Fund Manager Monthly Report - February 2015
View the latest portfolio and market commentaries from our range of fund managers.
Aberdeen Asset Management (Asia) - Hugh Young
For the month to end-February, the fund inched higher by 0.47% in sterling terms, underperforming the benchmark FTSE World - Asia Pacific index's rise of 1.78%. Negative asset allocation outweighed positive stock selection.
Accommodative monetary policy, made possible by still-weak energy and commodity prices, continued to support Asian equities in February. In corporate news, Standard Chartered announced a sweeping overhaul at the top. Bill Winters will replace Peter Sands as CEO in June. Group executive director Jaspal Bindra will step down this year and Chairman John Peace will follow suit in 2016. New independent directors will also be brought on board. We believe these changes should strengthen the bank and position it well for an emerging markets recovery.
On the earnings front, most of our holdings reported results that met or exceeded expectations. These included AIA, Public Bank, Singapore Telecom and Ayala Land. However, quarterly results for the three Singapore banks OCBC Bank, United Overseas Bank and DBS Bank missed expectations slightly, with growth slowing in tandem with higher provisions. Nevertheless, asset quality remained resilient, with limited exposure to the energy and commodities segment.
Elsewhere, HSBC’s profits were hurt by lower margins and fee income as well as fines for infractions under the previous management’s watch. While the bank still has some house-keeping to complete, we remain confident of its valuable global franchise and management.
In Australia, QBE Insurance’s second-half results signalled a clearer turnaround in its business, with management delivering on its strategy to reduce earnings volatility and improve capital positions. Rio Tinto and BHP Billiton reported resilient results despite a challenging pricing environment. With solid free cash flow generation, Rio Tinto announced a higher-than-expected share buyback and a 12% increase in full-year dividend. BHP Billiton also maintained a progressive dividend policy.
In February, we topped up CSL following a knee-jerk share price correction on the back of recent results. The blood plasma maker’s position in non-discretionary medicines and superior collection and manufacturing process should help it withstand competitive pressures in the near term. Prospects over the longer term also look favourable and the company should continue to deliver robust returns.
Artemis Investment Management – Adrian Frost & Adrian Gosden
UK & International Income
A strong performance from equities once again egged on by the absence of alternatives, specifically low or negative bond yields. Tentative signs of recovery in Europe and the avoidance of a Greek tragedy were encouraging. Some may say that investors are taking a ‘sunny side up’ view of the world!
However, worthy of note is that UK and US 10 year bond yields have quietly moved off their lows. This is relevant as there are many who are encouraging of yielding equities by virtue of the increasing incidence of very low or negative bond yields. This re-rating of equity yield may indeed come about but we should not forget that the more “bond like” equities become, then the more vulnerable they are to the fortunes of bonds.
Transaction wise, we re-built our GlaxoSmithKline position at the expense of Sanofi and added to BT, Tate & Lyle and Energas. We sold our remaining holding in Glencore.
Artisan – Dan O’Keefe & David Samra
Global Managed & Global Unit Trust
The MSCI All Country World Index rose 5.6% during February, with strong performance across most global equity markets (all returns local). The best performing major market was Japan, which rose 7.9% during the month. European markets rose 6.1%, the US was up 5.8%, Asia-Pacific increased 6.6% and emerging markets rose 3.3%. Unlike prior months, currency was not a major factor in overall performance.
Correlation was high, with nearly every stock in the portfolio contributing positively to performance during the month, and over 60% of the stocks rising more than 5%.
Among the largest contributors to performance were Qualcomm, ING Groep and Citigroup. Qualcomm rose 16% during the month after announcing a resolution to an anti-trust investigation in China, which had been hindering its ability to collect royalties from Chinese smartphone manufacturers. ING Groep shares increased 21% after announcing a reinstatement of its dividend. There was no meaningful news that drove the 12% rise in Citigroup’s share price.
A large detractor from performance was TNT Express, which declined 6% after reporting weak quarterly earnings, and unveiling its long-awaited turnaround plan, which will require significantly higher levels of restructuring costs and catch-up investments than previously anticipated.
