Fund Manager Monthly Report - August 2015
View the latest portfolio and market commentaries from our range of fund managers.
Aberdeen Asset Management (Asia) - Hugh Young
The fund fell by 8.01% in sterling terms, underperforming the benchmark’s decline of 6.21%. This was mainly driven by negative asset allocation.
Over the month, the key detractors included the underweight to Japan and overweight to Singapore. Japanese equities proved more resilient than most regional peers, falling by 4.25%. In addition, our Singapore bank holdings, OCBC and UOB, along with Standard Chartered (Stanchart) weighed on performance. There were broader factors at play, though. China’s unexpected devaluation of the yuan sparked concerns over financial institutions with mainland exposure. As a result, the share prices of OCBC, UOB and Stanchart fell sharply, as investors fretted over asset quality deterioration on the back of China’s faltering economy amid a broader regional slowdown. From our perspective, the Singapore banks’ mainland exposure has been relatively contained by the scaling back of trade financing in China. We expect asset quality risks to be mitigated by the quality of the two banks. Both lenders are well-run and well-capitalised. They have also lent prudently. With their share prices at the current levels, we think the Singapore banks offer good value. Meanwhile, Stanchart has continued to curtail its lending activity since last year, as part of a comprehensive restructuring.
The heavy weighting to Hong Kong and non-benchmark exposure to China further detracted from performance, given that these two markets were among the worst performers across the region. Among our holdings, China Mobile was more defensive. Its interim results exceeded market forecasts, as margins expanded on the back of tight cost controls. Jardine Strategic, among the key detractors in the year to date, also bucked the trend. The stock looks attractively valued relative to its long-term prospects.
In Australia, Rio Tinto was relatively resilient, given that its share price performance in prior months had already reflected the flagging outlook for global commodity prices. The company delivered decent results on the back of cost-cutting measures, with interim profits of US$2.9 billion surpassing consensus estimates of US$2.4 billion. Not holding the domestic banks – on concerns over the lack of a capital buffer and their reliance on wholesale funding – also benefited the fund. Both ANZ Banking Group and Commonwealth Bank announced right issues after the financial regulator highlighted the inadequate capital strength of banks.
Aberdeen Asset Management – Jamie Cumming
In August, the fund fell by 6.75%, underperforming the benchmark’s fall of 5.25%. Both asset allocation and stock selection were negative.
At the stock level, EOG Resources contributed to relative performance, with second-quarter earnings per share faring better than the consensus forecast. Italian-listed steel pipe manufacturer Tenaris rebounded over the month, underpinned by management’s expectations of a recovery towards the end of the year. American retailer TJX’s second-quarter earnings rose 6.1% on better-than-expected sales growth across all divisions at established stores.
Conversely, Standard Chartered was among the key detractors. Its revenues fell, while impairments (mainly in India) and compliance costs rose. It halved its interim dividend to conserve capital. Banco Bradesco’s shares slumped following it’s biggest-ever acquisition, of HSBC’s money-losing Brazilian operations. Casino Guichard Perrachon was weighed down by a US$1.8 billion sale of some of its Latin American supermarket assets to subsidiary Exito that raised corporate governance concerns.
In August, we introduced Israeli IT security provider Check Point Software Technologies and Japanese real estate business Mitsubishi Estate on recent weakness. Against this, we sold Sysmex as it now fails the fund’s ethical screens. We also raised our exposure to EOG Resources and Kerry Logistics, and trimmed Atlas Copco and Canadian National Railway.
Artemis Investment Management – Adrian Frost & Adrian Gosden
UK & International Income
Equity markets made a poor showing in August as the travails of the Chinese economy and the associated knee jerk policy unnerved investors. The fact that China is slowing should be no surprise but the extent of the slowdown was greater than anticipated.
We were quiet, confining our activity to moves that exploited relative value within the portfolio. As a result we switched some HSBC into Lloyds and added to Rio and AstraZeneca. The decision by Monsanto not to pursue its interest in Syngenta led to a sharp fall in the share price of the latter which was a negative.
We continue with the policy of the last 18 months to steer the portfolio between overvalued cash flow, courtesy of the great bond bull market and the potentially uncertain dividend prospects of some of the larger companies, but there is more for us to do here.
The impact of China’s decline will become evident in company statements but against that there is at least some modest growth elsewhere. Perhaps this will defer the interest rate rises that so many investors dread. For us, the day that interest rates go up is the day that economies will be more ‘normal’ and free from the mysteries of Quantitative Easing. It is inevitable that markets will not welcome such a move but for long term investors it is to be welcomed.
