Global markets have ended 2017 with a number of remarkable records in their wake. Here are three that help to illustrate where we find ourselves at the close of the year. It is strange territory indeed:


-The inclusive MSCI All Country World Index has, for the first time ever, had a full calendar year without a single negative return month (on a total return basis). In fact, this index has had consistent positive return months since October 2016.

-The S&P 500 similarly has had 14 positive total return months to date. This beats the previous longest positive streak of 10 months that ended in September 1995.

-In the past two years, US stocks have exhibited some of the lowest volatility on record, which record goes back to the 1880s.

Essentially, there are two ways to think about the current state of financial markets: The optimists would point to the robust health of the world economy generally, led by the US at full employment and a rapidly recovering Europe. To the inhabitants of this benign land, these data indicate further vigorous earnings growth ahead as well as markets that are correctly priced for this eventuality. An alternative view would be that a decade of ultra-loose monetary policy has unleashed a credit binge in which company performance has been boosted by credit-fuelled buybacks and easy money for sub-economic capital projects. Our cautious stance remains and thus too our leaning towards the latter interpretation, albeit a year too early.

The new records mentioned above provided some of the momentum for the steady progress of the fund’s quarterly returns in 2017. The upshot is that the full calendar year saw the fund returning 24.4% after costs, against the 22.4% of the MSCI World Index benchmark.

For the December quarter, the fund benefited most from its financial sector holdings. In particular, the reality of the long-awaited tax reforms and an apparent willingness by the Federal Reserve to keep raising interest rates boosted the fund’s US-based financial holdings, where Bank of America rose 17% and JPMorgan 13%. Additionally, Sberbank rose further in the quarter from oversold levels (+19%). From a sector perspective, consumer staples detracted the most from the quarter’s returns, with negative returns from Unilever (-4%), Wesco Aircraft Holdings (-21%) and Philip Morris International (-4%).

Geographically, the fund saw the bulk of its beneficial performance from holdings in the US, despite being effectively underweight this geography compared to the benchmark. This was thanks to further excellent returns this quarter from the homebuilder business NVR (+23%), as well as Cisco (+15%), Microsoft (+15%) and Boeing (+17%).

A number of businesses in the portfolio returned more than 50% in 2017. Our conviction about the mispricing of homebuilders in general was vindicated by the fund’s best performing investment in 2017, NVR (+110%). Taylor Wimpey, a UKbased counterpart, returned 58%, while another UK recovery trade was evident in the 68% return provided by IG Group. Boeing rose 95% in 2017 on the back of robust order growth. The principal detractors were Wesco Aircraft (-51%), where a number of management issues continued to plague the business, while the prolonged turnaround struggles of retailer Esprit (-32%) disappointingly continued in 2017. Nielsen (-10%) also frustrated its investors, with deeper than expected problems in their Buy division.

Disciplined stock picking, a focus on company fundamentals, and a healthy disregard for macroeconomic noise facilitated a satisfactory result in 2017, despite a difficult year for managers with a value-oriented mind-set. Based on current consensus expectations the fund has a forward P/E of 14.1x versus 16.9x for the MSCI World Index and a dividend yield of 2.5% versus 2.2%. The fund ROE is 20% compared to 16% for the above benchmark and has superior profitability (operating margin: 22% versus 19%). The fund has an active share of 86%.