Fund Manager Monthly Report - June 2015
View the latest portfolio and market commentaries from our range of fund managers.
Aberdeen Asset Management (Asia) - Hugh Young
The fund fell by 5.75% in sterling terms in June, marginally underperforming the FTSE World – Asia Pacific Index’s 5.52% decline.
Stock selection in Hong Kong weighed on relative performance the most. A key detractor was the position in Jardine Strategic as one of its core businesses Astra International continued to face a difficult macro environment in Indonesia and increased competition in the auto distribution segment in particular. Returns in sterling terms were further compounded by the weak rupiah. While we are cognisant of the short-term challenges, Indonesia remains an attractive long-term investment case, and Astra is well placed to tap this potential. Our property holdings Swire Pacific and Hang Lung Group also underperformed the broader market.
Conversely, stock selection in Japan added to performance. Chugai Pharmaceutical and Unicharm rebounded from prior weakness. Shin-Etsu Chemical also outperformed. The company will invest ¥7 billion to increase the production capacity of photomask blanks, a key material in semiconductor manufacturing. This is part of its attempts to scale up electronics and functional materials, its most profitable business segment. Separately, the company will set up a joint venture in China to produce material for light-transmitting fibres, which will allow it to tap growing demand as the country rolls out new telecommunications infrastructure.
Another key contributor was the overweight to Singapore, a defensive market. Our bank holdings did relatively well; they are likely beneficiaries of rising interest rates. Elsewhere, Standard Chartered’s stock price was well supported as Bill Winters officially took the helm as CEO, emphasising capital strength in a letter to staff.
Aberdeen Asset Management – Jamie Cumming
In June, the fund fell by 5.56%, underperforming the benchmark’s decline of 5.15%. Both asset allocation and stock selection were negative, although the currency impact was positive.
At the stock level, Weir Group was among the detractors from relative performance. Its minerals division met expectations, but its oil and gas business suffered a decline in activity in both April and May. The challenging oil and gas market also weighed on Wood Group, which expects weaker first-half results, although management is confident that cost-savings will mitigate lower demand and pricing pressures. Elsewhere, US technology company Oracle Corp was weighed down by muted quarterly results, with slower sales of its database software licences exacerbated by a strong US dollar.
Conversely, Brazilian lender Banco Bradesco was a key contributor to relative performance. Its shares rose in tandem with the local market, which outpaced its global peers. Despite muted economic data, Brazilian equities and the real strengthened on the back of expectations that the Federal Reserve would raise its interest rates at a measured pace. Meanwhile, Bill Winters officially took the helm at Standard Chartered, emphasising capital strength in a letter to staff. This boosted the lender’s share price, along with talk that UK Chancellor George Osborne would replace an annual bank levy with a corporate tax surcharge.
There were no major changes to the portfolio in June.
Artemis Investment Management – Adrian Frost & Adrian Gosden
UK & International Income
A justifiably difficult month for equity markets with the market fall being less discriminating than in previous setbacks, when defensives lived up to their name. The FTSE 100 bore the brunt of the fall with the smaller midcap areas remaining relatively unscathed. Bulls of this area can rightly point to higher growth but again higher valuation and markedly less yield are the counter arguments.
TUI Travel underperformed for obvious reasons whilst Syngenta gave back its gains in the face of a standoff in the Monsanto bid approach. Card Factory retreated from an over extended price level. Halfords performed well and is now breaking its highs last seen 5 years ago. This investment has not been without its setbacks but today it is fulfilling its original potential and patience is being rewarded.
We write at the time of the Greek ‘no’ vote where to date markets have been calmer than anticipated. Too much of a compromise from the EU will give encouragement to any anti-austerity lobbies across Europe with the risk that politics will hold sway over debt obligation.
Artisan – Dan O’Keefe & David Samra
Global Managed & Global Unit Trust
The largest contributors to performance this month were Royal Bank of Scotland (RBS) and Arch Capital Group. There were no material developments at RBS, but shares benefited from the 3% appreciation of the British pound versus the US dollar during the month. Arch benefited from an investor day in early June which showcased the positive cultural attributes of the company and the strength of the senior management team.