One of the few things that went up in August was Inmarsat’s third and important satellite.
Artisan – Dan O’Keefe & David Samra
Global Managed & Global Unit Trust
Nearly all major global stock indices posted meaningful declines in August, and the MSCI AC World Index (Net in GBP) fell -5.5% in the month. Confidence was shaken by concerns about the health of the Chinese economy, as well as fears that the tidal wave of easy money will begin to recede with a landmark interest rate hike by the Federal Reserve in September. During the month, approximately only 3 of the 46 names in the portfolio (7% of the holdings) increased in local currency terms, while the other 43 declined (93%).
Among the best performing stocks this month were Kia Motors and American Express. Kia’s share price recovered a bit of its multi-year decline, reacting we believe mostly to the financial advantages it should get from a depreciating Korean Won. The strength of the Won over the past few years has been a significant competitive disadvantage for the company. American Express shares reacted positively to news that activist hedge fund ValueAct has taken a stake in the company.
Among the worst performing stocks in the month were Carlsberg and Telefonica Brazil. Carlsberg announced 2Q earnings that showed continued declines in the company’s sizeable Russian business as well as weakness in Western Europe. Continuing macroeconomic concerns in Brazil, as well as the depreciation of the Brazilian real against the US dollar, negatively impacted Telefonica Brazil’s shares in the month.
AXA Framlington – Richard Peirson
AXA Managed & Balanced Managed Unit Trust
Slower growth in China and a sharp fall in its stock market, ‘currency wars’ surrounding the yuan, weak commodity prices and US interest rate concerns provided a catalyst for a long overdue correction in equity markets. Bonds, though resilient, did not benefit significantly from the weakness in equities. In the UK market resources stocks continued to underperform, while banks were hurt by the Asian dominated HSBC and Standard Chartered. Smaller companies, with lower weightings in the above and a more domestic focus, outperformed.
In the UK bond portfolio we added about 1% to a 10 year gilt, largely reflecting our very underweight and defensive position there rather than because we see compelling value. In Europe we sold Airbus which has been a strong performer this year and might suffer from less orders from Asia in future. We bought car-maker VW which had been hit hard by lower sales in China, Infineon Technologies, which is benefitting from more semi-conductors being used in cars and ASML, the leading lithography company which is a supplier to the semi industry. Elsewhere, we largely added to existing positions. Investment returns, though negative, were satisfactory in relative terms. The overseas returns, however, were flattered because the last day of the month was a bank holiday here but most overseas markets were open and fell modestly.
Identifying undervalued equities has not been easy of late with valuations towards the top of historic ranges. The sharp correction in August and early September, however, has begun to throw up some interesting opportunities. We still believe that equities are more attractive than government bonds, where yields are towards the bottom of historic ranges. We expect US interest rates to rise this year but the FED is likely to move very gently to avoid scaring markets.
AXA Framlington – George Luckraft
Diversified Income & Allshare Income Unit Trust
Equity markets were weak and volatile as poor Chinese economic data and a surprise depreciation of their currency unsettled investors. Thin holiday trading volumes helped to increase the volatility.
The portfolio held up relatively well in the weak market with strength in some of the small cap holdings such as Pendragon, FDM Group and Topps Tiles helping performance. In addition an absence of holdings in Glencore and Standard Chartered was a positive factor.
During the month exposure to the UK consumer was reduced with some sales of both Pendragon and Topps Tiles. The decision by the Federal Reserve re interest rates could herald a new era for markets. There is a possibility that volatility could spike again. Valuations have become more reasonable following the correction in markets with attractive yields available.
Babson Capital – Zak Summerscale
International Corporate Bond
A number of near-term uncertainties weighed on markets in August, leading to a volatile backdrop for the global senior secured bond market. Global equity markets experienced a particularly bumpy month with the measure for volatility (the VIX index) reaching a four year high during the month. In the U.S., the release of the latest minutes from the Federal Reserve were largely non-committal and though there are indications that the U.S. is getting closer to the first rate rise, the market has steadily been moving away from anticipating a rise in September. China continued to affect broader markets during the month, with uncertainty around the country’s growth contributing to further volatility in the region and in markets globally. Commodities also experienced a rough month with oil (WTI) falling to a 13yr low before bouncing back up sharply towards month-end. However, despite these circumstances global senior secured bonds held up comparatively well when compared to the wider equity markets.
