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Global Leaders Equity Portfolio: June 2020

  • Global equities rallied strongly during the month. This was driven by the easing of monetary policy, stimulus efforts and investor sentiment improving as we see a return to normalcy
  • The Global Leaders portfolio returned 2.7% in May. This was behind the MSCI All World Large Cap Index return of 4.4% for the month, but still 2.1% ahead of the year-to-date peer group returns
  • The rapid recovery in equity prices, initially led by a handful of technology companies, is increasingly becoming broader based. This suggests that a sustained equity rally is possible.
  • To help achieve returns, we sold our position in AT&T and replaced it with two new holdings, building materials giant CRH and electronics giant Samsung Electronics.
Market update

The Global Leaders portfolio returned 2.7% compared with the MSCI All World Large Cap Index’s return of 4.4% during May.

As expected, economic data continues to look poor due to the COVID-19 lockdowns, but this is mostly backward looking. There are signs of lockdowns easing and 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 failed to keep pace. These factors largely explained the relative underperformance of the portfolio over the month. That said, the performance of the Global Leaders portfolio is still 2.8% ahead of benchmark, year to date.

Our position in AT&T was sold during the month. The move was motivated by our belief that the company will continue 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. The environment for such disposals is likely unfavourable, especially in the short term. Following market moves, the opportunity to acquire other global leaders, at what we believe to be attractive prices, was taken. Positions were established in 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, the US. Being fully integrated provides the firm with a competitive advantage which we believe will be sustained. Any signs of economic weakness seem likely to be met with increased infrastructure fiscal spending by the US government, which ought to benefit the company.

Samsung Electronics is the global leader in smartphones and semi-conductor memory technology. 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 portfolio the role of share price momentum as a driver of portfolio performance is much maligned by pure value-oriented investors. It is however one of 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 over the month, falling 14%. Despite the very low proportion of earnings coming from Hong Kong, unrest returning to the Special Administrative Region has impacted sentiment for the stock. We consider that the company provides exceptional value with little impact on much of the business from COVID-19. We believe there are many catalysts for re-rating the business within our portfolio including additional buybacks, listing or spin offs of either the towers or pharmacy businesses, and even a redomicile. 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 portfolio 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 was initially led by a handful of technology stocks, it now seems to be becoming more broad-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.