Value-style investing, while proven in the long term, faced ongoing headwinds over the past year. 2019 was dominated by momentum investing and our funds did not reward our investors as we would have liked. The MSCI World Index’s performance of 28.4% including dividends (in dollar terms) masked the reality of a narrow market, in which a few selected stocks drove outperformance. Technology and high quality defensive industrial companies posted stellar returns, while large parts of the markets underperformed. Given our low exposure to expensive technology and defensive companies, our returns for 2019 were disappointing on both an absolute and relative basis. The good news, as we outline below, is that the future looks brighter.

2019 in review

While several shares performed well, such as the fund’s multi-year top holding Brookfield Asset Management which returned 52% for 2019, Wheaton Precious Metals (+54%) and Babcock International (+42%), disappointing returns delivered by several of the fund’s larger holdings proved to be the primary driver of overall fund performance.

Notable detractors over the period were Japan Post Insurance, L Brands and The Mosaic Company, which declined 24% on average.

Our equity positions are inherently diversified. Many of the factors impacting underperforming occurred in the same year, but had very little else in common. In particular, Japan Post Insurance was hit by a mis-selling scandal, L Brands by continued weakness in its Victoria’s Secret business (while the larger Bath & Body Works segment continued to shine) and Mosaic by a perfect storm of US floods, African swine fever and the ongoing US-China trade war which negatively impacted fertilizer prices.

The year was equally remarkable in terms of what we didn’t own and therein lies a large part of the reason for the performance of the funds. While as recently as 2016 the funds held significant positions in high-quality US counters such as Microsoft, Union Pacific and JP Morgan, we rotated away from these securities as they hit what we perceived to be their intrinsic values into areas that are currently undervalued and out of favour. It is important for clients to understand that many US stocks, specifically large cap equities in favoured sectors such as technology, or those with popular and (in our view) overpriced attributes such as perceived higher quality, momentum or lower volatility, went to stratospheric heights.

We owned some of these winners previously, but erred by selling too early.

We believe some important questions should be asked whenever an investment process results in a poor set of numbers in any year.