The largest detractors from performance this month were Oracle and Qualcomm. Oracle reported quarterly earnings on June 17th that disappointed the market, as the company’s EPS was below expectations. However, we believe the underlying franchise remains strong, and the earnings disappointment was the product of a business model transition towards the sale of “cloud services.” These sales generate recurring revenues and profits over time, which we believe is as attractive, if not more so, than the traditional model of selling a lump-sum, upfront license. Qualcomm shares suffered due to concerns that the merger between Avago and Broadcom, which was announced in late May, could create a more challenging competitive environment.
Our process remains unchanged. We continue to look for good businesses with good balance sheets, run by able managers and trading at a meaningful discount to long-term intrinsic value. Given currently elevated valuations, bargains are proving hard to find. However, our research efforts are ongoing and we are prepared to pounce on any opportunities that might arise when market conditions inevitably change.
AXA Framlington – George Luckraft
Diversified Income & Allshare Income Unit Trust
Markets were weak during June as concerns over Greece and the possibility of an interest rate rise in the US in September damaged sentiment. In addition data in China continued to disappoint.
The FTSE All Share saw its worst month in three years falling 5.8% in total returns. The portfolio held up relatively well outperforming by just over 2.5%. Performance was helped by rises in a number of smaller company shares such as Clarkson, Topps Tiles, NAHL Group and Hilton Foods Group. The biggest detractors to performance came from a lack of holdings in BT Group and Diageo which both showed strength during the month.
The saga over the future of Greece will continue to dominate market sentiment. If there is a Greek exit from the Euro there should be sufficient buffers and measures that can be taken to ensure that any contagion is limited. Events in China are more concerning and a hard landing would damage certain sectors of the global economy. Any such outcome would probably mean that any interest rate rises in either the UK or the US are further delayed.
Babson Capital – Zak Summerscale
International Corporate Bond
The global senior secured bond market came under pressure in June amidst a rise in government bond yields combined with heightened volatility in general risk assets. The early stages of June saw a series of solid U.S. economic releases, fuelling further speculation around the timing of a potential rate increase. Such talk soon dampened down as we moved towards the end of June, with the Federal Reserve in the U.S. releasing a dovish statement and the ongoing situation in Greece taking any immediate attention away from potential U.S. rate increase. The European market continued to be affected by the uncertainty around Greece, however credit fundamentals of the corporates issuing debt in the European market as a whole remain strong, with default rates staying low.
New issuance in U.S. and Europe was lower in June compared to prior months due to the higher government bond yields and the equity market volatility. Such market volatility resulted in several issuers having to reach for wider pricing than expected, resulting in more attractive economics for investors in an environment characterised by increased importance of credit selection. Furthermore in Europe, the influence of senior secured bonds continued in the primary issuance market, with 43% of the year to date issuance being senior secured.
Notable contributors to returns in June included names such as Unitymedia, a German cable operator; and Brighthouse, a UK retailer offering rent-to-own financial purchase agreements. Negative contributors over the month included names such as Murray Energy Corporation, the biggest privately owned coal mining company in the U.S; and C&S Enterprises, a U.S.-based provider of wholesale grocery distribution services.
The senior secured bond market remains in good health, and whilst the broader macro-economic headlines continue to dominate the near term outlook, this may further feed into attractive opportunities to take advantage of new credits by robust issuers coming into the market with more favourable economics due to the broader volatility within the markets. We continue to see some very attractive opportunities to further enhance the diversification within the International Corporate Bond Fund by selectively taking advantage of the primary market pipeline in conjunction with targeted secondary market opportunities, which we believe will continue to provide attractive risk-adjusted returns for investors in the fund.
