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Fund Manager Monthly Report - September 2015

23 October 2015

View the latest portfolio and market commentaries from our range of fund managers.

Aberdeen Asset Management (Asia) - Hugh Young

Far East

September was a volatile month for Asian markets, as Chinese economic data remained weak, commodities continued to languish and the US Federal Reserve sowed further confusion by refraining from raising interest rates. The fund fell 3.44%, marginally underperforming the benchmark by 0.20%.

In Japan, the underweight exposure contributed to relative return, although our holdings in Chugai Pharmaceutical and Japan Tobacco detracted. Chugai Pharmaceutical was weak, partly due to market concerns over proposals in the US to lower the cost of prescription drugs. The decline in Japan Tobacco’s share price was partly due to news that the company will be paying about ¥600 billion in cash for the rights to sell Reynolds American’s Natural American Spirit cigarette brand outside the US. The deal is set to be completed by early 2016. The ¥600 billion price tag represents a steep premium over the acquired assets’ current business and the likely contribution to the group, even after taking into account the tax benefit from amortising the goodwill linked to the deal. We intend to engage with Japan Tobacco’s management to properly understand how it will maximise the value of the acquired brand.

Stock selection in Australia and Hong Kong as well as the non-benchmark exposure to China via PetroChina detracted significantly from performance. In Australia, mining group BHP Billiton underperformed, as commodity prices were buffeted by fears over the impact of China’s slowing demand for resources. Reassuringly, BHP has Tier 1 assets and the balance sheet strength to withstand the swings in the current cycle.

Our exposure to PetroChina also effected performance, owing to further declines in the oil price. While the operating environment remains difficult, PetroChina has low-cost reserves, backed by a solid balance sheet.

In Hong Kong, Jardine Strategic continued to experience challenging conditions in Indonesia, one of its key markets. We continue to believe firmly in the strength of its franchises. The broader financial sector was weak. Notably, Standard Chartered (Stanchart) fell 16.2% in local currency terms during the month, driven by concerns over its exposure to commodities and emerging markets. While we remain vigilant of these risks, Stanchart has been reducing its loan exposure to the commodity sector over the past year. Stanchart’s valuation is attractive and we await chief executive Bill Winters’ unveiling of a detailed strategy to restructure the company in due course.

Stock selection in Korea and Taiwan contributed to relative return, as both Samsung Electronics and Taiwan Mobile rebounded after prior weakness.

Aberdeen Asset Management – Jamie Cumming


In September, the fund fell by 3.63%, underperforming the benchmark’s decline of 2.17%. Both asset allocation and stock selection were negative.

At the stock level, Taiwan Semiconductor Manufacturing boosted performance, saying third-quarter revenues should beat expectations due mainly to favourable foreign exchange effects, but that fourth-quarter revenues could miss targets. Pepsico also performed well, buoyed by a positive outlook for third-quarter earnings. Taiwan Mobile raised its earnings forecast on the back of robust new iPhone sales.

Conversely, the downturn in Brazil and the real’s drop to an all-time low against the US dollar impacted French supermarket operator Casino Guichard, which received half its revenue from South America last year. Potash Corp of Saskatchewan also detracted from performance. Its shares were hampered by softening end-markets despite production cuts by competitor Mosaic. Standard Chartered was impacted by concerns over its exposure to commodities and emerging markets.

In September, we introduced UK insurance business Prudential, an attractive franchise with a sound balance sheet. Against this, we sold South32, whose stock we had received when it was spun-off from parent BHP Billiton earlier this year. We also added to Kerry Logistics, MTN Group and Vodafone, and trimmed Dorma Kaba Holdings and Zurich Insurance.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

A weak month for equities as the declining economic growth and market policy blunders of China continued to weigh on markets. In addition the pressure of dollar strength and commodities weakness pressured Emerging Market assets.