The new issue activity during August was slow, with the summer holiday lull being exacerbated by ongoing market volatility. Within the U.S. HY bond market, 23 high yield bonds priced totalling $10.8bn which was the lowest monthly volume since December 2014. In Europe, the high yield market experienced a similar break in primary issuance over August, with just two issuers raising €566m in total. So far in Europe this year, a third of new issuance has been used to back M&A activity, compared to just 18% in 2014 and 15% in 2013. In the U.S., the year to date new issue volume has been dominated by refinancings (45%, which compares to 59% over the same period last year), with acquisition related volume coming at 37% of new issues.
The Energy-sector specifically may continue to be subject to further volatility within the global senior secured bond market, however overall the market remains fairly stable. We feel there may be some further uncertainty in the short-term as macroeconomic events continue to play out, but the global senior secured bond market as a whole remains in good health. Through our fundamental bottom-up credit selection, we feel markets like these could provide further opportunities for the International Corporate Bond Fund to take advantage of strong credits where the price may have become dislocated from the underlying credit fundamentals. With attractive yield levels and the senior secured positioning within the capital structure, we feel the International Corporate Bond Fund is well-positioned to continue to provide robust risk-adjusted returns for investors going forward.
BlackRock – Luke Chappell
UK & General Progressive
Global equity markets underperformed in August on concerns about a global economic slowdown driven by weakness in China’s economy and attempted government intervention on the country’s exchange and interest rates. Concern over the Federal Reserve raising rates in September’s meeting of the FOMC also weighed heavily on investor sentiment.
Regional performance was uniformly negative in August with Emerging Markets leading the rout, driven by weakness in China and local economies impacted by a potential slowdown. European markets fared relatively better, despite countries such as Germany being exposed due to its significant export profile with China.
August saw the implementation of the MSCI quarterly index review. The index review resulted in 14 additions and 10 deletions to the MSCI AC World Index resulting in two-way turnover of 0.6%. In developed Markets: 6 additions and 6 deletions were announced with the larges trades being St James’s Place, Ingenico and Alps Electric. In emerging markets, 9 additions and 4 deletions were announced, with the largest buys being Citic, India Bulls Housing and Glenmark Pharmaceuticals.
The MSCI All Countries World Index (equally weighted) declined -5.83% in August on a total return basis. The fund return was -5.62% over the same period.
BlackRock – Nigel Ridge
UK Absolute Return
Global financial markets moved firmly into risk-off mode in August sparked by an unexpected currency devaluation by the Chinese Government followed by a series of weaker economic domestic data points in the region. Despite a late rebound losses remained heavy and broad-based. The FTSE All-Share experienced a -5.3% fall which wiped out all year-to-date gains. While recent events have paved the way for further downside risk to inflation in the developed markets, economic data and earnings expectations (away from commodities) have remained on track.
The Fund delivered credible downside protection ending -0.4% (net of fees). The short book produced gains that offset much of the long book’s losses. At a sector level, consumer goods and industrials made positive returns while losses were largely concentrated within our long side of our financials. At the stock level, Betfair (consumer services) was the most notable winner supported by news of a potential nil premium merger with Paddy Power that could create the UK’s number one online player. One of our largest short positions in an outsourcing and distribution services company (industrials) also contributed as weak growth and increasing competitive pressures took a toll on the shares. While we remain cautiously positioned to the emerging markets overall, Asian focused bank HSBC was a faller despite results in July pointing to an improving capital position. Elsewhere within financials, 3i Group also detracted given the private equity group’s heightened sensitivity to the level of the market.
Gross exposure was taken lower from 122% to 108% during the month before opportunities were identified resulting in the gross ending at 120% by the end of August. The net exposure ended at 25%. We reduced some recently successful long positions and added to shares exhibiting attractive yield and therefore in our view limited downside. We also took profits in some FMCG (fast moving consumer goods) short positions given the price reversal seen. Our holdings exposed to the US and the UK should continue to benefit from the supportive macro backdrop in these regions rather than the negative implications that a Chinese slowdown poses to the emerging markets in particular.
EdgePoint – Tye Bousada & Geoff MacDonald
Volatility returned to financial markets in a big way towards the end of August as persistent fears about China weighed on investor sentiment. Despite this, the Portfolio outperformed its benchmark, the MSCI World Index. Contributors to performance for the month included Alere Inc. and Ubiquiti Networks Inc. Realogy Holdings Corporation, Generac Holdings Inc. and Shiseido Co. Ltd. were the largest detractors from performance.
In the face of increasing investor unease, the Investment team added to many high-conviction holdings. We also continue to strive to upgrade the quality of the Portfolio by relinquishing businesses where our thesis has been recognized and deploying capital into new ideas. Cash levels have come down as we have worked to capitalize on new opportunities. One such example is WESCO International Inc.