BlackRock – Luke Chappell
UK & General Progressive
The surprise result of a Conservative majority in the UK General Election had an unusually large impact on certain sectors of the UK stock market, notably the reduced likelihood of property and utility taxes led to short term jump in these sectors. However, the travails of Greece lead to share price falls in June, whilst market expectations are for US interest rates to begin to increase later this year.
The fund underperformed in the quarter, bringing the return for the year back in line with that of the index. Holdings in stable, defensive ‘bond proxies’, such as Compass and Reed, underperformed as bond yields rose. The holding in EasyJet was the largest negative contributor as earnings were hit by capacity concerns and the impact of French strikes. BG rose strongly following the bid from Shell, whilst UK domestic names, such as Next and Sky reported strong earnings growth and rose in the wake of the UK election.
Eurozone economic activity is showing signs of improvement with sentiment tempered by uncertainty around Greece, whilst recent macroeconomic data from the UK and US continues to point to growth. We believe this environment is suited to our strategy of investing in concentrated but economically diversified portfolio of best ideas that aims to identify companies with structural growth, and those companies able to positively impact earnings through self-help.
BlackRock – Nigel Ridge
UK Absolute Return
Risk-off characterised the sentiment across most equity markets as bond markets aggressively sold off and Greece worries could no longer be ignored. Recent economic data has improved while wage growth and a waning impact from lower energy prices helped boost inflation expectations.
The Fund delivered +2.4% producing another quarter of strong performance. To put the extended run of successful stock-picking into context, a long-term (annualised) return of around 4% to 5% (ahead of Libor) would be a credible outcome for the lower risk equity strategy. Stock selection within financials and industrials contributed materially while the portfolio responded positively to the UK Election outcome. Gains from 3i Group were driven by asset disposals above expectations while kitchen supplier Howden Group rose despite a still challenging consumer backdrop. The banking pair proved profitable helped by Lloyds while the publishing pair modestly detracted with RELX (formerly Reed Elsevier) caught up in the ‘bond proxy’ sell-off despite results in-line with expectations.
A re-pricing of interest rate expectations has fuelled bond market volatility and this has subsequently impacted equity markets. Despite a generally improving economic climate, uncertainty is forcing investors to reassess how they value risk assets. The current financial backdrop could again become the norm rather than the exception which should be supportive of a strategy where stocks rather than the market determine performance.
First State – Jonathan Asante
Global Emerging Markets
At a stock level, Weg (Brazil: Industrials) rose as it has a broad product portfolio and is able to deliver growth in a difficult domestic environment, as well as internationally. LG Chemicals (South Korea: Materials) gained, benefiting from lower crude oil prices. Having a decent growth pipeline and a solid balance sheet is reassuring in volatile times. Housing Development Finance (India: Financials) outperformed as it continued to deliver solid results.
On the negative side, Tech Mahindra (India: Information Technology) was weak on poor results. The company is facing difficult times as some clients in the telecom and energy sectors are cutting back orders and expenditure. Unilever (UK: Consumer Staples) declined on concerns about competitive pressures and Axiata Group (Malaysia: Telecom Services) fell as management plan to alter the business model.
Invesco Perpetual – GTR team
Fund performance was negative during June. Our exposure to European and Asian equities proved a drag on performance as equities in general struggled to brush off the slew of negative headlines around Greece. As yields moved higher over the month, our selective emerging market debt idea also lost ground. On the plus side, our volatility idea pairing a long view on Australian dollar volatility with a short view on US dollar volatility was positive. Our currency idea preferring the Japanese yen to the Korean won also boosted performance following the Bank of Korea’s decision to cut interest rates. The US dollar strengthening versus the Canadian dollar was also useful for the fund. There were no new ideas added to the portfolio during the month and no ideas were closed. Markets are in transition and it appears that very few factors are driving the performance of a range of different asset types. The market is very focused on the potential for tightening policy in the US which is impacting fixed income markets, but concerns over the political landscape in Europe has also an impact on risk assets such as equities. We have recently re-evaluated the amount of risk in the portfolio and believed that it made sense to reduce credit and equity risk as it had started to drift up based on our risk model during this period. We continue to re-evaluate the portfolio and each idea on its own merit and we believe that each idea in the portfolio has earned its place and has the potential to deliver a positive return over our two- to three-year investment horizon.