The Fund was more resilient than the market over the month. The key routes to outperformance over the period were having a low exposure to resources and an overweight in small and mid-cap stocks. We benefitted from the former having lowered our mining and oil exposure in 2014 and early this year, in particular our decision to sell Glencore in early 2015 looked well founded.

We were not a significant beneficiary of the small and mid-cap out performance. In fact a noteworthy feature of the performance was that the positives were largely from capital allocations such as Tui, Imperial, Direct Line, Lockheed and Card Factory.

Transactions were limited to additions to Lloyds, Pearson and Astra and a reduction in the L&G position.

Artisan – Dan O’Keefe & David Samra

Global Managed & Global Unit Trust

Almost all global markets declined in September, as growth concerns weighed on stock markets. Among our best performing stocks this month were Kia Motors and Arch Capital. Kia is performing well in its domestic Korean market as well as in the US. Moreover, as an exporter, the company is profiting from the recent depreciation of the Korean won versus the US dollar. Arch Capital’s shares rallied in late September, aided in part by an exclusive endorsement by the American Bankers Association for the company’s mortgage insurance solutions and hopes that an uptick in US mortgage applications in September will be positive for Arch’s mortgage insurance volumes.

Among the worst performing stocks were Joy Global and Telefonica Brasil, both of which are suffering either directly or indirectly from the end of the China-led commodity super cycle. Joy reported disappointing earnings beginning of September. The company’s main customers in coal and copper mining appear to be conserving cash at all costs as low commodity prices take their toll. We view these headwinds as cyclical and believe Joy is in a strong position to benefit when the mining environment improves.

Brazil continues to endure a painful recession driven by the slowdown in China which has depressed demand for Brazilian exports. So while Telefonica Brasil’s business remains fairly resilient, it can’t resist the selling pressure as investors flee Brazil. The Brazilian real has fallen to record lows due to the recession, contributing further losses for dollar-based investors such as ourselves.

AXA Framlington – Richard Peirson

AXA Managed & Balanced Managed Unit Trust

September was another difficult month for equity markets as weak manufacturing data from China continued to hurt sentiment and resources stocks in particular. This weakness and volatility was sighted by the US Federal Reserve as a reason for keeping US interest rates unchanged at their September meeting. Our performance in equities was disappointing: relatively poor in the UK and US but we outperformed in Europe, Pacific ex Japan and Emerging Markets. In the UK owning no tobacco stocks or SAB Miller, which received a bid approach from AB Inbev, was responsible for much of our underperformance. We also had large positions in Vodafone, which underperformed when they ended talks with Liberty Global over an asset exchange, and Wolseley, where results were in line with expectations but the outlook statement was disappointing.A number of industrials were effected by weakness in resources while GKN suffered due to the impact of VW’s emissions’ fraud on the auto sector.

On the positive side Synergy Health rallied 40% after the bid by US company Steris was approved and Quintain received an offer of 141p cash, having already accepted one of 131p. The better returns from bonds, which were seen as a safe haven, also had an impact on the Fund’s underperformance as we remain underweight and cautiously positioned.

In the UK we sold our holdings of Poundland and Smiths Industries. Poundland had rallied following the approval of its bid for 99p Stores and we sold part of the holding after that announcement. Smiths Industries announced results that we considered disappointing and with the appointment of a new chief executive we were concerned that future profits expectation could be too high. We added to a number of existing holdings during the month, particularly in the resources area where we added to BG and Rio Tinto.

China is likely to remain a major influence. Markets have rallied significantly in early October but we need more evidence that growth in China is stabilising if the rally is to be sustained. The oil price has also rallied as recent demand has surprised positively. The US Federal Reserve did not raise interest rates in September but may still do so this year if activity in China and other leading emerging economies does not deteriorate further over the next few weeks and markets are less volatile.

AXA Framlington – George Luckraft

Diversified Income & Allshare Income Unit Trust

Equity markets continued to be weak as investors fretted over the outlook for global growth. The All Share Index produced a negative total return of 2.7% with the portfolio outperforming by over 2%. Latchways rose by over 40% on the back of an agreed takeover and Conviviality Retail were strong as they acquired Matthew Clark. Strong results helped Alumasc, Hilton Foods and Park Group. In contrast Entu were weak while Topps Tiles saw some profit taking.