There were no meaningful purchases or sales of securities during the month. Our cash positions remain elevated, and we continue to be cautious about valuations.
AXA Framlington – George Luckraft
Diversified Income & Allshare Income Unit Trust
Equity markets continued to rise as the imminent onset of further Quantitative Easing (QE) in Europe combined with better jobs data in the US helped sentiment. In particular liquid equity stocks with bond like characteristics continued to perform. In addition a stabilisation of commodity prices helped the performance of large cap commodity stocks where the fund is underweight. The nature of the performance of smaller cap shares is normally driven by company specific news and February is a month of limited company news in advance of the annual reporting cycle. Accordingly many of the smaller company holdings were broadly unchanged leading to an underperformance of the portfolio. Some of the holdings which did report such as Greencore, Senior Engineering and Pendragon saw good share price rises.
During the month a new holding was acquired in Aviva and the holding of Wolesley was sold. Some of the profits were taken in GKN and Cineworld. The stronger data in the US and the onset of more QE in Europe is causing a large move in their respective currencies with Sterling being caught in the middle. The run up to the General Election will also cause volatility. The portfolio is overweight lowly rated stocks with premium yields which should provide a defensive characteristic with good potential for good medium term returns.
Babson Capital – Zak Summerscale
International Corporate Bond
High yields bonds performed well in February, reflected in the attractive returns generated by the SJP International Corporate Bond Fund for the month. Markets reacted positively to an aid extension in Greece, a ceasefire in Ukraine, the patient approach by the U.S. Federal Reserve bank on monetary policy and some stabilisation in oil prices. This stabilisation saw Energy sector names bounce back from recent lows, with the sector being a significant contributor to the U.S. market performance after the volatility it previously experienced. The positive tone was further helped in European markets by the announcement of Quantitative Easing from the European Central Bank. Lastly, low bond yields and high stock prices combined with a very firm demand for high yield assets to help close out the month in a buoyant mood.
The improved market sentiment has led to a more active primary market with the year-to-date volume ahead of last year’s both for U.S. (currently in excess of $50bn issued) and European (currently in excess of €23bn issued) high yield bond issuance. New issues continued to witness a substantial amount of buyer demand, evidenced by primary deals being oversubscribed. The top contributors in the portfolio for February included Citgo, a Texas-based refiner and marketer of transportation fuels, lubricants, petrochemicals and other industrial products, and KCA Deutag, an international oil and gas services company based in the UK. Negative contributors during February included BrightHouse, a UK-based rent-to-own company, and Equiniti, a leading UK-based business service process provider focusing on administration, processing and payment services.
The U.S. high yield market outperformed Europe in February, driven by recoveries in U.S. Energy names. With Quantitative Easing in Europe and corporate balance sheets remaining in good health, we would expect demand for the senior secured high yield asset class to continue to remain strong in the current environment. As such, the International Corporate Bond Fund continues to take advantage of primary market activity as well as selective secondary opportunities, ensuring a diversified portfolio of robust companies with attractive yield profiles.
BlackRock – Luke Chappell
UK & General Progressive
UK equities rose during the first quarter as the European Central Bank’s programme of quantitative easing (QE) improved investor confidence coupled with positive economic surprise in European economic indicators. In the US, data continue to show reassuring economic growth, although there are some signs that growth is moderating. Divergence in central bank policy has impacted currencies with dollar strength and euro weakness. Lower oil prices have led to capital spending plans within the oil sector being revised lower, whilst evidence of a boost to consumer spending has been mixed.
The fund began 2015 with positive relative performance driven by holdings in Shire, which delivered strong revenue growth and beat market profit expectations and Wolseley, given its significant exposure to the stronger US economy and currency. Global catering group Compass was also a beneficiary of US economic strength and reported a positive trading update signalling acceleration in organic revenue growth. Sky rose despite paying significantly more than expected to secure the majority of the 2016-2019 English Premier League broadcast rights, whilst the fund’s underweight exposure to the oil and gas sector helped relative performance, given the continued weakness in the oil price.