J O Hambro – John Wood
UK & General Progressive
The portfolio’s outperformance over the first six months of the year in a rising market came despite a high cash balance, the ‘wrong’ asset mix (we are significantly underweight the small and mid-cap areas of the market which outperformed) and the ‘wrong’ beta. Two logical conclusions could be drawn from this apparent anomaly: either the fund manager is either a genius or there is something seriously wrong with the current state of financial markets. Unfortunately, it is far more likely to be the latter.
Our focus continues to be on identifying companies that can generate above-average returns over the long term through compounding growth. We aim to do this by buying and holding stakes in companies characterised by high quality franchises that generate plentiful free cash flow and which have solid balance sheets marked by low levels of debt. High return investments are scarce in today's low return environment, but we believe we can achieve attractive long-term returns through the patient process of holding stocks that regularly compound their growth over time.
Loomis Sayles – Kenneth Buntrock
Investment Grade Corporate Bond
UK corporate bonds have been relatively resilient given the rise in yields across global markets since mid-April. The UK IG market continues to perform better than other major IG markets as demand is strong given better yield proposition versus Euro IG. Our strategic bias is currently to use bond sell-offs to maintain a positive credit bias. After all, faster growth is a sign that central bank policies are finally working, and a stronger economy is typically favourable for corporate health.
The UK general election on May 7th was a key event. After consistent poll predictions of a very tight race and likelihood of a minority government, the incumbent Conservative Party led by David Cameron won a clear majority. This comforted markets, though investors are increasingly noting that the uncertainty is by no means over.
UK IG had a terrible June, with spreads widening by 18 bps, leading to significant underperformance versus gilts for the month and quarter. Year-to-date, spreads are only a few bps wider so excess returns remain positive. With solid spread tightening earlier in the year the UK IG market continues to perform the best among the major, developed IG markets in 2015. Energy, Technology, and Chemicals generically outperformed the broader market during the quarter with the large, defensive Integrated Energy players leading the pack. Subordinated Insurance, a high beta sector, and Communications were the primary underperformers.
The portfolio has benefited from names held in the Banking, Consumer Goods, and Energy industries. A modest allocation to high yield has been a source of positive returns as well.
Meanwhile, picks within the Media sector have been detrimental to results. The portfolio was overweight to Time Warner Cable and the GBP-pay bonds widened in April on the news of failed merger talks with Comcast. TWC did begin to reverse in May and some of this positive performance was viewed as a selling opportunity.
Majedie – James de Uphaugh
UK Growth & UK & General Progressive
Your portfolios outperformed the index in June, albeit falling -4.5%, versus -5.8% for the FTSE All-Share. European markets sold off, reflecting the uncertainty surrounding Greece’s perilous position in the single currency. Further afield, Chinese investors suffered a rude awakening as 30% was wiped from the value of their domestic market in short order.
The lead performer during the month was our much cherished UK Smaller Companies allocation to your portfolio. Being more domestically focused than their larger, more internationally exposed peers, smaller companies have benefited from the post-election rally: businesses exposed to the housing market (for example, Mortgage Advice Bureau) and those which would have suffered under a less business–friendly government (Staffline) did particularly well. Wm Morrison was also a contributor to performance, reflecting a shift in sentiment in the food retailers. RBS benefited from a general view that much of the bad news is now behind the UK Banking Sector, which has yet to be reflected in valuations.
In times of market volatility, investors tend to rush to areas of perceived safety (regardless of valuations), and so it was with Diageo, which saw its share price rise over the month; we do not hold the stock, so this dented performance somewhat. Two positions that we have been selling down after an extended re-rating - Marks and Spencer and BAE Systems – also performed poorly, which was a further detractor.
We continue to favour the UK Banking sector, as we mentioned last month, and we have also been reducing our underweight in the mining sector, where we feel, selectively, that valuations now offer an attractive risk reward ratio.