The holdings of Conviviality Retail, DX Group and Lloyds Bank were increased while that of Pendragon was further reduced.

Babson Capital – Zak Summerscale

International Corporate Bond

The senior secured bond market came under pressure in September as the volatile backdrop seen in August persisted. Factors weighing heavily on markets included global growth concerns, particularly surrounding the slowdown in China, as well as continued low oil prices and the ongoing sell-off in the commodity sector. The Fed’s decision to not raise interest rates in September was generally anticipated; however, Yellen’s messaging regarding the impact of overseas turmoil on the US economy and inflation did little to stabilise markets. Against this backdrop, Global senior secured bonds posted a negative return for the month and for the third quarter, with spreads widening broadly across sectors. However, the global senior secured bond market held up relatively well when compared to wider risk asset classes, as equity markets like the S&P 500’s -6.4% third quarter loss was the largest quarterly setback since the third quarter of 2011.

New bond issue activity in September remained light, extending the trend of recent months as markets remained volatile. In the US high yield bond market, 25 high yield bonds priced totalling $21.1bn. In Europe, the high yield market saw just 4 bonds price, totalling €840mn. Weakness in energy and commodities and concerns surrounding China and global growth look set to continue to be primary sources of market reaction, for risk assets in the near future. Whilst corporate fundamentals broadly remain healthy, the notable default activity year-to-date has been concentrated in the Energy, Metals and Mining sectors, accounting for over three quarters of US default volume in 2015 so far. Excluding these troubled segments of the market, default rates remain low. In summary, the fundamental backdrop remains positive and the senior secured bond market as a whole remains strong.

Notable contributors to the portfolio during September included names such as Murray Energy Corporation, the biggest privately owned coal mining company in the US, and Takko, a German discount fashion retailer. Detractors over the month included names such as Sabine Pass Liquefaction, a US based developer of natural gas liquefaction facilities, and Unitymedia, a German cable operator.

BlackRock – Luke Chappell

UK & General Progressive

The UK stock market continued to be impacted by concerns about the strength of Chinese economic growth and from uncertainty around the course of interest rates in the US and UK. Weaker demand from China and the unflinching resolve of OPEC to maintain production led commodity price weakness which, in turn, took their toll on the mining and oil sectors.

Positive contributors to performance came from defensive shares such as Reed Elsevier, now re-named RELX, and British American Tobacco, as well as not holding a number of commodity facing shares that significantly underperformed. EasyJet confounded the sceptics’ fears of excess capacity in the European short haul market by reporting load factors and yields that were better than expectations, leading to a significant rally in the share price.

The main detractors to relative performance included Wolseley, which fell after the company cautioned on growth for next year, principally due to weak sales in its US industrial business, which includes oil and gas customers who have reduced spending as the oil price has fallen, leading to modest earnings downgrades. We continue to expect that growth and market share gains in the rest of the US business should drive earnings growth above market expectations. Johnson Matthey has recently suffered from the weakening prices of platinum group metals, however in September, its share price fell as VW, one of its catalyst customers, became enmired in the scandal surrounding the testing of its diesel engines.

Activity over the period saw us add to EasyJet and Next, whilst we reduced positions in Rio Tinto, Royal Dutch Shell and Johnson Matthey.

BlackRock – Nigel Ridge

UK Absolute Return

Equity markets fell in September with sentiment effected by the US Fed softening its rhetoric and holding off from lifting rates from their record lows. Despite the financial market backdrop, the direction of growth has slowly improved across the euro area and remains on track in the US thus far.

