Global Equity Income Portfolio - October 2019

Summary

  • Central banks eased during the month
  • The strategy performed broadly in-line with the MSCI ACWI Index which returned 2.1%.
  • More cyclical sectors and traditional value stocks performed well. The strategy has low exposure to these cyclical sectors but some exposure to traditional value including new holding Standard Life Aberdeen. The position in Pfizer was sold.

September saw a rebound in equity markets with the MSCI ACWI Index rising 2.1%. The performance of the Global Equity Income strategy was broadly in line returning 2.1%.  Disappointing economic data saw most central banks easing monetary policy. The more cyclical sectors that performed badly in August saw the best performance. Despite the high exposures to less cyclical sectors, such as healthcare and consumer staples, strong stock selection enabled the strategy to perform in-line with the wider market.

Of particular note was the performance seen by “traditional value” stocks i.e. those trading on low multiples of earnings. One such traditional value stock held by the strategy is AT&T. Activist investor Elliott Management Corporation unveiled a position in the company during the month. They highlighted the attractiveness of the valuation and, as observed in some of our recent internal research, the wastefulness of management in making tangential acquisitions rather than focusing on their core offerings. The stock was one of the strategy’s best performers during the month.

Shares of BP and Shell also performed well. During the month a drone attack on Saudi Arabia resulted in the biggest ever supply shock and a sharp increase in the oil price.

The best performing stock held during the month was new purchase Standard Life Aberdeen. Following the merger of Standard Life and Aberdeen Asset Management in 2017 this is one of the global top ten active asset managers. The firm has stakes in three listed companies with a combined market value of $5bn. This leaves the rest of the business trading on just two times earnings. The firm has faced a number of headwinds and has suffered from outflows from key strategies. Our analysis indicates that these will now stem and that the firm’s dividend is sustainable. After the 14% price increase since purchase shares still offer a 7.8% dividend yield.

A number of global flashpoints remain of interest with the potential of escalation of conflicts almost ever present. Hopefully the Hong Kong unrest has peaked following the violence seen during protests arranged to mark the 70th anniversary of the founding of the People’s Republic of China.  Europe’s problems should be settled more peacefully with resolution of Brexit, one way or the other, likely to result in a return of confidence in the relevant parts of local equity markets. While certainly not immune the strategy’s holdings are relatively less sensitive to geopolitical trouble than much of the wider market.

The investment environment might well continue to favour traditional value stocks over the next few months.  The income focus of the strategy naturally leads to some more value orientated names which ought to benefit from this.