Mandate Overview11 Oct 2019
The Fund is a feeder fund investing only in the Stonehage Fleming Global Best Ideas Equity Fund (“Master Fund”), managed by Stonehage Fleming Investment Management Limited in the United Kingdom. The Master Fund seeks to achieve long-term growth in capital and income in a focused portfolio of high quality listed businesses from around the world.
Stnhage Flming SCI glbl bst ideas equity FF Sep 19 - Fund Manager Comment11 Oct 2019
- Our philosophy is designed to buy outstanding quality businesses that can grow on a sustainable basis. The intention is to hold them until they may become overvalued. McDonald's has been in the Fund's list of top ten holdings for a long time.
- It is often the sustainability of a simple business model that delivers better than what many may expect. In the case of McDonald's, the model is to own the majority of the restaurant properties and to franchise the restaurant operations to independent franchisee groups.Dividends are funded only from rent income, with any excess rent and the franchise royalty income utilised to reinvest in the business, to cover marketing and relatively low operating costs and to buy back shares.
- As simple as this model may sound, it is very supportive of sustainable growth in different forms. It creates an ideal landlord-tenant relationship in the sense that they are practically business partners working in the best interests of both parties. It also creates a very stable cash flow stream, with less risk of losing a tenant than in most other property businesses. The discipline of paying dividends only from rent income creates a cash flow buffer to finance future growth.
- Of course, enduring success of the restaurants is absolute key for continuing organic growth. In this context, McDonald's invested heavily in product quality and evolved its menu to offer healthy choices, while its scale ensures competitive pricing of its products. Home delivery also has become a new growth avenue.
- The share delivered a total return of +21.3% p.a. over the past five years, compared to +6.9% p.a. for the MSCI World AC index and +11.1% p.a. for the S&P 500 index (all in US$ terms). The dividend has been raised each of the past 43 years, making it one of the world's few Dividend Aristocrats. I
Stnhage Flming SCI glbl bst ideas equity FF Jun 19 - Fund Manager Comment06 Sep 2019
The first half of this year delivered a return of +16.2% for the MSCI ACTR index (+12.2% in the first quarter and +3.6% in the second quarter). This is more than double the long term compounded annual return for the index. Whilst investors are grateful for this excellent result, they may wonder whether it signals complacency and an overheated market, especially against the backdrop of two fundamental issues of concern to many - US yield curve inversion and the Federal Reserve seemingly close to start cutting their target rate. These events traditionally precede the next respective recessions and are perceived to damage investor confidence.
We commented in our March 2019 fact sheet on S&P 500 historic returns following the US 2/10 year yield curve events. The overall conclusion was that returns generally continued on a positive track, with just a few exceptions. It is also worth making the point that this particular fundamental curve has not yet inverted and is currently actually steepening. The more tactical 3 month / 10 year curve has inverted recently, but is also steepening slightly again.
A study of S&P 500 returns following the past seven initial Federal Reserve rate cuts (since 1984) of the subsequent six and twelve month periods show a median return of +8% and +14% respectively. Five of the seven cycles delivered positive returns over those periods. The two negatives ones were those following the burst of the technology bubble and the credit crisis era, both with real and financial imbalances in the economy with high specific risks.
Investors have to take serious cognisance of all the warning signals in the capital markets, but have to equally be careful not to overreact. The challenge lies clearly in having the necessary insight of the level of imbalances in the economy (if any) and the potential depth of economic contraction (if any). The possibility of a long soft landing should not be discarded.
Stnhage Flming SCI glbl bst ideas equity FF Mar 19 - Fund Manager Comment29 May 2019
The first quarter of 2019 delivered the best first quarter returns since the turn of the century for both the Fund’s comparative MSCI ACTR and the S&P 500 indices. Both indices have, though, not yet reached their respective peak levels registered last year.
Despite this positive backdrop, financial headlines are littered with news of the US yield curve inverting and the implied risks of an imminent US recession. Some perspectives in this context may be of value.
That the yield curve has inverted (and then flattened again) reflects the drop of long rates (10-years or longer) below the very short rates (up to 3 months) rather than below the more fundamentally based 2-year rate levels. Whilst we do not perceive yield curves based on short rates as fundamentally too well founded, an analysis of a number of such curves nevertheless indicate the possibility of an US recession about 24 months in the future.
The more fundamentally based yield curves are in process of flattening but have not yet inverted. If they may flatten and then immediately invert, it may signal the next US recession to be about 23 months away (considering data around the three most recent recessions). The S&P 500 index has historically peaked shortly before the respective recessions started. The average lead time over the last five recessions has been 4 months.
We studied the average S&P 500 return levels after 12, 18 and 24 months following the more fundamental 2/10-year curve inversions. They were +16%, +17% and +20% respectively ($-terms, excluding dividends). The lowest individual figure was -2% (after 18 months in the case of the 1980 inversion event).
We do not attempt to forecast equity markets but see it as our duty to seriously consider the risks of staying invested. The current headlines of yield inversion do not yet force us onto the proverbial side-lines