WESCO International Inc. is a distributor of products and provider of supply chain management and logistics services used primarily in industrial, construction, utility and commercial, institutional and government markets. We like WESCO’s low working capital intensity and its ability to generate cash. Its attractive valuation of less than 8 times free cash flow combined with our conviction in its growth prospects has led us to increase our position; WESCO is now a top 10 holding in the Portfolio.
Invesco Perpetual – Paul Read & Paul Causer
Returns for high yield bonds were negative through August as concerns about the economic slowdown in China and associated weakness in commodity and other emerging markets dominated market sentiment. Given this backdrop the energy sector was the worst performing sector. There was also some volatility associated with individual companies. Given the higher weighting to energy companies the US high yield market tended to underperform the Europe market. Amidst the volatility and the usual summer lull in capital raising, bond issuance was low with Barclays estimating just €1.3bn issued in all European currencies. This compares to €1.8bn issued in August 2014. Data from Merrill Lynch showed the European currency high yield bond market returning -0.9%, with BB bonds returning -0.8% and CCC and below 0.0%. US High yield bonds, which have higher exposure to the energy sector returned –1.8%. European investment grade corporate bonds returned -0.7%. (All returns are total returns and sterling hedged.)
Invesco Perpetual – GTR team
Fund performance was marginally positive over the month. A broad spread of ideas had an influence on performance. While a number of our equity ideas had negative returns, the implementation of these ideas meant the downside from the market sell-off was largely mitigated. We reduce market exposure in the ideas that follow other Invesco Perpetual or Invesco strategies and use options to lessen the impact of sharp market falls across equities and credit ideas. Our UK and Asian equity idea actually ended the month in positive territory. Volatility was clearly a theme and our idea pairing a long position in Australian dollar volatility versus US dollar volatility worked well as the China fall out hit commodities-based currencies particularly hard. Our long position in Asian equity volatility versus US equity volatility also added to performance. Market volatility was also reflected in the performance of our currency ideas, in particular, the strong appreciation of the Japanese yen against the Korean won was a standout positive. Our relative ideas in the interest rates space also worked in our favour with the difference between interest rates in Sweden vs Europe and Australia vs Europe both narrowing. During the month, there were no new ideas added to or removed from the fund.
J O Hambro – John Wood
UK & General Progressive
The financial tsunami that we have written about for a number of months rolled in during August. It was relatively less painful for our portfolio as we had continued to stand on the shore (our large cash balance helped relative performance), but the more complacent "surfers" among the investment community will still be feeling the bruises from crashing hard on to the beach. Portfolio names that held up well in the sell-off included National Grid, Compass Group and Ultra Electronic.
Unlike some market participants, our crystal ball did not identify China as the factor responsible for the heightened market volatility seen in the final week of August. It was just one of many possible triggers that could have caused a market dislocation. Our long-held fear, though, has been that extended momentum markets would, like a cartoon character running off a cliff edge, suddenly find nothing beneath their feet but air. And it's not just the stock market that has been running out of road. The turbulence in the oil price is a prime example of what happens when illiquid markets struggle to clear effectively on a day-to-day basis.
A crucial question now is what do investors with little interest in the boring minutiae of cash flows do when the momentum charts are broken. So far, the response has been a move to 'bucket' investing. Everything now has to be in either a positive developed world 'bucket' or a negative emerging markets 'bucket'. This shows signs of becoming another lazy industry mantra.
In 2007/8, the investment mantra of the moment was decoupling. Emerging markets fizzing with growth prospects would decouple from the overleveraged and stagnant developed world economies, offering unbridled investment opportunities (the subsequent performance of EM as an asset class showed this was misguided). Today's mantra, blithely invest in the developed world cyclicals bucket because China's woes will prevent interest rate rises in the UK and USA, could be similarly misconceived.
This investment behaviour starts to excite us. When people empty buckets without checking their contents, it will provide opportunities for investors prepared to do the fundamental analysis. However, we believe that we are at the beginning, not the end, of this process, so we have plenty of time to do the necessary work.
Loomis Sayles – Kenneth Buntrock
Investment Grade Corporate Bond
UK IG had a terrible month of August, with spreads widening by 18 bps and excess return versus gilts decidedly negative. Metals & Mining was easily the worst performer, but many sectors had a difficult month including Insurance, Pharma, and Communication. Somewhat surprisingly, returns across the quality spectrum were relatively equal. GBP corporates broadly underperformed USD and EUR issues, even though the local market does not have as significant of exposure to oil and gas revenues and new issuance has been light – the two drivers often cited for weakness in US markets.