The main detractor to fund performance was Johnson Matthey, which fell following concerns around the impact of lower oil prices on its process technologies business, where the low oil prices may reduce demand for industrial catalysts by the oil & gas industry. Miner Rio Tinto announced strong results, a share repurchase worth $2bn and increased its dividend, but underperformed as a result of the continued fall in iron ore prices, which have yet to stabilise.
US economic activity remains strong, in contrast to Europe where activity remains subdued. The announcement of QE in Europe has improved investor sentiment, but evidence of its real economic impact is not yet visible and we see a divergence of monetary policy between Europe and the US in 2015. In addition to the timing of interest rate increases in the US and UK, the uncertainty surrounding the number of potential outcomes of the General Election may provide a further source of volatility for UK equities.
Inflation expectations are expected to remain modest aided by a lower oil price, whilst economic growth in the US, UK and Asia and the potential for recovery in Europe, is a positive backdrop for corporate earnings and equity valuations.
In this environment we continue to focus more on the specific drivers of individual companies and the ability to determine their future rather than relying on a specific macro outcome.
BlackRock – Nigel Ridge
UK Absolute Return
The Fund added +0.7% (gross) in February. Positive sentiment characterising the bullish start to the year continued into February taking a number of equity markets to all-time highs. The low inflation environment provided more room for central banks to support growth with a number of rate cuts being seen. Notably in Europe, improving economic data (albeit from low levels) was seen with manufacturing, services and composite PMIs all pointing to expansion. Bond markets continue to point to a period of deflation but so far this year equity investors have reacted positively to the combination of the oil price fall, low rates and activity levels rising in most developed countries.
Gains and losses over the month were split between the long book and short book. Our higher conviction net long positioning among financials was the biggest sector contributor. Industrials made the next largest positive contribution while consumer services, hampered by the short side, was the largest detracting sector. Of the naked positions, Essentra was the top performer again in February building on January’s gains. We continue to have confidence that management will be able to progress their revenue growth strategy. Shares rose in Hargreaves Lansdown reversing the trend seen in recent times. We see a long duration structural growth story as the company strengthens its market position. Private Equity firm 3i Group was the next top performer as the company followed up the recent strong earnings growth with news of its latest investment. As for naked positions that detracted, a short position in a UK food retailer hurt as shares saw positive support from growing belief that management can turnaround the decline in revenues. We remain sceptical and see further cause for concern from structural shifts continuing to force supermarkets to respond. Following this was our long position in HSBC where regulatory scrutiny contributed to share price weakness. The new era of banking poses challenges yet the absolute return investment case has support. Elsewhere, a short position in a developed market consumer goods business was a weak performer. In a tough environment, we have concerns that the ability to respond through price to falling volumes poses earnings risk. Within the pair book, the banking positions added the most alpha while outsourcing was the weakest performing strategy.
Gross exposure was maintained at around 132% with overall portfolio activity resulting in a small reduction in the net exposure. The Fund performed better in the second half of the month and we continue to think the stock specific cyclical positioning held is well placed to benefit from a greater focus on company performance. Valuations for the more defensive parts of the market that are being deemed lower risk, have become stretched relative to their historical levels. This is more a function of the search for income in a low growth world and not necessarily a result of improving fundamentals as revenue and earnings progression remains soft. With the substantial re-rating of earnings seen in this area, attractive alpha opportunities may arise in companies where expectations prove to be too high.
First State – Jonathan Asante
Global Emerging Markets
In emerging markets we often find strategic industries, like telecoms, are controlled by governments whose interests are not always aligned with our own. One company, however, where we were comfortable that we were sufficiently aligned was China Telecom, as the future of China depends on a reliable and advanced communications network. We believed that we as shareholders would get to participate in this development and we have done so in terms of a rising share price.
