. Today, TCK is the only company that has the technology, and manufacturing know-how to make SiC rings.

Outlook

Emerging Markets have rallied strongly from the March bottom, initially driven by unprecedented central bank and government monetary and fiscal stimulus, subsequently from a gradual relaxation of lockdowns as markets anticipate an economic recovery in the second half of 2020. The broadening out of the recovery has extended investor interest to more value sectors, sensitive to the economic recovery and trading at low valuations (at one-point trading close to GFC levels). Market sentiment has improved, and the focus has shifted to a sharp rebound in economic activity.

However, investors must weigh the possibility of further economic damage if there is a second wave and economies move towards lockdown again. Also, the timing and efficacy of vaccines under development is far from clear, the business/consumer sentiment remains low and tensions between the US and China are rising over Huawei and Hong Kong. Crucially, the team believe that the world is likely to remain in a slow growth environment after the initial rebound. Hence, the Fund remains focused on Quality Growth and marginally, adding to cyclicality where they feel that there is enough margin of safety and the company benefits from medium/long-term catalysts.

Geir Lode, Portfolio Manager

Market and Performance Review

Global Equity markets continued to advance in July with the MSCI World Index returning 4.78%. Earnings season is well underway and, so far, there have been few surprises. The big winners have been the Mega Cap technology companies, which have typically posted impressive results. This has been a contributory factor in the strong showing of Sentiment, Growth and Profitability and an avoidance of Valuation in the Alpha Model.

Over the month, the Fund outperformed the benchmark index. From a sector viewpoint, selection in Health Care, Utilities and Energy contributed the most, offsetting detractions from selection in Information Technology and Materials. From a regional perspective, the largest contributions came from selection in Europe and Japan. There were no meaningful detractors.

Lonza Group, West Pharmaceutical Services and Siemens Gamesa were the largest individual contributors from stocks held. Intel, which is not a Fund holding, was also a significant contributor. Lonza Group increased following positive trial results of Moderna’s coronavirus vaccine trial. It also posted better-than-expected earnings, driven by improving margins. West Pharmaceutical reported better-than-expected earnings across all segments and issued positive guidance driven by demand in biologics. Siemens Gamesa reported earnings below expectations, but its order backlog hit a record high and the share price increased based on its perceived future prospects under the new CEO.

The largest detractors from stocks held were ASML, Delta Air Lines and Kao Corp. Tesla and Facebook, which are not held in the Fund, also detracted significantly. ASML reported quarterly earnings slightly below consensus expectations. Additionally, Q2 bookings were disappointing, although the company continues to have a strong order backlog. Delta Air Lines continues to be impacted by the decline in global air travel. Kao Corp reported below-consensus results as disappointing cosmetics sales in Japan more than offset growth in China and increased demand for hygiene products.

Activity

We opened a new position in MSCI in July. The company looks particularly attractive from a growth and profitability standpoint. Further, it has a strong balance sheet and is well-liked by the market. These attributes justify its premium valuation.

Outlook

A sense of relative calm has spread across Global Equity markets with volatility continuing to tick downwards. The earnings season has not delivered many significant shocks thus far, although it is notable that many companies are still withholding guidance, but this has not spooked investors. The winners from the earnings season have undoubtedly been the Mega Cap technology companies. Expectations for the ‘FAANG’s and other similar transformational companies were sky-high and yet many managed to exceed a seemingly impossible target by an impressive margin.

More generally, the Federal Reserve remains resolutely dovish with Chairman Powell’s latest press conference focused on the downside risks posed by rising COVID-19 cases and signs that it was starting to affect confidence and activity levels. However, in these strange times bad news is often seen as good news and markets have responded positively. Meanwhile, there are some potential risks on the horizon, including a reignition of US-China tensions as the Presidential election draws nearer and growing fears of a second wave of coronavirus. If something major does happen, the traditional summer lull in trading volumes could magnify the impact on markets, and while there remains plenty of support for equity markets, this is something to be wary of.

Lewis Grant, Portfolio Manager

Market and Performance Review

Global Equity markets continued to advance in July with the MSCI All Country World Index returning 5.29%. Earnings season is well underway and, so far, there have been few surprises. The big winners have been the Mega Cap technology companies, which typically posted impressive results. This has been a contributory factor in the strong showing of Sentiment, Growth and Profitability and an avoidance of Valuation in the Alpha Model.