Majedie – Chris Read
The UK Income Fund return outperformed the FTSE All-Share index returning -4.6% in June, compared to a -5.8% index return.
During the month our holding in the online gaming company, Playtech, performed well over the quarter after a successful bid for its competitor +500. The combination of these companies will lead to significant economies of scale, as they will operate from a stronger single technology platform, at a minimum cost. Direct Line saw good results over the month, reporting an improved dividend alongside a more supportive outlook. In addition, their cost guidance was better than expected.
On the negative side, the Mining sector detracted from performance with positions in Rio Tinto, BHP Billiton and Vedanta Resources disappointing over the quarter. Approximately 10% of the portfolio is in the Mining sector and with a yield of 5-6% from our holdings. We feel we are being paid to wait whilst the operational improvement comes through, so we have retained the positions in these stocks.
Manulife – Paul Boyne & Doug McGraw
Global Equity Income
Following the announcement of Greece’s referendum, key equity, credit and interest rate benchmarks posted negative returns. There was also a sharp sell-off in Chinese equities during the period.
Underweight positions in the utilities and information technology sectors contributed to performance. Individual contributors to performance included Baxter International Inc., Deutsche Börse AG and Nippon Telegraph and Telephone Corporation. Baxter International announced a spin-off of its bioscience division. Deutsche Börse’s announced a joint venture with two Chinese exchanges. Nippon Telegraph and Telephone acquired a majority stake in a German data-center operator.
Stock selection within the industrials and consumer discretionary sectors detracted from performance. Individual detractors from performance included The Bridgestone Corporation, QUALCOMM, Inc. and Koninklijke Philips N.V. (“Royal Philips”). Bridgestone’s share price declined as investors sold Japanese equities following a strong run. QUALCOMM struggled with increased competition and mergers in the chip sector. Royal Philips’s share price continued to decline following a weak first-quarter earnings report.
We believe U.S. equities appear expensive, but that opportunities exist to invest in European companies with international operations and favourable equity valuations, especially if the euro weakens. In Japan, we continue to focus on leading companies with strong management teams and cash flows.
Orchard Street – Chris Bartram
Property Unit Trust
The portfolio valuation as at 30th June 2015 was up 1.0% month on month.
Following the successful completion of the additional four units at Westhill Shopping Centre in Aberdeen we have exchanged contracts on lettings for three units with the fourth under offer. The additional tenant line up, to include Home Bargains and Costa, will improve the scheme’s overall offering.
In addition, we completed a number of new leases namely;
- 5 year lease at J4 Industrial Estate in Camberley at ERV
- 3 year lease renewal ahead of ERV at Unit 4, Chelmsford Industrial Estate
- 10 year lease at Unit 678 at Viridian Park Industrial Estate
- 3 year lease at Unit D17 at J31 Industrial Estate in West Thurrock
All of the above have secured additional income for the fund and reduced the void rate. The portfolio vacancy rate is 5.2% compared with 8.4% for IPD and the initial yield on the portfolio is 4.8% which compares with 5.2% for IPD.
Property Life and Pension funds
The portfolio valuation as at 30th June 2015 was up 0.5% month on month.
We have completed the acquisition of the Templeback office building in Bristol for £58.6m. The prime riverside property is well located between Temple Meads station and the main retail pitch of Cabot Circus and comprises 123,000 sq ft arranged over ground and five upper floors let to NFU Mutual and Mott MacDonald.
After three rounds of bidding we have completed the sale of Cotes Industrial Park in Alfreton for £6.75m ahead of the pre market valuation of £6.15m.
We have completed the 5th floor letting at Old Jewry in the City. The new 10 year lease has a rental income ahead of ERV and leaves one floor remaining which is currently under offer. The recently refurbished building has attracted strong tenant interest and should be fully let within the next month or two.
