Summary 

• The Global Leaders Fund (I share class in US$), returned 2.6% over the month. This was somewhat behind the MSCI All World Large Cap Index return of 4.4%, but still 2.8% ahead of benchmark year to date
• Global equities rallied during the month of May. This was driven by an easing of monetary policy, stimulus efforts and investors sentiment improving as we return to economic normalcy
• The rapid recovery in equity prices, initially led by a handful of technology companies, is becoming broader based. This suggests that a sustained equity rally is possible. The fund has benefited from this while retaining its quality ethos
• Over the month, the position in AT&T was sold and replaced by two new holdings: building materials giant CRH and electronics giant Samsung Electronics.  

Market update

In May, the Global Leaders Fund (I share class in US$) returned 2.6% in comparison to the MSCI All World Large Cap Index return of 4.4%.

As expected, economic data continues to look poor due to the COVID-19 lock-downs. This, however is mostly backward looking. Increasingly, there are signs that lock-downs are easing with a return to economic normality. Supported by continued easing of monetary policy, industrials and higher cyclical stocks generally performed well, while consumer staples and healthcare did not keep pace. These factors largely explained the relative under performance of the fund during May. The fund is still 2.8% ahead of the benchmark, year to date.

Our position in AT&T was sold over the month. We believe that the company continues to suffer from market-share losses. Although the high-dividend yield remains attractive, the involvement of a prominent activist investor should result in disposals in the medium term. We believe that the environment for such disposals will be unfavourable, especially in the short term. Following market moves, the opportunity to acquire other market leaders, at what we believe to be attractive prices, was taken. Positions were established in global giants CRH and Samsung Electronics.

CRH is the world’s leading building materials company, with more than five times the scale of its competitors in its core market of the US. Being fully integrated provides the firm with a competitive advantage, one which we believe will be sustained. Any signs of economic weakness are likely to be met with increased infrastructure fiscal spending by the US government, which will benefit the company.

Samsung Electronics is the global leader in smartphones and semi-conductor memory technology. We believe it is set to benefit from a cyclical recovery in memory pricing and demand off the back of 5G and increased demand for data centres. Data centre demand is being driven by cloud computing, e-commerce, remote working and gaming. In addition, we expect a new replacement cycle for smartphones driven by 5G technology and foldable phone innovation.  

When it comes to equity funds, the role of share price momentum as a driver of fund performance is much maligned by pure value-oriented investors. It is, however, one of a few factors that have been shown to provide outsized rewards empirically. In order to benefit, we allow positions to increase in size within the fund while we continue to see shares trade at a discount to our view of intrinsic value. By contrast positions are not generally topped up when their price declines. 

Hong Kong-based CK Hutchison was the main disappointment this month falling 14%. Despite a very low proportion of its earnings coming from Hong Kong, unrest in the Special Administrative Region has impacted sentiment for the stock. We consider that the company provides exceptional value. In addition, the COVID-19 pandemic has had very little impact on much of their businesses. We believe that there are many catalysts for re-rating the business within our fund, including additional buybacks, listing or spin offs of either the towers or pharmacy businesses, and even a re-domicile. As the famous saying goes, “It ain’t what you don’t know that gets you in trouble. It’s what you know for sure that just ain’t so”. 

While we retain conviction in the investment thesis an approach of not topping up our investment failures should mean the fund is not so subject to entrenched analyst positioning. 

The recovery in global equity prices since the initial announcement of the coronavirus pandemic has been rapid. While the recovery has been led by a handful of technology stocks, it seems to be becoming broader based. We remain optimistic that over the long term, high-quality stocks purchased at reasonable prices will provide long-term investors with good levels of returns. The degree of monetary stimulus by central banks also looks supportive for equity prices.