The Fund managed to avoid some of the broad-based weakness affecting equities and delivered -0.6% (net of fees). Given the challenging market backdrop, returns were driven by the short book. The most notable losses were seen from stock selection within industrials while positioning within consumer services proved the most successful. The largest contribution came from RELX (consumer services) with the defensive shares being in favour and benefitting from the company's recent strong results. Gains also came from financial platform provider Hargreaves Lansdown who reported an increase in both new customers and assets under administration suggesting the company has been a beneficiary of recent pension reforms. The biggest detractor was Wolseley which fell after the company cautioned on growth in 2016 leading to small earnings downgrades though we retain conviction in the business. Losses also came from AA, the breakdown recovery business, after the company reported a drop in first half revenues casting doubts on the strategy of the new management team.

The headline net exposure ended the month at 27% while the gross exposure was held largely constant at around 119%. We have sought to capitalise on opportunities, primarily on the long side, created from short-term price weakness. This has been in holdings where we retain confidence in the medium to long term investment thesis. We have also used the flexibility of the index future on the short side to buy market protection. The Fed’s decision against a first interest rate hike has heightened fears over the true direction of global growth. This represents the latest obstacle for investors to overcome and the prospect of greater volatility only adds to the uncertainty.

EdgePoint – Tye Bousada & Geoff MacDonald

Global Equity

The Portfolio underperformed its benchmark, the MSCI World Index, in September. Detractors from performance included Carpenter Technology Corporation, WESCO International Inc. and Team Inc. Despite the negative performance, Microsoft Corporation, TE Connectivity Ltd. and Ryanair Holdings PLC were bright spots that buoyed fund returns.

Market volatility has moderated from its August highs but remains at elevated levels relative to earlier in the year. The Investment team has long stated that we look forward to the return of volatility to financial markets. Now that it has returned the team has added to high-conviction holdings. As a result, cash levels have come down significantly. One example of how we have taken advantage of market volatility is a relatively new holding in the Portfolio, Rexnord Corporation.

Rexnord is a business that had been on the Investment team’s watch list for some time prior to our initial purchase earlier this year. Rexnord’s businesses include process and motion control systems typically used in automated assembly lines and water management and plumbing infrastructure for non-residential buildings. The stock price has been under pressure due to the decline in mining which was a large end market for their motion control business. This provided us the opportunity to buy a business at a good price with an excellent management team and a water management business with the potential to grow faster than the overall economy.

First State – Jonathan Asante

Global Emerging Markets

Emerging markets rebounded after a period of weakness as investors breathed a sigh of relief that the global central bank policy of extraordinarily low interest rates will continue for the time being. We have no better insight than anyone else about the timing of interest rate rises, but in the long run rates will have to increase.

Our favourite companies tend to be run by families who have built their wealth over generations and have therefore witnessed many of the boom and bust cycles which are characteristic of emerging economies. This time horizon offers a degree of protection against the temptations of ‘free money’ (very low interest rates), often offered in a currency different from the cashflows that will be used to pay back the debt. Moreover, the more patient companies are finding opportunities to acquire attractive assets from distressed (or impatient) sellers, such as Bradesco’s purchase of HSBC Brazil and Antofagasta’s acquisition of copper assets from Barrick Gold.

First State – Jonathan Asante

Worldwide Opportunities

We completed our purchase of Brazilian financial services company Banco Bradesco during the month. Bradesco, a company we have long known, is Brazil’s second largest privately owned financial services business. Although the company is very profitable, of greater interest to us over the years has been the ownership structure which ensures the management not only control the company but hold a stake in it until they retire. In addition, dividends from the company provide money for a massive educational programme in Brazil. These ownership features suggest it will be run for the long-term benefit of shareholders and the community rather than short-term management enrichment.