Over the month, the Fund outperformed the benchmark index. From a sector viewpoint, selection in Health Care, Consumer Discretionary and Real Estate contributed the most, offsetting detractions from selection in Materials and Communication services. Overall, value was added in all regions in July with successful selection in Europe, North America, Japan and Emerging Asia offsetting the detraction from our overweight in Europe.

Lonza Group, Taiwan Semiconductor (TSMC) and Trane Technologies were the largest individual contributors. Lonza Group increased following positive trial results of Moderna’s coronavirus vaccine trial. It also posted better-than-expected earnings, driven by improving margins. TSMC increased after Intel announced a delay to its next generation chips, which could give TSMC an edge over its rival. Trane Technologies reported revenues and earnings significantly ahead of expectations with notable resilience in demand for heating, ventilation and air conditioning systems.

The largest detractors from stocks held were ASML, Delta Air Lines and Orix Corp. Tesla, which is not held in the Fund, also detracted significantly. ASML reported quarterly earnings slightly below consensus expectations. Additionally, Q2 bookings were disappointing, although the company continues to have a strong order backlog. Delta Air Lines continues to be impacted by the decline in global air travel. Orix Corp fell after its subsidiary, Avolon, which finances and leases aircraft to the airline industry, reported large impairment charges in its quarterly results.

Activity

We opened a new position in MSCI in July. The company looks particularly attractive from a growth and profitability standpoint. Further, it has a strong balance sheet and is well-liked by the market. These attributes justify its premium valuation.

Outlook

A sense of relative calm has spread across Global Equity markets with volatility continuing to tick downwards. The earnings season has not delivered many significant shocks thus far, although it is notable that many companies are still withholding guidance, but this has not spooked investors. The winners from the earnings season have undoubtedly been the Mega Cap technology companies. Expectations for the ‘FAANG’s and other similar transformational companies were sky-high and yet many managed to exceed a seemingly impossible target by an impressive margin.

More generally, the Federal Reserve remains resolutely dovish with Chairman Powell’s latest press conference focused on the downside risks posed by rising COVID-19 cases and signs that it was starting to affect confidence and activity levels. However, in these strange times bad news is often seen as good news and markets have responded positively. Meanwhile, there are some potential risks on the horizon, including a reignition of US-China tensions as the Presidential election draws nearer and growing fears of a second wave of coronavirus. If something major does happen, the traditional summer lull in trading volumes could magnify the impact on markets, and while there remains plenty of support for equity markets, this is something to be wary of.

Hamish Galpin, Portfolio Manager

Market and Performance Review

The Fund outperformed the benchmark index return of 3.91%. Currency and sector allocation were supportive to relative returns, whereas stock selection detracted slightly. Positive stock selection in Health Care was outweighed by that of Real Estate and Information Technology.

Jungheinrich shares rose in the month; the company published new guidance for the year, which, whilst lower due to COVID-19, did contain some positive signals such as small market share gains expected in Europe. Brooks Automation, who provide precision instruments for technology manufacturing, rose on the back of strong quarterly results. Despite COVID-19 headwinds, the company delivered strong revenue growth and increased profitability across segments. West Pharmaceutical Services shares also rose following the release of second quarter earnings which were ahead of estimates. The company also raised their full year guidance for 2020.

Open House’s shares, having been a strong performer in the prior two months, fell in July as the company completed a fund-raising share sale. John Wiley & Sons shares went ex-dividend in the period and traded lower on limited news flow. Kirby shares also failed to rise with the market in the month. The company released their second quarter earnings statement which showed revenues and profits were down year-on-year.

Activity

The Fund made five new purchases in the month; Breedon, Dechra Pharmaceuticals, CLS Holdings, Hulic REIT and Power Integrations. These were funded by the sale of Teradyne, following very strong performance, and Relo, and trims to holdings in Brown & Brown and Abiomed. The Power Integrations purchase maintains the Fund’s exposure to technology and the disposals, with the exception of Relo, reduce the Fund’s exposure to stocks which are now Mid Caps.

Outlook

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

Martin Todd and Mark Sherlock

Martin Todd and Mark Sherlock, Co-Portfolio Managers

Market and Performance Review

Global equities continued to rise in July with optimism around restarting economies as lockdown restrictions eased and governments alongside central banks continued to provide support.

