Market review

Global equity markets performed well over the quarter. On a total US dollar return basis - the S&P 500 Index gained 9.0%, the MSCI World Index 8.6% and the MSCI Emerging Markets Index 11.8%. The surprising decline in long dated developed market bond yields that started in Q1 reversed in the final quarter of the year. Yield on US 10 year maturity government bonds increased from 1.7% at the end of Q3 to 1.9% at the end of Q4. The yield on 10 year German bonds, which had fallen to -0.6% at the end of Q3, closed the year at -0.2%.

In December President Trump became the third president since America’s founding to be impeached. Nearly all Democrats voted in support of the two articles of impeachment - abuse of power and obstruction of Congress – but they failed to attract Republican support. As Republicans control the Senate and a two-thirds majority would be required to remove Trump from office, a conviction seems unlikely.

In the UK election in December, the Conservative Party secured the biggest majority since 1987 - an unexpected landslide after relentless campaigning on the promise to “Get Brexit Done”. The majority will give Prime Minister Boris Johnson greater leeway to steer future trade talks.

Portfolio review

The fund performed in line with its MSCI World Index benchmark which returned 8.6% in the quarter. Financials was the best performing sector for the fund, returning 16% vs. financials in the benchmark returning 8.8%. The major contributors were all London-listed companies - on the clear UK election victory for the Conservatives lead by Boris Johnson, and the subsequent certainty of Brexit going ahead - with a significant rebound in the Prudential plc price from oversold levels (+22%), a 31% surge in Legal & General Group and OneSavings plc rising 26%. The fund’s consumer-focused holdings also contributed to performance. Alibaba gained 27% after posting consensus-beating Q2 results in early November, while UK-based homebuilder Taylor Wimpey strengthened 32%. Altria clawed back some of its losses from earlier in 2019 after better than expected Q3 numbers (+23%).

The most significant detractors from performance came from the IT sector, where the fund’s absence of exposure to a surging Apple share price (the biggest constituent in the MSCI World Index; +31%) and poor performance from Oracle (-3%) did the most damage. Other disappointing returns for the quarter came from Unilever (-4%), Cisco Systems (-2%) and Boeing (-14%). Boeing has experienced ongoing headwinds in its efforts to get the 737 Max approved for commercial use after two of these new regional jets crashed in 2019. In addition, the company fired its CEO in December.

The fund endeavours to control risk in a rational manner by dampening hard-to-predict factor exposures and focussing its risk budget on proven bottom-up stock picking.

Based on current consensus expectations the fund offers a more attractive valuation than the overall market (fwd P/E: 13.1x vs. 16.9x and Div Yld: 3.0% vs. 2.3%), while producing a better return (ROE: 26% vs. 20%) and better profitability (operating margin: 25% vs. 20%). The fund has an active share of 88%.