Global equities advanced again in the second quarter of 2017, with a number of key markets carried past historic highs by a strong earnings season and benign economic data. Political risk eased following the market-friendly outcomes of the Dutch and French elections. Most major economies continued on a broadly encouraging trend, with only the UK showing signs of a meaningful slowdown.

Beneath these positive indicators, however, market performance for the quarter overall was dominated by risk aversion. Investors took flight to the "safety" of wellknown growth stocks, in our view paying little attention to their valuations (for instance, Amazon has been trading on around SOx forward earnings). Over 02, growth outperformed value in every major region around the globe- the differential between the MSCI World Growth and the equivalent Value index was around 2.4%. As this marked a continuation of trends from the end of 01, unsurprisingly momentum as a style was also strong. This represented a difficult environment for valueoriented approaches such as ours, where investment decisions are based on solid fundamentals. Only in June did we see the tentative beginnings of a reversal, with valuation once again being rewarded.

Another headwind for our investment approach was the extraordinary narrowness of the market during most of the quarter. Investor attention was focused to such an extent on a small cohort of "growth" stocks that they drove performance pretty much alone, leaving the vast majority of names to underperform the index. Our highly diversified portfolios can struggle in these conditions. Again, though, towards the end of the quarter we did see performance broaden out and a number of the expensive, over-popular names fall back somewhat.
Against the backdrop of the quarter, the fund underperformed. The two principal detractors from relative performance were the US consumer discretionary and information technology sectors. In both areas the attractive valuations and quality of our favoured overweights were not rewarded (examples of detractors include Intel and Oualcomm). Within consumer staples, our good-value overweight positions in the US food & drink industry (e.g. Campbell Soup and General Mills) were neglected and so dragged on relative returns. Our overweights in materials in most regions across the globe held back returns, giving back some of the gains made in 01. For example, falling commodity prices negatively affected our favoured mining stocks.

The biggest positive for the strategy over the quarter came from the financial sector. Overweights in Japanese banks and Continental European banks and insurers contributed. In addition, our long-standing underweight in lower quality Australian and Canadian banks was beneficial as they performed poorly over the quarter, partly because of unfavourable currency moves linked to weakening commodity prices.

Source: Schroder QEP Global Core quarterly fund update - Second quarter 2017 Disclosures

The positive stockmarket momentum generated in late 2016 was strong enough to carry over into the new year, driving widespread equity gains in 01.

US equities performed well, reaching an all-time high during the quarter. The market initially reacted positively to President Trump's plans, although his failure at the end of the period to pass healthcare legislation did raise doubts about the administration's ability to implement its policies. Macroeconomic data remained supportive, with the labour market particularly robust, as reflected in buoyant consumer confidence. As was widely expected, the Federal Reserve raised base rates by 0.25% in March.

On a global view, cyclical sectors led the market- the technology sector was the winner over the quarter by a large margin. The notable divergence of the two resource sectors continued. Materials outperformed the broader index slightly on the back of rising industrial metals prices due to higher demand from China, as well as gains for gold and silver. Energy, on the other hand, was weaker than any other sector by more than 5%, suffering from a decline in oil prices as inventories and production in the US increased at a faster rate than expected.

The first quarter of 2017 saw some of the reflation trades from late last year unwind, including the outperformance of value. Growth was resurgent and bettered value in almost every corner of the globe- the differential between the two MSCI World style indices was around 4% for the quarter.

While not the most favourable environment for the QEP approach, our disciplined rebalancing meant that we had already trimmed our exposure to many of the "hot" areas of the market that suffered in this reversal. For example we had been taking profits in US industrials for several months. Across most strategies our preference for materials over energy was rewarded, and mining stocks were a key contributor to relative performance. Over the quarter the main headwinds to QEP performance were stock specific.

The fund underperformed the benchmark over the first quarter. The strong performance of a narrow cohort of "growth" stocks in the US technology and consumer discretionary sectors was the key drag - we are underweight expensive names such as Facebook and Amazon. However, the strategy's overweight position in Apple provided a partial offset. Healthcare was a negative, as our fundamentally-based positioning was not rewarded amid the volatility caused by speculation on healthcare reform in the US. Within continental European financials our preferred insurers underperformed while the lower quality banks that we underweight did well; in Japan our favoured attractively valued banks lagged over the quarter.

On the positive side, the real estate sector contributed to fund performance over the quarter thanks both to our long-standing holdings in Hong Kong and our avoidance of US REITs. In the US more broadly, the strategy also benefited from not owning expensive stocks in telecoms, utilities and staples. In the latter sector, we saw additional contributions from our overweights in home products stocks in the US and Europe including the UK this industry saw substantial merger and acquisition (M&A) activity /speculation over the quarter.

Source: Schroder QEP Global Core quarterly fund update - First quarter 2017

The Absa Global Core Equity Feeder Fund aims to provide capital growth primarily through investment in equity securities of companies worldwide by investing in a broadly diversified portfolio of securities selected through the application of analytical techniques.