However, we took the decision this month to sell our holding in China Telecom as dividends in the company are not growing in line with cash flows. We worried that as the company matured and generated more cash, instead of being returned to shareholders, it would be spent on other investments. For example, one of China Telecom’s peers recently invested in a bank, demonstrating that as companies become bigger they can become more risky.
At a stock level, Housing Development Finance (India: Financials) rose as investors believed it was well positioned to capitalise from India’s economic recovery and Coca-Cola Hellenic (UK: Consumer Staples) performed well as results showed that the company is weathering the tough operating environment. LG Chemicals (South Korea: Materials) climbed as low oil prices are likely to be a positive for input costs.
On the negative side, Tiger Brands (South Africa: Consumer Staples) declined as the operating environment remained difficult and Natura Cosmeticos (Brazil: Consumer Staples) was weak as Brazil is a difficult market at the moment and the company’s business model transition is impacting results. Shoprite (South Africa: Consumer Services) underperformed as recent results were unexciting.
Invesco Perpetual – Paul Read & Paul Causer
February saw bond yields bounce back from the lows reached in January. The main catalyst for this volte-face was much stronger than expected employment data in the US, which caused core government bonds and in turn corporate bonds to come under pressure. In Europe there were significant discussions about Greece’s attempt to renegotiate its debt with its Eurozone creditors. A deal was finally reached late in the month. Whilst this was undoubtedly a very significant political story its market impact has so far been limited. The agreement did however remove a significant potential source of future volatility. Underlining this point Greece’s finance minister announced that Greek banks had received €700m of inflows the day the deal was signed reversing the recent outflow of deposits. Supply in European High yield was active with Barclays estimating €11.2bn issued. Data from Merrill Lynch showed the European Currency High Yield bond market returning 2.0% with BB bonds returning 1.6% and CCC and below 3.2%. European investment grade corporates returned 0.7%. (All in Sterling hedged returns).
In terms of positioning we are defensive, our exposure is skewed toward higher quality well established high yield names, predominately rated BB. Many of our holdings are in the financial sector, where we think we are able to obtain the type of defensive qualities we are after while still achieving a reasonable level of yield. The fund also has a sizable allocation to liquid assets, including cash. This positions the fund to react quickly as market opportunities arise.
In a busier month of trading, we bought new positions in Svenska Handelsbank 5.25% 29/12/49 (Financial), Jaguar 3.875% 01/03/23 (Consumer goods), JBS 7.75% 28/10/20 (Food) and JBS 7.25% 03/04/2004 (Food). We sold part of our positions in both J Sainsbury 1.25% 21/11/19 (Food) and EDF 5.875% 22/07/49 (Utilities).
Invesco Perpetual – GTR team
In February, there was a reversal of some of the ideas that had worked very well in January, as changing expectations for the inflation outlook caused markets to re-price indiscriminately. This had an impact on a number of our interest rates ideas and also saw the US dollar give back some of its gains versus the euro. The short UK inflation idea turned negative as markets perceived a bottoming out of the oil price. Our selective Asian equity exposure also proved negative. However, these negatives were at least partially mitigated by our UK and Global equity ideas and the positive performance of our European Curve Flattener credit idea as investors were encouraged to take more risk.
J O Hambro – John Wood
UK & General Progressive
Our approach to fund management is highly unfashionable. The cool kids are riding the liquidity wave with their flashy surfboards, oblivious to the dangerous currents beneath. Meanwhile, we're standing on the edge of the shore, trousers rolled up to our ankles, muttering about the dangers because we have an aversion to drowning. We are being mocked for our caution, but we would rather be around for the long term than look like the coolest kid at the beach for one holiday season.