Although we are not currency forecasters it is also worth noting that the Brazilian real looks reasonably valued against other developing nation currencies for the first time in a decade. The fund maintains high cash levels. A fall of confidence globally during the next year or two would enable us to deploy all of the cash.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

The high yield bond sector had a challenging September as uncertainties about China and the slump in commodity markets continued to weigh on market sentiment. The energy sector came under pressure as did companies with exposure to emerging markets. Given its lower overall weighting to energy companies European high yield bond markets outperformed US high yield bond markets. Amidst the increased levels of volatility European high yield bond issuance remained low with Barclays estimating €1.9bn across all currencies. This compares to €5.5bn issued during September 2014. Data from Merrill Lynch showed the European currency high yield bond market returning -2.2%, with BB bonds returning –2.4%. CCC and below bonds returned 0.2% reflecting positive returns from Greek corporate bonds, which continued to benefit from the apparent resolution of the Greek sovereign crisis earlier in the summer and the reelection of prime minister Tsipras. US high yield bonds, which have higher exposure to the energy sector returned –2.6%. European investment grade corporate bonds returned -0.6%. All returns shown are total returns, sterling hedged.

Invesco Perpetual – GTR team

Multi Asset

Market volatility continued into September and a broad spread of ideas had an influence on performance as the fund ended the month flat. Despite equity markets ending lower, the structuring of our equity ideas meant that a number of them contributed positively. For example, our selective Asian equity idea and our relative idea preferring US large cap to US small cap stocks both boosted performance. Our idea pairing Asian equity volatility and US equity volatility also performed well against this backdrop. Our US dollar ideas were also positive as the currency strengthened against both the euro and the Canadian dollar. Notable detractors included our long equities ideas in Germany and Japan. Our interest rates idea preferring Swedish government debt to Eurozone debt also reversed recent positive performance as the European Central Bank renewed its vows to battle against deflation. During the month, we removed one of our interest rates ideas from the portfolio. We reviewed our Australian short rates idea and felt its return potential had been diminished and did not justify a standalone place in the portfolio. As a result, we moved our position to a longer-dated part of the Australian interest rates curve and combined the view into our Australia vs Europe interest rates idea, therefore increasing the idea’s sensitivity to interest rate changes.

J O Hambro – John Wood

UK & General Progressive

The portfolio's material outperformance in September was largely founded on positive sector exposure effects, with almost negligible exposure to basic materials and the portfolio's high cash balance adding relative value. Individual stocks that contributed helpfully included RELX and National Grid. The global stock of debt is higher today than at any point in history, and the world economy has never been more sensitive to an upward change in interest rates as it is today. More importantly, the scale of global capital flows is now so great that it can swamp the fundamentals of the economic and business cycles. The production of goods and services has become a big part in the speculation surrounding financial assets. Zero interest rate policies, quantitative easing, credit creation and derivatives have created a stock of globally-traded financial assets approaching $200 trillion. Speculation in foreign exchange is 100 times the size of transactions required to fund trade flows.

We continue to look for opportunities in companies with strong balance sheets and solid business models, producing goods and services in demand and run by skilled management teams with a long-term, investment-led approach. In particular, be ready to act when short-term speculative movements driven by capital flows provide opportunities.

Majedie – James de Uphaugh

UK Growth & UK & General Progressive

The portfolios underperformed a falling market during September, returning -4.1% vs. -2.7% for the FTSE All-Share. The month was dominated by concerns over the sustainability of Chinese economic growth, which resulted in a rout in commodity markets; mining and energy stocks suffered accordingly.

Despite having recently initiated positions in one or two miners (Anglo American being one), our underperformance mostly resulted from not holding Consumer Staples, to which despite their valuations, investors flocked as a perceived ‘safe haven’ from the markets’ volatility.

Not holding Glencore offered some respite and Sainsbury, where an upgrade to consensus forecasts for 2016 profits, was welcomed by the UK Food Retail sector as a whole. More stock specific developments saw our holdings in Rentokil and Ryanair remain unaffected by the market turmoil and our holding in Amlin benefitted from Japanese bank Mitsui Sumitomo’s bid.

