Global Equity Growth Fund: October 2023

14 November 2023

Against a background of high inflation and continued strength in economic data in the US, central banks have continued to tighten market liquidity. The equity market declined globally with the FTSE All World Index (USD) -3%. The environment of good economic news meaning less supportive central banks and hence negative share price moves can be puzzling for those not involved in financial markets. From a bottom-up perspective, share price moves can still be puzzling for those at the coalface. The negative -9.5% market reaction to Alphabet increasing sales 11.9% and earnings 46%, with a 1.6% and 7% increase ahead of consensus estimates respectively, with a benign outlook for instance is difficult to explain while we continue to see fundamental upside to our assessment of intrinsic value.

Disappointingly for the fund managers, both sector allocation (0.9%) and stock selection (2.2%) contributed negatively during the month. The Global Equity Growth Fund (I class USD) declined -6.5% with information technology and healthcare the worst.

The best performing stocks during the month were Autolus Therapeutics (21.0%), Microsoft (7.1%), and Amazon (4.7%). There was little news from Autolus Therapeutics during October although the Biological Licence Application for their lead CAR-T drug candidate obe-cell is due by year end and this tends to provide a step change for market perception of value. Microsoft and Amazon both reported results and continue to see positive growth in their cloud businesses. Microsoft is set to roll out AI assistance to Office products which looks set to provide another engine of growth. Amazon retail has enjoyed high margins in the US which they believe will be sustained.

At the negative end, Align Technology shares declined -39.5%. The maker of the clear aligner Invisalign system reported results showing 7.9% revenue growth and 57.4% earnings growth and encouragingly 10% growth in teen treatments. They did however indicate a more muted sales environment in September and provided sales guidance for the next quarter of only $US1bn which was 9% lower than consensus expectations. Conscious of the macro sensitivity of the company the position had been reduced, however, we did not anticipate such disappointing guidance and market reaction. In the long term we continue to expect adoption of clear aligner systems in preference to traditional wire and brackets given the huge cost savings and value-based pricing advantages.

Luxfer provided a profit warning and then withdrew their long-term EPS target when reporting their results. The maker of magnesium alloys and gas storage tanks has struggled with availability of magnesium. While an abundant element the production in China Magnesium reduced a few years ago to reduce pollution associated with coal fired power stations making the electricity required. US Magnesium had declared force majeure and failed to supply their customers. Two countries evidently stepped into the breach in increasing their production: Russia and Israel. Both countries are experiencing disruption to supply due to wars. In passing on some of their increasing costs to clients Luxfer has experienced price sensitivity. While management had confirmed longer 2015 targets to us recently, this was withdrawn given the current uncertainty faced by the business. The position was actively reduced after the profit warning.

Enphase shares declined -33.8%. Competitor SolarEdge issued a profit warning during the month, and Enphase provided guidance significantly below market expectations. While an element of destocking had been expected this was a disappointment. In the longer term the company is well positioned to benefit from growth in renewables but the current environment of uncertainty means the share price does not, in our view, adequately reflect this. The company has a strong balance sheet and is generating cash much of which, with the shares trading at what management believe are attractive levels, will be used to repurchase shares.

Aside from the active reduction in the Luxfer position, a few other trades were made. Duolingo was sold having pleasingly met our target price with no reason for it to change. A new position was established in Crowdstrike a cybersecurity specialist.

Looking forward, there are reasons to think that the performance of equities as an asset class will improve. The Federal Reserve appears to be at the end of their rate hiking cycle. Forward looking economic indicators in Europe look positive and Government policy support for the Chinese economy is being delivered.