The Fund outperformed the benchmark index in the period. Stock selection was the main driver of relative returns in the month. Stock selection was particularly supportive in the Health Care and Industrials sectors. Currency was also positive whereas asset allocation detracted from relative performance.

Siemens Gamesa Renewable, Emergent Biosolutions and Orsted were the largest contributors to relative performance in the month. Siemens Gamesa Renewable rose following the approved spinoff of Siemens Energy. Siemens and Orsted also announced further wind power contract wins which buoyed their share prices alongside the EU Green Recovery plan which noted further investment in renewable energy. Emergent Biosolutions saw share price strength following the announcement of a large deal with AstraZeneca to produce their potential COVID vaccine.

Planet Fitness suffered weaker performance in the month as some states in the US imposed restrictions on gyms due to concerns of increased COVID cases. Ecolab announced second quarter earnings which were slightly weaker than expected due to sales weakness from hospitality customers. Not holding Apple also detracted from relative performance during the month as the tech company saw significant share price strength following their announcement of better than expected third quarter earnings.

Activity

We made no new purchases or complete sales in the month; however, we chose to trim some of our better performing holdings such as Dexcom and Emergent BioSolutions and use proceeds to top up relative underperformers including Xylem, Ecolab and Planet Fitness.

Outlook

Whilst we have been encouraged by the strong second quarter reporting season and resilience of the majority of our companies which have reported so far, the outlook remains uncertain. We have seen guidance upgraded by a number of our companies, but the overall tone remains cautious. For many companies, visibility on a new normalised level of demand won’t be evident until the fourth quarter at the very earliest, perhaps not until Summer 2021.

Nevertheless, we remain confident of the long-term outlook for our strategy; impactful companies are essential to help service the unmet needs of the environment and society and are therefore exposed to enduring sources of demand. COVID has resulted in a paradigm shift for responsible strategies in general as it has put focus on the critical need to build resilience in healthcare, food and water security, and across supply chains. It has also put climate change and worker rights under the spotlight. As governments worldwide look to fiscal stimulus to support re-opening economies, we believe that companies addressing the SDG’s remain best placed to benefit.

Hamish Galpin, Portfolio Manager

Market and Performance Review

The MSCI All Country World SMID Cap Index benchmark returned 4.87% in July. The Fund underperformed the benchmark index return in the month. Stock selection was the key driver of relative returns, particularly in Information Technology, where some less capital-intensive businesses that we do not own performed well. Currency and sector allocation were marginally negative in the month.

AMN Healthcare Services shares outperformed in July helped by broker upgrades following reports that demand for nurses was increasing. Fortune Brands Home and Security rose to new highs in the month following the release of strong second quarter results with particularly good margin improvement. The company subsequently received several broker upgrades. West Pharmaceutical Services shares also rose following the release of second quarter earnings which were ahead of estimates. The company also raised their full year guidance for 2020.

Open House’s shares, having been a strong performer in the prior two months, fell in July as the company completed a fund-raising share sale. John Wiley & Sons shares went ex-dividend in the period and traded lower on limited news flow. Kirby shares also failed to rise with the market in the month. The company released their second quarter earnings statement which showed revenues and profits were down yearonyear.

Activity

We added two new holdings during the month; Diversified Gas & Oil and Marr SpA. Diversified Gas & Oil is a top natural gas producer and operator of midstream assets within the Appalachian Basin. We believe the company can improve efficiency and move to be a greener operator while helping to support provision of skilled and well-paid employment. Marr SpA is an Italian food service company, supplying restaurants nationwide across Italy. The company dominates a fragmented market, is well run, has an asset light model which gives them high returns and the Italian market is attractive. We believe the company could benefit from market share gains and provide environmental impact by focusing more on sustainable sourcing, products and the trend towards healthier eating.

Outlook

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

Gary Greenberg & Kunjal Gala, Co-Portfolio Managers

Market and Performance Review

The benchmark MSCI Emerging Markets SMID (net TR) Index rose 8.45% in July. Emerging Market equities rallied again in July and continued their recovery for a fourth consecutive month. Positive economic data from China and the sell-off of the US Dollar, which recorded its worst month in over a decade, supported investor sentiment, despite a resurgence in Coronavirus outbreaks and elevated US-China tensions. The increase in new cases in Brazil and India continued in July, while recent outbreaks in Hong Kong have seen the reintroduction of some restrictions. China’s official Purchasing Managers’ Index readings for July were positive and new orders rose boosted by a surge in exports. Peru was the best performing market, pulled higher by a precious metal mining company which outperformed significantly over the month. Turkey was the worst performing country amid fears the US might impose sanctions against Turkey for purchasing Russian military hardware. Investors were also concerned that Turkey’s central bank is depleting its foreign exchange reserves to help stabilise the Lira in the currency markets.