The British economy continues to trundle along nicely. Buoyant consumer demand remains the major driver owing to a healing labour market and recovering wage growth. Indeed, real incomes are now growing in excess of 2% per annum, the fastest pace since 2007. Consumer and business optimism is also high, while the housing market is again picking up speed. The latest RICS housing market survey showed 51% of respondents expecting increased prices over the next 3 months, compared to just 19% at the beginning of the year. In light of this, the market has brought forward its expectations of the first rate hike from the Bank of England – albeit views still range from December 2015 into 1Q 2016. Consensus remains that the BoE will not move in advance of the Federal Reserve.
Security selections in the Banking, Utilities, Insurance, Energy, and Telecommunications sectors underperformed versus the benchmark (ML Sterling Non-Gilt, 1-15yrs Custom Index). Picks among consumer Goods companies did add modest value. Underweight allocations to quasi government sectors, specifically Supranationals and Government Guaranteed, also detracted from performance on a relative basis. These subsectors were generally more resilient to the selling pressures than corporate bonds were as a whole.
We are overall duration neutral and interest rate risk did not play a material role in relative performance.
Majedie – James de Uphaugh
UK Growth & UK & General Progressive
Your portfolios outperformed a falling market over the month. Fears of a China-induced global economic slowdown were enough to rout financial markets during August. Thin summer trading exacerbated the moves as hedge funds and quant models fell victim, once more, to risk controls that resulted in forced selling. Buyers stepped back and those assets exposed to the great Emerging Market secular growth story experienced a sharp re-appraisal of valuations.
We have for some time been cautious on the China trade, wary of the rapid economic growth fuelled on debt, and so have been under exposed in areas of the market that had been bid up on the BRIC dream. Miners have been an area we have avoided, until recently, so not holding Glencore aided performance as the vulnerability of the company’s credit rating spooked the market in the face of falling commodity prices.
While macro headlines drove sentiment, the sub-portfolio of more UK-focused small and mid-size capitalised companies held up, because the data highlighted the UK as the fastest growing developed market economy, and evidence of a pick-up in business investment emerged. More stock specific developments saw our holdings in Rentokil, Ryanair and Card Factory remain unaffected by the market turmoil.
On the negative side, a difficult trading environment and deflationary pressures hampered our holding in Tesco, and the broader market’s ongoing distaste for the strategic direction of Barclays weighed on the share price.
We continue to favour banks, UK food retailers and we are selectively adding to miners.
Majedie – Chris Read
The UK Income Fund returned -2% over July whilst the FTSE All-Share fell -5.3%.
The Fund managed to weather the worst of the storms we saw in July with a number of holdings in both the Mining and Financial sector, such as Phoenix Group, Rio Tinto, Admiral and Man Group all performing well. Current volatile conditions in the market are ideal for Hedge Funds such as GLG at Man Group; GLG is a third of their business. GLG funds have been performing well and this will come through in the form of performance fees. We continue to be positive on the potential for Man Group to re-rate and as our conviction has grown we have added to our position and it is now the third largest position in the Fund.
On the negative side, Delta Lloyd, a Dutch life insurer disappointed as their half year results showed a weakness in their capital base which was not well received by the market. The market is concerned that there is a capital hole that will need to be filled with a further re-capitalisation and these concerns weighed on the share price. After thorough analysis we feel we have a grasp on their capital situation and even if they do need to recapitalise they are still a very cheap company who continue to progress operationally and gain market share in areas such as pensions. We doubled up our position on the share price weakness.
Manulife – Paul Boyne & Doug McGraw
Global Equity Income
Stock selection in health care and telecommunication services contributed to performance. Individual contributors included Heineken N.V., Verizon Communications Inc. and Nestlé S.A.
Stock selection in information technology and consumer discretion detracted from performance. Individual detractors included Viacom, Inc., Macy’s, Inc. and Bridgestone Corporation.
We added Exxon Mobil Corporation to the strategy, and sold Aon plc, Chevron Corporation, Deutsche Börse AG, Nippon Telegraph and Telephone Corporation (“NTT”), Viacom and Statoil ASA.
Oldfield Partners – Richard Oldfield
The sharp falls in markets in August left the fund in negative territory for the year to date: -1% in sterling and -2% in US dollars. The weakness in the Chinese economy appeared to be the proximate cause of the reversal, but as James Mackintosh in the Financial Times suggested, ‘the 2015 summer scare is confusing. Is it a crisis made in China? A prediction of global slowdown? The realisation that commodity weakness does not automatically boost consumer spending? Anxiety about an imminent Fed rate rise? Or merely a natural correction of excessively high prices?’