We increasingly feel that the UK economy is operating in a late cycle environment: a tight labour market, evidence of wage inflation and unexciting growth lead us to avoid areas of the market reliant upon deflationary conditions. Further from home, we are seeing increased evidence - notably the lowering of borrowing requirements - of the Chinese government using all methods available to ensure the economy continues to grow. Furthermore, our detailed study of the US shale industry (one of our fund managers is a geology graduate) has revealed enough uncertainties for us to believe that the oil price is likely to rise from here. We are exploiting these insights through our mining and energy positions.

Majedie – Chris Read

UK Income

The UK Income Fund outperformed during the month, albeit producing a negative return of -1.9% vs. the FTSE All Share of -2.7%.

The month was dominated by concerns over the sustainability of Chinese economic growth, which resulted in a rout in commodity markets; mining and energy stocks suffered accordingly. This had both a positive and a negative impact on the portfolio. We don’t hold BP or Glencore – thus aiding our relative performance – but we do have positions in the Mining sector (principally Rio Tinto, BHP Billiton and Vedanta) which were impacted by the fall in commodity prices.

More broadly, the portfolio benefitted from a number of stock picking successes. Two holdings received bids during the month: the insurer Amlin, from the Japanese bank Mitsui Sumitomo, and the European electrical retailer, Darty, was approached by France’s Fnac. Tate & Lyle made a welcome announcement of a better performance from its bulk business, where it has gained substantial market share (with the majority of its earning in US dollars, the currency’s strength has been a boost too). Another company whose fortunes seem to have improved, is Sainsbury, where an upgrade to consensus forecasts for 2016 profits was welcomed by the UK Food Retail sector as a whole.

Aside from the Mining companies discussed above, the obvious detractor was the Dutch insurer Delta Lloyd, with the shares down nearly 40% (in GBP). We have used this share price weakness to double our position in the company.

We view this market volatility as an opportunity to both top and initiate positions, which we feel have significant re-rating potential; such conditions can be tiring, but it is also invigorating because in the end we believe that they are a friend to the opportunistic investor.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

Stock selection in the energy and materials sectors contributed to performance. Individual contributors included SES SA, British American Tobacco plc and Bridgestone Corporation.

An underweight position in the information technology sector and stock selection in the industrials sector detracted from performance. Individual detractors included Whirlpool Corporation, Japan Tobacco Inc. and Royal Philips NV. We added Canon Inc. to the strategy.

Orchard Street – Chris Bartram

Property Unit Trust

We have had further success at Richmond Riverside where we have negotiated the removal of the Vitec Group lease break clause thereby increasing the term certain. We have also completed a rent review on this space at £47.50 per square foot, which is significantly ahead of the estimated rental value.

We have completed three rent reviews on units B2, B3 and B4 at Stuart Road Industrial Estate, Altrincham. The rental income secured is £185,095 p.a. (up from £168,727 p.a.) which represents rents ranging between £6.62 and £6.95 per square foot, compared with an ERV £6.75 per square foot.

The portfolio vacancy rate is 4.9% compared with 9.4% for IPD and the initial yield on the portfolio is 4.8% which compares with 5.1% for IPD.

Property Life and Pension funds

A new 4.5 year lease has been completed on the 7th floor 6-10 St Andrews Street, London EC4. The rent payable is £57.50 per square foot and has set a new rental tone within the building, which paves the way for further rental uplifts in due course.

We have had further success at Richmond Riverside where we have negotiated the removal of the Vitec Group lease break clause thereby increasing the term certain. We have also completed a rent review on this space at £47.50 per square foot, which is significantly ahead of the estimated rental value.

The portfolio vacancy rate is 7.7% compared with 9.4% for IPD and the initial yield on the portfolio is 5.0% which compares with 5.1% for IPD as at 30th September 2015.

RWC – Nick Purves

Equity Income

It was another volatile month as equity markets moved towards the lows of the August sell-off. Market uncertainty remains elevated as focus remains on macro issues: the timing of a possible Fed rate hike, China’s economic slowdown, and the oil price.