Quantitative easing will shortly be under away in the eurozone as Mario Draghi seeks to kick-start a sclerotic eurozone economy that is slipping into deflation. There is little evidence from the United States and the United Kingdom that QE actually does anything at all for the real world economy other than pump up the price of financial assets to ever higher levels – we have seen stock market indices hit record highs in recent weeks, helped to a great extent by the news of European QE and the latest game of kick-the-can-down-the-road with Greece. But this liquidity rally, counted in years rather than months now, can still go on a lot longer. Occasionally, it seems a dose of sanity returns to the market – who would have thought AO World wasn't going to sell every single fridge freezer and washing machine in Europe in 2014? But when you appreciate that this stock still trades on 46 times earnings post its recent profit warning (for something which is essentially a modern version of the Argos catalogue), you are reminded that valuations in the stock market remain merely on distant cousin terms with fundamentals. It's not cool, but we still think absolute valuations matter. And we'll probably be standing on the shore line with our rolled-up trousers looking uncool for some time yet.
Loomis Sayles – Kenneth Buntrock
Investment Grade Corporate Bond
Economic activity remains sound; growth could be somewhat above potential in 2015.The rate-hike cycle due to start this year has been priced out by many. Inflation has fallen well under the BoE's targeted 2% given oil prices. Our house expectation is for one hike (from current 0.50% policy rate to 0.75%) in the next twelve months. Monetary conditions are set to remain loose, until inflation and wage growth take hold. Housing cooled during the second half of 2014 and is not currently an outsized risk to the economy. We are mindful of risks and volatility around the May 7th elections. Although, we expect the BoE to begin raising rates in the next 12 months, we are not looking for dramatic rate increases and should remain a rate friendly environment for corporations. Desynchronized recoveries among major economies should cause the global economic recovery to be more drawn out, and keep inflation low.
After posting strong returns in January 2015, UK Corporate bonds reversed course in February. However, both investment grade and high yield issues outperformed UK Gilts on a duration-matched basis as the yield curve faced upward pressure and yields reverted close to where we started the year on lower demand for safety and improving inflation expectations. We have a favourable outlook towards spreads. In fact, the recent spread widening has largely been a buying opportunity, in areas where credit fundamentals are supportive. There are risks to this view due to changes in US Federal Reserve and Bank of England hiking plans, oil price volatility (especially to low side), EU concerns, and decelerating revenue and margin growth.
An overweight allocation to Corporate bonds added value as the segment outpaced quasi-government issues. The underweight exposure to the financial sector detracted in terms of relative performance as the industry has been relatively resilient in 2015. Selections among banking names contributed to perform well, as did those from Services and Media. Perpetual bond spreads tightened throughout the month, which had a material impact on relative results.
The UK Gilts curve saw yields across the belly to the long end of the curve. While we maintain a neutral to benchmark duration, there was modest underperformance from slight mismatches in select key rate buckets in the longer end.
Magellan – Hamish Douglass
During the month, we reduced and exited the positions in Novartis, DirecTV and US Bancorp following recent strong performance and added new positions in Woolworths and Qualcomm.
There were no material differences arising from trading during the month.
On 28 February 2015, the portfolio held investments in 26 companies, with the top-ten investments representing 50.24% of the portfolio’s total assets. The portfolio held 12.50% of its assets in cash at the end of the month.
The portfolio is currently positioned to take advantage of the following major ongoing investment themes:
- Technology/software: We believe that entrenched global software companies enjoy enormous competitive advantages and exhibit attractive investment characteristics.
- Internet/e-commerce convergence: There are a number of internet enabled businesses that have very attractive investment characteristics with increasing competitive advantages.
- The move to a cashless society: There continues to be a strong secular shift from spending via cash and cheque to cashless forms of payments, such a credit cards, debit cards, electronic funds transfer and mobile payments.
- US interest rates normalising: As the US economy recovers, the Federal Reserve will increase the federal deposit rate and begin to reduce the size of its balance sheet.
- US housing recovery: A recovery in new housing construction should drive a strong cyclical recovery in companies exposed to US housing and also provide a strong boost to the overall economy.
- Emerging market consumption growth: Through investments in multinational consumer franchises.
During the month, the portfolio returned +3.42% in sterling terms, before fees, this compares with a benchmark return of +2.88 %, giving relative performance of +0.54%.
