Since our last commentary at the end of June, global equity markets have advanced another 4.8% (MSCI World Index, US dollar total return). Over the last 12 months, this return is now 18%, while the last five years (a more meaningful investment period) have produced a remarkable bull run of some 68%. That’s 11% per year, compounded, since September 2011. To produce the 68%, earnings have grown only 11% in five years, dividends provided a further 15% or so, while the market price to earnings (PE) multiple has expanded by a heady 42%. The latter is now close to 17x forward earnings, which is not unprecedented, but close to ratios last seen in the dotcom boom and bust at the turn of the century.

Inevitably, such a prolonged period of equity market gains - and particularly the last mentioned PE expansion - causes discomfort about what might come next. Much debate and commentary have ensued about the likelihood of a correction, especially during these unusual monetary conditions. The truth, of course, is that nobody really knows, although some people are very well paid to pretend that they do. We are by nature sceptical of forecasters and forecasting and thus attempt to prepare rather than predict. To this end, the fund’s portfolio is built from undervalued developed world companies, whose prices invariably fall far less than those of overhyped expensive businesses when the market corrects, as it inevitably must at some point if history is any guide.

For the quarter, the fund’s holdings in the consumer discretionary sector helped produce index beating returns despite overall market nervousness in this area, caused by the much-publicised disruptive behaviour (or anticipated behaviour) of the likes of an Amazon. In particular, exposure to the homebuilders subsector on both sides of the Atlantic produced good quarterly returns (NVR +18%; Taylor Wimpey +16%). Indeed, since our purchase of US-based NVR in February of 2014, it has returned 157%. We believe that it still offers significant value. Lions Gate Entertainment Corporation also added to the fund’s performance from consumerbased companies, rising 19% during the quarter.

Other performers and detractors for the period were Boeing (+29%), ASML (+31%), Royal Dutch Shell (+16%), Altria Group (-14%) and Medtronic (-11%).

The fund has significant holdings in Information Technology (some 20% of fund assets) and Financials (27% of fund assets), both of which have contributed meaningfully to returns in this period and over longer periods.

Our approach in the IT sector has been two-pronged. Firstly, ownership of the ‘old’ era companies, dismissed as they were for likely being overtaken and made obsolete by the so-called FANGs (Facebook, Amazon, Netflix and Google), has been a very profitable strategy for the fund. This is the classic value opportunity where unpopular businesses are made available to the market at well below their intrinsic worth. The fund’s holdings in businesses like HP Inc. and Microsoft have risen well above 30% over the last year, while Apple (about 3% of fund assets) has returned close to 40% over this period. Cisco and Oracle are other noteworthy fund holdings. We have, however, also closely studied some of the so-called ‘new’ era disruptor companies, and are satisfied that a select few, while expensive-looking at first glance, have only modest growth built into their share prices, compared to their likely potential. In this vein, we have bought exposure to ASML (the sole provider of next generation lithography machines for the manufacture of semi-conductors) and Alibaba (the rapidly growing Chinese online and mobile commerce enterprise).

Financials have been the fund’s most significant contributor to outperformance over the last 12 months. Over this period the fund’s financial holdings returned 36% vs. a 23% return for the fund as a whole before fees. While financial businesses have been repairing balance sheets since the financial crisis struck, their valuations have only lately begun to reflect this comprehensively reduced risk. We believe there is more value to be unlocked here and are happy to be patient while this process unfolds.

Based on current consensus expectations the fund has a forward PE of 14.9x versus 17.7 for the MSCI World Index and a dividend yield of 2.5% versus 2.3%. The fund return on equity is 20% compared to 17% for the benchmark and it has superior profitability (operating margin: 22% versus 19%). The fund has an active share of 87%.

The SIM Global Best Ideas Feeder Fund will change it's name to Denker Sanlam Collective Investments Glbl Equity Feeder Fund, effective from 01 September 2017