The portfolio vacancy rate is 8.5% compared with 8.4% for IPD and the initial yield on the portfolio is 4.7% which compares with 5.2% for IPD as at 30th June 2015.
SW Mitchell Capital – Stuart Mitchell
Continental European, Greater European & Greater European Progressive Unit Trust
We remain very positive on the outlook for the investments that we have made within the fund.
We have spent a very busy June visiting most of our existing holdings and many other possible new investments as well. Highlights include a number of very comforting meetings with BNP, Banca Intesa and Lloyds where business continues to progress even better than we might have expected. We also had an encouraging discussion with Banco Popular who appear to be more confident about their ability to sell off non-core property assets than previously thought. This was supported by conversations with a number of Madrid based private equity investors who are keen to invest in the sector. We were also impressed by Airbus’s announcement of an order of up to 75 A330 neos from China. Closer to home, meetings with a number of the British housebuilders attested to vigorous recovery within the industry.
We continue to believe that most analysts have failed to appreciate the intensity of the recovery which, as earnings growth becomes increasingly ‘visible’ throughout the year, should lead to significantly higher share prices. At the same time, the Eurozone moves ever closer to normalisation. Many investors have struggled to accept how deeply companies and governments have restructured at the periphery of Europe. Just look, for example, at the 40% reduction in costs that IAG achieved at Iberia. At the same time, German wage growth is beginning to accelerate quite quickly. The recent 3.4% pay award struck by employers and the highly influential IG Metall trade union is the highest since 2007. In fact, a significant proportion of peripheral Europe’s productivity gap with Germany has now been eliminated over the past few years. Closer to the core, furthermore, Matteo Renzi and Francois Hollande are beginning to make real progress with reform. We were very encouraged by a number of meetings with Italian savings banks who spoke of imminent consolidation within the sector. We are also hopeful that the recent election of Syriza in Greece will ultimately lead to a sensible restructuring of the country’s debts. The market, however, remains compellingly valued with shares pricing in an unusually bearish decline in returns on capital into perpetuity. Even more strikingly, the more domestically orientated companies are trading at, in many cases, a 50% discount to their counterparts in the US. We continue to find the best opportunities in the more domestically orientated areas of the market.
Companies from the periphery of Europe make-up 28% of our investments. On a recovery basis, for example, the Italian media group Mediaset represents great value. The same holds true for our holdings in Sacyr and Banco Popular.
Banks constitute 19% of the fund. We still believe that the market has failed to appreciate the benefits of a rapid recovery in financial margins coupled with draconian cost cutting and easing regulatory pressures. We have focused on the strongest retail banking franchises such as BNP and Intesa where we believe that returns should rather rapidly return to pre-crisis levels.
Telecom companies represent 15% of the fund including investments in the telecom groups Orange, Deutsche Telekom and Telecom Italia.
Our favourite growth companies, such as Amadeus and Eurofins make up the remainder of the portfolio.
Wasatch Advisors – Ajay Krishnan
Emerging Market Equity
A new addition to the portfolio in June was also one of the best performers. Bajaj Finance Limited is the lending arm of the Bajaj Group—a well-regarded Indian industrial house founded in 1926. Bajaj Finance is a non-bank financial company (NBFC) offering a broad spectrum of lending services, including vehicle loans, mortgage loans, consumer loans and commercial loans. Because it isn’t tied to any single segment of the economy, the company is well-positioned in our view to benefit from India’s continued development and modernization. Bajaj Finance’s management team ranks among the most impressive we’ve met in recent memory.
The quality of a company’s management is critical to our assessment of its potential to succeed. At a recent investment conference, we met again with the management teams for Qualicorp S.A. and WEG S.A. of Brazil, International Container Terminal Services, Inc. of the Philippines and a number of others. Several weeks later, we travelled to Mexico to visit Promotora y Operadora de Infraestructura S.A. (PINFRA), Gentera, S.A.B. de C.V. and additional Mexican companies that we own or that we’re considering for investment. Company visits allow us to appraise the essence of a company and its management team in the context of its own surroundings.
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.
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