In sterling terms, the largest contributors to performance were Yum! Brands (+0.40%), eBay (+0.38%) and Microsoft (+0.36%). The largest detractors from performance were Wal-Mart (-0.09%), Unilever (-0.07%) and Woolworths (-0.03%).
In sector terms, Information technology (+1.55%), Consumer Discretionary (+0.81%) and Financials (+0.48%), Consumer Staples (+0.14%) and Health Care (+0.08%) all made positive contributions.
Geographically speaking, the United States (+2.34%), the United Kingdom (+0.54%), Germany (+0.22%) and France (+0.11%) made positive contributions, while Switzerland (-0.03%), Australia (-0.03%) and the Netherlands (-0.07%) detracted.
Majedie – James de Uphaugh
UK Growth & UK & General Progressive
Your portfolio produced a positive return of 3.1% in February, slightly underperforming the FTSE All-Share index rise of 3.7%.
Markets continued to test their historic highs during February, with the momentum of positive economic data being recorded in Europe being particularly noteworthy. The longer negotiations between Greece and the Troika of the ECB, IMF and EC continue, the greater the likelihood that a deal will be struck over debt refinancing, at which time one question mark over the Eurozone will be erased. Either way, there is no doubting that the lower oil price and the ECB’s desire to broaden the money supply through QE is leading to an increase in economic activity in the region.
Mining shares performed well during February after a period of weak performance. The most likely catalyst was Chinese Central Bank easing, and specifically for BHP Billiton, which has significant exposure to oil production, the bounce in the oil price would have been well received. We continue to avoid this sector, so the absence from your portfolios of the likes of BHP, Rio Tinto and Glencore held back performance. The other obvious detractor was our Vodafone position which, having risen 30% between October and January, paused for breath and endured a sluggish month, hampered by consensus concerns for the strategic path it is taking. As a mobile operator, it needs to add to its offering in order to compete in a converging world; this requires significant capital expenditure. However, we continue to favour it as the best UK listed exposure to the consolidating European telecommunications market.
On a positive front, the Food Retail companies that we hold on your behalf, Tesco and WM Morrison, continued on their recovery paths: both announced senior hirings which were well received. The market recognised another stock, Rentokil, which has undergone significant restructuring over the last twelve months; with 50% of its business exposed to the European consumer recovery, we are strong supporters and indeed we had an excellent meeting with their management in our offices last month.
In terms of portfolio activity, we have continued to add to our UK banking exposure, where stronger businesses, on attractive valuations, are emerging from a period of introspection. HSBC is a position we have been building, a stock we have eschewed in recent years due to its emerging market exposure. The regulator has forced many of HSBC’s competitors to retrench to their core or traditional businesses, leaving the bank as one of the few genuinely global players, and now trading on an attractive valuation.
Your portfolios continue to see evidence of a consumer-led recovery in Europe, and are positioned accordingly, with an eye on the potential for a sell-off in US equities and a continuing slowdown in China.
Majedie – Chris Read
Your portfolio produced a positive return of 4.7% in February, outperforming the FTSE All-Share index rise of 3.7%.
The largest driver of a strong performance during the month was our holding in Vedanta, a relatively new position in the portfolio, which bounced after a sharp sell-off last month. We hold Vedanta because of the potential operational improvements we see in the business, but it is sensitive to the fluctuations of commodity prices. PostNL, the Dutch post office, posted strong Q4 results, providing further evidence of their cost savings programme and impressive volume growth. This is a company that we have held on your behalf for a while, and is showing pleasing signs of a successful restructuring programme. Not holding either HSBC - which announced poor Q4 results, and Vodafone, which paused for breath after a strong performance over the previous quarter – also drove relative returns.
Inevitably, given our investment process is one of seeking out companies on an improvement and/or restructuring path, the road to recovery inevitably has speed bumps. One such stock was Tate & Lyle, which announced that the reorganisation of its logistics was taking longer than anticipated; the fact that this was due to an increase demand for its products gave us confidence in the investment case. The two other main detractors – EasyJet and Royal Caribbean Cruises – were companies that have benefited from the low oil price, so a bounce in crude oil during February affected sentiment towards them. We feel that a low oil price will be a feature for a good while yet.
