During the second quarter the Fund rose 4.8% while the MSCI ACWI Index increased by 3.8%. This outperformance was in large part due to the relative weighting of the Fund towards developed market equities. These performed better than emerging market listed equities over the period. Much of this has been led by exposure to US successful technology companies which the Fund continues to benefit from. During the period five stocks delivered returns of over 10%: Microsoft, Nestle, Visa, JP Morgan and Adobe. Of the four of these that reported during the quarter, all produced better than expected results. Nestle is next due to provide an update in late July.
While the market was somewhat of a rollercoaster during the period, there were few fallers in the Fund from start to finish. Shares in Philip Morris and Alphabet (Google) were the worst performers. Falling cigarette volumes and increasing legislative threats have lowered sentiment for tobacco stocks in general. News was reported in The Wall Street Journal that the Department of Justice will begin a US Antitrust investigation into Alphabet. The company controls much of the technology used by advertisers and publishers to buy and sell advertisements online. Any investigation is unlikely to be short and is also unlikely to significantly impact sales. A possible worst case outcome might be an eventual breakup of the search giant. This is unlikely to be disorderly.
During June a new purchase was made in the Anglo-Swedish pharmaceutical company, AstraZeneca (AZ). AZ saw their revenue fall 40% in eight years due to key patent expiries from, amongst others, Crestor and Nexium. Brilinta (US$1.5bn sales) and Farxiga (US$1.3bn) will likely face generic competition in the next few years. In aggregate though the firm is through the trough of their patent valley and has five recently approved innovative products all on their way to expected blockbuster status. These newly approved drugs are in several trials for other potential indications. The chances of clinical trial success for these are higher than for average pharma products. With long patent lives and scope to grow the target market this will produce predictable earnings growth over the next decade. The company paid an uncovered dividend, likely to placate UK investors after rejecting a takeover offer from Pfizer in 2014, which management were comfortable with given expectations of growth from new products. A recent capital raise to reassure credit rating agencies upset equity investors. This provided an entry point to one of the most attractive growing healthcare companies.
Looking forwards we are considering increasing the Fund’s underlying exposures to select emerging market economies that look set to benefit from positive demographics. Where possible this is likely to continue to be via investments in developed market equities. These tend to have higher levels of corporate governance and controls than are usually available in local markets. However the valuation multiple disconnect between shares in certain Asian-Pacific markets and those in developed markets has widened over the last few years. We continue to monitor potential new opportunities.