The market which came off worst was Japan, where prices are not excessively high, but where the effect of a weakening China might be thought to be greatest. Four of the five weakest stocks in the portfolio were Japanese: Nomura, Toyota (both -13%), Komatsu (-12%) and MUFG (-11%). None of these, nor our other holdings in Japan, have significant exposure to China. The most exposed is Komatsu, where 7% of revenues are from sales in China. The second best performing stock in the portfolio in the month was Rio Tinto (-1%), the holding most vulnerable to China.
We are inclined to agree with Martin Feldstein, former chairman of the Council of Economic Advisers in the US, who said that ‘though the recent selling was triggered by a variety of events, including the collapse of oil prices and financial chaos in China, the high price-earnings ratios were enough to make the downturn inevitable. All that was needed was a spark.’ Our contention is that the high valuations are principally in the US rather than in Europe or Japan, and there is much more reason to be nervous of prospects for medium term returns in the US than elsewhere. In the short term, however, we feel it is much more likely that the summer scare has been just that – a correction – and that we will now have a period of stability or strength. We think this for two reasons: First, the world economy is generally in much better condition than in the last several years. Recent consumer confidence and other indicators in the US are strong. Manufacturing activity in Europe has been expanding and unemployment falling. Japan has been spluttering but on the whole showing some recovery. While debt is in aggregate even higher than in 2007-8, its composition has shifted from the private sector and households. Second, we have for many years paid attention to the Investors Intelligence Survey of Advisory Sentiment which measures the number of advisory newsletters in the US which are bullish or bearish. This may sound as useful as Mystic Meg but it is a marvellous inverse indicator, for the good reason that if all are bullish they have no cash left to invest and if all are bearish they have already done their selling. Just a few months ago there were well over 60% bullish in this survey and fewer than 20% bearish. The latest figures show 27% bullish and just under 27% bearish. Such little optimism is usually a very positive portent for the market – usually, but not always (nothing is quite as useful as that). The biggest exception was in 2008-9 when bearish in the Investors Intelligence Survey outnumbered bullish as early as June 2008, before the crash.
We do not think we are in a 2008-9 situation. But we have been prompted to look up some 2009 details by the fact that the average upside to our target valuations for the stocks in the portfolio is currently 62%, a figure only exceeded in March 2009 when it was 63%. These target valuations are a combination of present share price, a variable in the form of earnings or cash flow or assets, and a multiple; and we subject them to a lot of scrutiny at all times – they are spuriously precise, of course - but especially at times like this when it may be that both the variables and the multiples we ascribe to them are stale, giving too rosy a prospect. Nonetheless, they represent the knitting to which we stick. By the end of 2010 all but four of the 21 stocks in the March 2009 portfolio had risen by more than 25% and the average rise was 52%. By August 2015 all but two in the March 2009 portfolio were up more than 40% and the average rise was 143%. Our current valuation targets, and the corollary, the low valuations of the companies we hold, give us grounds for optimism.
Orchard Street – Chris Bartram
Property Unit Trust
We have exchanged an agreement for a new 10 year lease over 17,200sqft of offices at 33 Golden Square in Soho. The lease is due to commence on 1st August 2016 after a comprehensive Grade A refurbishment costing £2.9m requiring the tenant to vacate the property for ten months. The rent payable will increase from the existing £805,000pa to a new initial rent of £1.22m rising to £1.4m over the first five years of the lease. This asset management initiative has had a positive effect on the capital value, increasing the property valuation by just under £4m to £27.95m.
In the City at New London House we have extended the lease on a ground floor retail unit by five years and increased the rent payable by 8%.
The portfolio vacancy rate is 5.1% compared with 8.8% for IPD and the initial yield on the portfolio is 4.9% which compares with 5.1% for IPD.
Property Life and Pension funds
At Queens Road Retail Park in Sheffield we have completed a new 10 year lease to Dreams securing a new rental value of £16.50psq. The retail park is now fully let.
In the City at New London House we have extended the lease on a ground floor retail unit by five years and increased the rent payable by 8%.
The portfolio vacancy rate is 7.8% compared with 8.8% for IPD and the initial yield on the portfolio is 4.9% which compares with 5.1% for IPD as at 31st August 2015.
RWC – Nick Purves
August saw some of the most volatile conditions seen in markets for a long time as worries over a potential economic slowdown in China came to a head with all major markets finishing the month in the red. The market is also coming to terms with the fact that the US Federal Reserve may soon be raising interest rates, although the probability of a near-term rate hike has fallen given the events of the month.