This is a stock picking portfolio, where the focus is on companies undergoing a cycle of improvement, and paying a healthy dividend to their investors while this plays out; various stocks in the General Financials sector fit into this theme at present.
Manulife – Paul Boyne & Doug McGraw
Global Equity Income
Stock selection within the energy and information technology sectors contributed to performance. Individual contributors included Eaton Corporation PLC, Japan Tobacco Inc. and QUALCOMM Incorporated. Eaton benefited from strong earnings, while QUALCOMM announced a settlement with Chinese regulators. Japan Tobacco's shares rose following the acquisition of select patents and trademarks.
Stock selection within the consumer discretionary and health care sectors detracted from performance. Individual detractors included Bridgestone Corporation, Baxter International Inc. and Macy’s, Inc. Bridgestone's shares fell on profit taking as oil prices rose, and Baxter posted disappointing earnings.
Oldfield Partners – Richard Oldfield
In generally strong markets, Renault (+26% in local currency terms), MUFG (+23%), Lukoil (+23%), Kyocera (+16%), and ArcelorMittal (+15%) were the strongest performers. The share price of Renault is up more than two and a half times since the dark days of 2011 when the Eurozone seemed in danger of collapse and the European economy was crumbling. Rightly or wrongly the threat of Grexit is being taken more calmly by markets this time round, and while the European economy remains insipid things have clearly improved. In 2011 the share price of Renault was €27. The value of the company’s stakes in Nissan and Volvo was more than €50, so that the core Renault operation had an implied value of more than minus €23 a share, a ridiculous anomaly reflecting fear. The fear has dissipated, both about the broad economic environment and about Renault’s own business. With Dacia, and Logan especially, they have made strong progress. The core operations are producing free cash flow, a rarity among European mass car manufacturers, and the balance sheet is strong. Russia, recently a strongly profitable area for Renault has been a worry, but success elsewhere has more than compensated. We are close, now, to our target valuation.
Kyocera, the most recent purchase in the portfolio made during the fourth quarter last year, is typical of many Japanese companies in that there is, we believe, a large gap between price and value. The problem frequently in Japan has been that managements were unlikely to do anything to realise the value. This gradually is changing, evident in the huge increase in share buybacks in Japan last year which had the effect of increasing return on equity and reducing the inefficiency of Japanese balance sheets, stuffed with cash. Kyocera has cash and securities worth nearly three quarters of its market capitalisation. The core operations of the company - ceramics for every purpose from kitchen knives to mobile telephone components – are strong, with high market shares in most businesses and decent profitability. Although the management talks of enhancing shareholder value and has made some steps with the buyback of shares, there is a long way to go. The gap between price and value is sufficiently wide to allow us to be patient.
The poorest performers in the portfolio were Japan Airlines (-8%), Hewlett-Packard (-4%) and Staples (-2%). All of these were among the strongest performers in the last twelve months or so. Japan Airlines has benefitted from the fall in the oil price and some of this benefit has reversed with the recent oil price recovery. Hewlett-Packard announced that the cost of the forthcoming separation of its businesses between two quoted companies would be higher than expected. With Staples, there will be a hiatus while we await the decision of the Federal Trade Commission on the proposed take-over by Staples of Office Depot.
Orchard Street – Chris Bartram
Property Unit Trust
The portfolio valuation as at 28th February 2015 was up 0.2% month on month.
At J31 Park, West Thurrock we have completed a new 5 year lease ahead of ERV. The previously vacant 6,800 sq. ft. of space was in line for refurbishment, however, due to the asset’s location and the strength of tenant demand a letting was completed quickly without incurring any capital expenditure.
The portfolio vacancy rate is 3.8% compared with 8.5% for IPD and the initial yield on the portfolio is 5.3% which compares with 5.4% for IPD.
Property Life and Pension funds
The portfolio valuation as at 28th February 2015 was up 0.02% month on month.