The Fund underperformed the benchmark index over the month. Stock selection in China and Korea detracted, offsetting strong relative returns in Taiwan and Russia.

Delta Electronics, a Taiwanese global leader in switching power supply solutions, rose as earnings for its power business are expected to jump driven by strong PC/server demand momentum. The company’s’ leading position in power should ensure it keeps benefiting from increasing cloud applications and telecom infrastructure upgrades. Its Industrial Automation (IA) business should also benefit from ongoing supply chain relocation and increasing automation. Eugene Technology rose due to increasing prospects of sales of its Wafer Deposition equipment to Samsung, Micron and Hynix. Korean memory manufacturers are now localising their supply chain, and Eugene Tech is the only Korean equipment maker that can replace the Japanese vendors in the LPCVD BATCH space. Duratex, a Brazilian manufacturer of wood panels, sanitary fittings and building materials, rose after the company’s Q2 2020 results beat expectations and signalled an impressive recovery in June and optimistic outlook for Q3 2020.

NC Soft, a Korean online gaming company, retreated in July after the stock had performed well on strong prospects for its existing hit titles, the overseas launch of its L2M (Lineage 2M) game and the release of Blade & Soul 2 which are expected to further propel earnings. NC Soft has benefitted from increased traffic and favourable dynamics as a result of stay at home arrangements. Landmark Optoelectronics, a Taiwan-based manufacturer and distributor of wired communications machinery and electronic components, fell after reporting disappointing Q2 2020 sales results due to a subpar performance in shipments of 100G silicon photonics products. However, the company expects the second half of 2020 operations to rise fuelled by 5G applications. SITC International, which offers marine shipping services, underperformed amid renewed US-China tensions and supply chain disruptions.

Activity

The team initiated a position in Sunny Friend Environmental Technology, an industrial infectious waste disposal company which operates medical and industrial waste treatment plants. The company uses technology to handle various types of hazardous waste and collects, incinerates, solidifies, and develops solutions to streamline the disposal. The company recovers materials from waste, recycle resources, and conducts environmental tests to discover innovative solutions. Sunny Friend is the only listed medical and industrial hazardous waste company and is well-placed for an ongoing expansion into China.

The team also initiated a position in Tokai Carbon Korea, a subsidiary of Tokai Carbon Japan. The company manufactures silicon carbide rings (SiC) that are widely utilised during the etching process in the NAND market and produces single silicon crystal and purified graphite products mostly for the semiconductor industry in Korea. Tokai Carbon also makes LED susceptors that are designed to improve wear and chemical resistance when manufacturing light-emitting devices. Today, TCK is the only company that has the technology, and manufacturing know-how to make SiC rings.

Outlook

Emerging Markets have rallied strongly from the March bottom, initially driven by unprecedented central bank and government monetary and fiscal stimulus, subsequently from a gradual relaxation of lockdowns as markets anticipate an economic recovery in the second half of 2020. The broadening out of the recovery has extended investor interest to more value sectors, sensitive to the economic recovery and trading at low valuations (at one-point trading close to GFC levels). Market sentiment has improved, and the focus has shifted to a sharp rebound in economic activity.

However, investors must weigh the possibility of further economic damage if there is a second wave and economies move towards lockdown again. Also, the timing and efficacy of vaccines under development is far from clear, the business/consumer sentiment remains low and tensions between the US and China are rising over Huawei and Hong Kong. Crucially, the team believe that the world is likely to remain in a slow growth environment after the initial rebound. Hence, the Fund remains focused on Quality Growth and marginally, adding to cyclicality where they feel that there is enough margin of safety and the company benefits from medium/long-term catalysts.

Note: the equities commentaries above are as of 31 July 2020. For coronavirus-related updates, please visit our dedicated webpage.

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

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

On 26 June 2020, all sub-funds of the Federated Hermes Investment Funds Plc umbrella were renamed to incorporate the new Federated Hermes brand

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