The issues in China have been bubbling under the surface for a while. The boom in the Chinese stock market over the last year saw the Shanghai Composite Index rise 60% from the start of the year to its peak in early June. This rapid rise in the market was, in part, a result of share buying with borrowed money, so when the market started to fall many investors had to sell to pay back debt, this exacerbating the fall. Following a collapse in stock prices, the index is now flat for the year.
The wider issue is that China’s economy is slowing, and this has translated into worries about what impact that will have on the rest of the global economy, a concern that was highlighted by the currency devaluation at the beginning of the month.
In developed markets, the VIX Index, also known as the fear factor index, moved sharply higher to levels not seen since 2008, resulting in huge intra-days swings in equity prices. The FTSE 100, after finally breaching the 7000 level earlier this year, sold-off aggressively falling below 6000. The more domestic FTSE 250 outperformed, falling by only half that of the more global FTSE 100. Heading into month end risk assets recovered some of their losses with the move higher being led by oil; Brent jumped by 24% in the 3 days before month end.
Despite the moves seen in the wider market the Fund held up well outperforming the benchmark. Close Brothers was the best performing name in the portfolio over the month as the stock rebounded very strongly after the initial market sell-off and the share price finished up 2.6%. RSA shares also held-up well over the month as the possibility of a bid from Zurich remains. The proposed offer is £5.50 per share, however RSA is currently trading at a discount, suggesting that the market is not convinced the deal will go through.
Some names across the portfolio suffered as they were dragged down by the wider macro concerns. The weakest sector for the Fund was media with both RELX Group and Sky falling, although in each case there was no specific news to move the price.
Stock markets face an uncertain few months. Ultra-loose monetary policy around the globe which has been in place for a long time has pushed equity markets ever higher. Share prices have significantly re-rated over the last few years and look fully valued on the most reliable valuation measures. The question is, is the recent sell-off enough of a correction? On balance, we don’t believe that it is and that many companies remain fully valued. We maintain a cautious outlook, and think it is prudent to have some cash on hand to take advantage of any new opportunities that may arise.
Sands Capital – David Levanson, Sunil Thakor & Perry Williams
We focus on the underlying fundamentals and long-term growth prospects of our businesses, not short-term stock price movements. The Global Growth portfolio is characterized by relatively low turnover, therefore positions are not frequently adjusted. As a group, our portfolio companies continue to execute and deliver solid business results.
On a relative basis, the top five contributors to performance were CP All, Ono Pharmaceutical, FMC Technologies, Priceline Group, and Titan Company. We recently performed a deep-dive analysis of the immune oncology (IO) landscape, and as a result, have increased conviction in the long-term potential for Ono Pharmaceutical. Ono is a leader in IO therapies through its drug Opdivo, which harnesses the power of the body’s immune system to fight cancer in a much more targeted and effective manner than chemotherapy. Since our initial work on Ono and the IO space several years ago, new industry studies suggest the applicability of IO therapies has the potential to expand to additional cancer types not considered in our initial analysis. We now believe the IO market could be significantly larger than we originally estimated, leading us to increase our long-term sales projections for Opdivo. While we expect the IO space to increase in competitiveness, we believe this expanded market potential will provide the opportunity for multiple players to win long term.
The top five relative detractors from performance were Housing Development Finance, Workday, Alibaba Group, Charles Schwab, and Baidu. During the month, Workday reported positive second quarter results that exceeded expectations on all key metrics and raised its full-year revenue guidance. Despite this strong report, shares declined due to perceived weakness in the company’s customer billings expectations. We believe this is optical and does not signal any changes in its operating or competitive environment. Beginning this quarter, management is rolling out new billing procedures by charging customers once its Workday system goes live, rather than at the signing of the contract. This provides some much-needed flexibility for customers that were previously burdened by having to pay for both their legacy system, as well as their new system during installation. While this will likely affect the timing of the company’s cash collection cycle, we believe it is a long-term positive change that will reduce friction for potential customers when faced with a decision of whether or not to deploy Workday.
During August, we sold Discovery Communications because we are concerned about the company’s domestic and international growth potential. At the time we purchased Discovery, we expected ongoing penetration of pay-TV worldwide would drive increasing global viewership, making its international segment a core growth driver. However, we have since determined the company’s international opportunity is more saturated than our initial research indicated. In order to boost its international growth, Discovery has pursued expansion opportunities outside of its core competency in non-fiction content, but we view these efforts as having limited payoff potential. In the U.S., we have growing concerns about the stability of the Discovery’s business in the face of increasing pressures on cable distributors. Cable companies are dealing with mounting threats from cord-cutters (i.e., people who drop their cable subscription in favor of a-la-carte services) and a potential break-up of the traditional channel bundle. We believe these competitive changes could result in less pricing power and lower advertising revenue for Discovery. Taken together, the issues in Discovery’s international and domestic segments weaken our conviction in the company’s prospects for above-average growth. As a result, we no longer view the company as a fit with our investment criteria.