Asset management activity continues with a large number of letting deals awaiting completion, however, there are no completed transactions to report this month.
The portfolio vacancy rate is 9.4% compared with 8.5% for IPD and the initial yield on the portfolio is 5.1% which compares with 5.4% for IPD as at 28th February 2015.
SW Mitchell Capital – Stuart Mitchell
Continental European, Greater European & Greater European Progressive Unit Trust
We purchased a significant new position in Airbus whose sales currently split 67% Civil Aircraft, 22% Defence and Space and 11% Helicopters. We first became interested in the group in 2012 when new management dramatically changed the corporate governance of Airbus by dissolving the government-led shareholder pact and creating a more typical corporate governance scheme. At the same time the company bought back 15% of the shares and increased the free float from 49% to over 70% today.
We believe that Airbus should be able to significantly narrow the profitability gap between themselves (6.6% operating margin) and Boeing (10.9% operating margin). The Defence and Space business is being dramatically restructured (‘a bit like open heart surgery’). At the same time the Helicopter product range has been refreshed and the shares in Dassault progressively divested. More importantly, the earnings of the group have been depressed by development costs in the A350 and A330 NEO. The recent weakness in the euro relative to the dollar will also drive profitability sharply higher.
The share could be trading on 6 times 2020 earnings with 30% of the current market cap paid out in dividends.
Our company meetings over the past month confirm a significant acceleration in the recovery. Most notably, Intesa San Paolo talked of a healthy rebound in lending over the past few months. The bank also confidently increased the 2014 dividend by 40%. Mediaset echoed Intesa’s views referring to a sharp pick-up in Italian advertising revenues since the end of last year. Even the reputedly moribund French economy is displaying signs of life with residential building permits at the highest level for several years. Nearer to home, the British house builders continue to experience buoyant demand.
The recovery should receive an extra boost from the recent weakness in the euro and the precipitous fall in the oil price. The TLTRO also seems to helping reduce funding costs for companies at the periphery of Europe.
At the same time, the Eurozone moves closer to normalisation with the recent Greek election bringing forward the likelihood of a sensible solution to the country’s debt crisis. Less covered, but equally important, is the recent 3.4% pay award struck by employers and the highly influential IG Metall trade union in Germany. This is the highest pay deal struck since 2007 and is set against a background of falling prices in January. Crucially, this should boost the region’s largest economy and aid the recovery in the other weaker Eurozone economies. Recent surveys, furthermore, suggest that German consumer confidence is at the highest level since 2006. Matteo Renzi and Francois Hollande also appear to be making progress with much needed reforms. In Italy, reform of the labour market and electoral system is imminent, whilst in France, Hollande employed the infamous 49.3 decree in order force through business friendly legislation.
Curiously, however, the market 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. As you might expect, we continue to find the best opportunities in the more domestically orientated areas of the market.
Italian and Spanish companies represent 33% 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 FCC.
Banks make up a further 23% 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 Intesa and BNP where we believe that returns should rather rapidly return to pre-crisis levels.
Utilities now constitute 20% of the fund including investments in the telecom groups Orange, Deutsche Telekom and Telecom Italia.
Our favourite growth companies, such as Essilor and Assa Abloy make up the remainder of the long book.
Wasatch Advisors – Ajay Krishnan
Emerging Market Equity
Fuelled by optimism surrounding Prime Minister Narendra Modi’s agenda for reform, India’s major stock indices have risen approximately 40% over the past 12 months. While company earnings also have increased, those gains generally have not kept pace with stock prices and were largely driven by widening profit margins rather than increased sales. As a result, we have been trimming portfolio positions in Indian companies whose shares we consider richly valued.
Going forward, we expect that India will continue to represent the portfolio’s most-heavily weighted country. Until we observe a general pickup in top-line growth, however, we anticipate paring back the portfolio’s India weighting in favour of countries – such as Mexico and the Philippines – in which we believe current stock prices are better supported by company fundamentals.
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.
FTSE International Limited (“FTSE”) © FTSE . “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.