The US Federal Reserve kept policy rates unchanged, citing recent financial market turbulence and economic risks stemming from abroad. Markets are now pricing in just an 18% probability of a hike in October and a 42% chance of a hike in December. The interesting thing here is that the prospect of no hike this year is not being viewed as a positive by markets.

The decision to postpone the rate hike continues to have knock-on consequences, with the ECB talking about extending their QE programme whilst forecasts for the first hike from the BoE continue to be pushed further into the second half of next year.

The Fund had a negative month, falling slightly more than the benchmark. Part of the reason for this is that the more domestically orientated FTSE 250 Index continues to outperform the more globally focused FTSE 100 index where the Fund has greater exposure. RELX Group was the best performing stock in the month, rising on the back of good interim results which showed a steady progression in earnings. Positive performance was also generated by consumer goods company Unilever with the share price rising 2.4% in September, and pharmaceutical AstraZeneca whose share price rose 1.5%.

The share price of RSA fell back to levels seen in mid-July as Zurich announced it was to abandon its offer because of losses at its own general insurance unit. Analysts have said that another offer for RSA shouldn’t be ruled out. Smiths Group was also a detractor from performance. The company reported annual results during the month; which were well received and showed resilience in the John Crane division. Nevertheless, the market continues to be concerned about the company’s exposure to lower capital expenditure in the oil industry. The oil majors struggled as the oil price failed to hold onto gains made in August slipping below $50 per barrel again. Vodafone’s share price fell as the company announced that it had ended asset swap talks with Liberty Global.

The noise surrounding markets, macro and political events have no bearing on our positioning; what we are concerned about is the valuations and risks associated with each company that we look at. Share prices have significantly re-rated over the last few years and, despite the falls of the last few weeks, look fully valued on the most reliable valuation measures. We maintain a cautious outlook, and this 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

Global Equity

We focus on the underlying fundamentals and long-term growth prospects of our businesses, not short-term stock price movements. The 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 Nike, Housing Development Finance Corp., LinkedIn, Facebook, and UCB. Despite a tepid macroeconomic environment in India, Housing Development Finance Corp. (HDFC) continues to perform well, driven by sustained demand for home mortgages. To date, HDFC has not experienced much cyclicality in loan growth, as we believe it is underpinned by an early stage, powerful secular trend toward home ownership. Additionally, HDFC’s prudent underwriting standards have resulted in limited credit losses over its history. While we expect loan growth in the high-teens going forward, we believe there could be upside to our estimates from lower interest rates and an improving macroeconomic climate. In fact, as interest rates in India have declined, HDFC has passed on the vast majority of the benefit to borrowers through small reductions to their loan rates. We believe this improved affordability, combined with other positive factors, such as rising urbanization, favorable demographics, and an increase in the housing supply, could accelerate loan growth and fuel greater mortgage penetration.

The top five relative detractors from performance were BioMarin Pharaceutical, Regeneron Pharmaceuticals, Las Vegas Sands, Alibaba Group, and Monsanto. Toward the end of the month, shares of many biotech companies underperformed, as drug pricing reform proposals were highlighted amidst the political rhetoric surrounding the 2016 Presidential election. In our view, broad, detrimental changes to drug pricing policy is unlikely, however, we believe the biotech businesses we invest in - those that address rare diseases or areas of underserved, unmet need - are better positioned than other pharmaceutical companies, regardless of the outcome. Most of our biotech investments rely on increased patient adoption globally and pipeline successes. In addition, we believe rare disease companies tend to be well-diversified geographically, and thus less at risk from reimbursement changes in any one geography. Nevertheless, this development weighed on the stock prices of the biotech companies held in the portfolio, including BioMarin and Regeneron. In our view, there has been no change to the underlying fundamentals of either business, and we continue to view their long-term prospects positively.