Select Equity – George Loening & Chad Clark
For the month of August 2015, the Sub-Account returned -3.9% on a net basis versus a -5.5% return for the MSCI ACWI during the month. The account’s cash levels did not change meaningfully, finishing August at 8.2% of overall assets. We did take advantage of market weakness to add to some of our existing positions, including Mettler-Toledo, a manufacturer of weighting instruments sold into industrial and healthcare end markets; Signet Jewelers, the largest US jewellery retailer; and Intertek, the third largest global provider of outsourced testing & inspection services.
The top three contributors in the month were Precision Castparts, a leading aerospace supplier which announced it was being acquired by Berkshire Hathaway; Wirecard, a provider of payment processing services for online commerce in Europe and Asia; and Signet Jewelers. Many of the top detractors in the month were companies with perceived exposure to China and Emerging Markets, including DKSH Holding, Asia’s largest provider of market expansion services; AIA Group, Asia’s oldest and largest life insurer; and Julius Baer Group, the Swiss private bank.
We initiated a new position in Expeditors International of Washington, a global logistics and freight forwarding company. We have been active investors in the value chain for the last two decades, and the company’s new management team has implemented changes that we believe should result in better growth and profitability over the next several years.
Tweedy, Browne – William Browne, Tom Shrager, John Spears & Robert Wyckoff
The enhanced volatility did lead to more portfolio activity during the month. We established a new position in General Electric (GE), which has a long history of increasing its dividend and being shareholder friendly.
We also added to a number of pre-existing positions in the portfolio including Standard Chartered, BAE, CNP Assurances, Diageo, and United Overseas Bank (UOB). On the sell side, we modestly trimmed the portfolio’s position in Unilever. As we write this review, global equity markets have regained much of the ground they lost in August; however, if the increase in volatility remains with us for a time, we feel we are well positioned to take full advantage.
Wasatch Advisors – Ajay Krishnan
Emerging Market Equity
Emerging-market equities followed Chinese stocks lower in August. Although every country in the MSCI Emerging Markets Index posted a decline, our stocks held up better in India, Thailand and Mexico. As a result, the portfolio declined less than its benchmark.
Our two strongest contributors to performance for the month were the Indian drug makers Glenmark Pharmaceuticals Limited and Lupin Limited. Currency weakness in the rupee made the products of both companies more competitive in overseas markets. International Container Terminal Services, Inc. of the Philippines was our worst detractor. The stock fell on concern that China’s slowing economy may impact international trade.
Wellington – Haluk Soykan
Gilt yields generally increased over the month with the biggest moves coming at the 2 and 10-year points (12 and 8bps respectively) on the curve. We did see a small rally of 4bps at the 5-year point. The rally in gilts at the start of the month over concerns surrounding growth in China, retraced over the second half of the period as data from the US, Germany and UK all reported on a positive trend. In the UK, consumer confidence jumped to a 15-year high, jobless claims declined, while industrial output fell, following a drop in oil, gas, and mining production. US data released during the month continued to be constructive. The economy grew faster than initially estimated in the second quarter with upward revisions to consumer and business spending and inventories. Consumer confidence rebounded, primarily due to a favorable labor market outlook. Euro area PMIs beat expectations with manufacturing unchanged at 52.4 and services rising to 54.3. In Germany, factory orders surged, strongly beating expectations and 2Q GDP expanded, driven primarily by foreign trade. Data from China was largely negative with weakness in industrial production, retail sales, and manufacturing. In Japan, the economy contracted by an annualized 1.6% in the second quarter and inflation and household spending slowed.
For the month of August the Portfolio underperformed the benchmark, by 3bps, the Portfolio returning 0.31% and the benchmark returning 0.34%.
The UK economy continues to be characterised by an unbalances mix of inputs; gains in housing and consumption, combined with widening current account and fiscal deficits. UK headline inflation remains very weak, up from 0% to 0.1% year-on-year. Falling import prices should continue to provide a drag on goods inflation. The slight rise in unit labour costs points to a trough in service sector inflation, but is not consistent with a sharp pick up. We think the Bank of England remains pinned for now, unless they justify a hike because of diminishing domestic spare capacity.
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The information contained herein represents the views and opinions of our fund managers and not those necessarily held by St. James’s Place Wealth Management. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice.
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