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BlueAlpha BCI Global Equity Fund  |  Global-Equity-General
4.4234    +0.0377    (+0.860%)
NAV price (ZAR) Fri 4 Jul 2025 (change prev day)


BlueAlpha BCI Global Equity comment - Dec 16 - Fund Manager Comment16 Mar 2017
Global Markets
In the fourth quarter, financial markets finally had to face another inevitable increase in the Feds Fund rate. Given the amount of news, analysis and ongoing angst about the extent and the timing of rate increases, one might mistakenly assume this was a big deal. In hindsight, it was hardly news at all. Perhaps correctly so. Rates are extremely low (perhaps too low) - they need to "normalise" and the US economy is in good shape. This, linked with a tightening labour market, means that expectations are for continued but moderated hikes in 2017. Global equities ended the quarter in positive territory, directly as a result of a strong performance by the US (+3, 3%).

Japan was flat with both Europe and the UK down over 1%. Emerging markets and Asia gave back some of their strong 3rd quarter performance ending down 4.5% and 6.7% respectively. Gold was sold off aggressively during the quarter, falling 13%. Commodities were broadly higher, in large part due to a rally in oil in November, following the first agreement by OPEC in 8 years to cut production.

The big news - and barely a plausible idea at the beginning of the year - was the election of Trump as the next US president. This left-field event, together with the widely unexpected Brexit result, hardly sounds like an environment conducive to investment returns - however, on average, markets appear to have taken these events in their stride. After a firm dose of "risk off" in the first 3 weeks of the year driven by both Chinese growth fears and energy sector debt contagion, markets mostly grinded up for the remainder of the year with the World Index ending up 7.5%.

These surprise events over the last year serve to highlight how futile it is to try and forecast outcomes, and even more so, to anticipate how markets will respond. While the surprise "bad" Brexit outcome caused a 2 day and 7% decline in markets, 6 months later markets are 13% higher. More interestingly, the initial "shock" of a Trump victory (with gold spiking intraday and index futures selling off) was as quickly reversed once the negative surprise was deemed decidedly positive for markets, given prospects for lower tax rates and repatriation of foreign cash into dollars.

Portfolio
The fund returned 2.1% in USD over the quarter, ahead of the world index return of 1.8%. Exposure to consumer discretionary and industrials added to performance, while technology and healthcare detracted from returns - as did a lack of exposure to financials. At a stock level our top contributors to performance were Fiat (+30%), Time Warner (+23%) and Boeing (+19%). Fiat is a new investment in the quarter while Time Warner and Boeing are longstanding positions. The worst detractors from performance were Japanese mobile operator KDDI (-17%), Facebook (-10%) and SS&C Technologies (-10%). There were no material changes to the fundamentals of any of these businesses.

Over the quarter, we reduced our healthcare exposure and sold our investments in Medtronic and CR Bard. We also sold out of aerospace supplier Safran, and Samsung. Apart from Fiat, the only other new purchase in the quarter was Pandora. Pandora is an affordable luxury jewellery business best known for its signature charm bracelets.

Over 30 years, it has built a significant competitive position generating 60% plus returns on invested capital. With less than 1% of the global jewellery market it appears this high return business still has enormous growth opportunities ahead of it. A recent short term growth scare and only a slightly higher than market rating provided a good opportunity to make an investment. In the case of Fiat - while one would be stretched to argue that it is a highquality business (operating in a capital intensive and low return industry) the valuation considered from various aspects seemed too compelling to ignore. More importantly management stood by the implied free cash flow generation of 10bn Euro over the next 2 years while the market capitulation stood at only 9bn Euro at the time of investment.

For the year, the fund gained 1.4% in USD, underperforming the world index. Given the strong retracement of the Rand against the Dollar last year, this resulted in a 10% decline in the fund in 2016 in Rand terms. Dollar performance was strongly influenced by sectoral exposure. The fund had no exposure to either energy or financials (other than Blackstone), which exceeded the market return by 13% and 10% respectively. At the other end of the spectrum we held reasonable exposure to healthcare which as a sector underperformed by 13%. Consumer discretionary also lagged the market by 5% while technology was marginally ahead.

Given that we endeavour to invest in high quality growers, it is an inevitable outcome of our investment approach that we will tend towards higher return industries. In turn we will naturally find ourselves "out of sync" with market forces from time to time. Nonetheless we remain focused on investing in high quality businesses with good growth prospects.
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