Select Equity – George Loening & Chad Clark

Worldwide Opportunities

The global equity sell-off continued in September driven by concerns about global growth and the Fed’s decision to leave rates unchanged. The MSCI AC World Index (GBP) declined -2.1% in September and -6.0% in the third quarter, marking one of the largest declines in several years. For the month of September 2015, the Sub-Account declined -3.4% on a net basis and -5.6% in the third quarter. During the month we took advantage of the market volatility to add to several high quality businesses, including Thermo Fisher Scientific, the largest global distributor and manufacturer of laboratory equipment and supplies, and Mettler-Toledo, a manufacturer of weighing instruments sold into industrial and healthcare end markets.

We exited two smaller positions during the month as we rotated into positions with superior risk/reward characteristics. The account’s cash levels did not change meaningfully, finishing September at 8.4% of overall assets. The top three contributors in the month were Wirecard, a provider of payment processing services for online commerce in Europe and Asia; O’Reilly Automotive, a US automotive aftermarket parts retailer and distributor; and SABMiller, the world’s second largest brewer by volume. The greatest detractors in the month included Rotork, a UK based manufacturer of actuators and valve gearboxes; Wolseley, the world’s largest distributor of plumbing and heating products; and Misumi Group, the Japanese global distributor of customized factory automation components.

Tweedy, Browne – William Browne, Tom Shrager, John Spears & Robert Wyckoff

Global Equity

Solid returns in the portfolio’s consumer staples holdings, i.e. food, beverage and tobacco stocks, were not enough to offset declines in the portfolio’s financial, pharmaceutical and industrial holdings. Nice returns from Tobacco BAT Nestle, and Diageo were more than offset by disappointing results in Standard Chartered, DBS Group, Zurich Insurance, Novartis, GlaxoSmithKline, G4S, and Siemens. Buys outpaced sales during the month, as we took advantage of pricing opportunities to add significantly to our position in CNP Assurances and IBM while trimming our position in BBA, which has been a strong performer and is approaching our estimate of intrinsic value.

With the return of volatility and a healthy dose of skepticism in markets of late, we are beginning to see valuations come back into a more reasonable relationship with our view of underlying business values and their future prospects. If this continues, as we suspect it will, we should be in a position to put additional capital to work.

Wasatch Advisors – Ajay Krishnan

Emerging Market Equity

We repositioned the portfolio in September by selling several companies with deteriorating fundamentals. These included Qualicorp S.A. and Coca-Cola Icecek A.S. Qualicorp is a health-insurance broker in Brazil, and Icecek is a large Coca-Cola bottler in Turkey. Each company faced difficult challenges to its growth and profitability in a country with worsening economic and political environments, and deteriorating investor sentiment. Proceeds from these sales were partly used to increase portfolio positions in Lupin Limited and UPL Limited. Lupin is a pharmaceuticals company, and UPL makes products to control mosquito populations. Both companies are located in India, where the economic and political situations are better, in our view. We also believe these companies have strong prospects for future growth.

Wellington – Haluk Soykan


Gilt yields fell over the course of the month, most significantly at the 10-year point of the curve, which fell by 21 bps, while 2-years and 30-years both fell around 12 bps. Gilts experienced a brief downward shock mid-month when BoE Governor Carney suggested that rate rises could start in early 2016, and another towards the end of the month when Janet Yellen stated that the Fed was on course to raise rates this year, which caused speculation that the BoE would follow. However, they recovered by month-end.

For the month of September the Portfolio outperformed the benchmark by 6bps, the Portfolio returning 1.00% and the benchmark 0.94%. The UK economy continues to be characterised by an unbalanced mix: housing and consumption gains, combined with widening twin (current account and fiscal) deficits. In contrast to the euro area, the UK consumer has rising employment and nominal wages supporting disposable income, while the household credit channel is also improving - consistent with the strong trends in mortgage approvals and secured lending to the household sector. UK headline inflation remains very weak, if global disinflation and slowdown persists, then the BoE will be pinned as increasing household debt and spending will eventually weigh on the UK outlook. Alternatively, if the global environment stabilises and markets digest a Fed rate hike, then the MPC will likely react to domestic conditions by opening the door to a February hike.


The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

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. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.

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