INVESTMENT REPORT FOURTH QUARTER 2015

Transcription

1 INVESTMENT REPORT FOURTH QUARTER 2015

2 Outlook for 2016 By Bo Knudsen, Managing Director and Portfolio Manager We live in a changing world full of contrasts. A world in which growth is becoming more and more difficult to identify. The global economy has become more divergent than it has been for years. Some geographic areas are in recession, while others are experiencing moderate growth. There is turmoil in the commodity markets whereas global consumer spending is in recovery, all of which makes for attractive hunting grounds for the focused and active investor. We continue to follow our proven strategy of carefully selecting stocks benefitting from thematic tailwinds. These are our main insights for 2016: Growth and recession Investors seek insights by making complex things simple. That is a difficult, but necessary exercise. Many observers speak of a single global economy and a single global equity market moving in a single direction. A simplification like that makes the most sense during periods of crisis. Historically, equities move more in sync during such periods. Now, however, we have moved to a new environment. One where stocks move more individually instead of marching to the same beat. The global weather system can comprise both flooding in India and drought in California at the same time. It is the same with the global economy of It, too, can have growth and recession at the same time in different areas. In 2016, the United States will hike interest rates, while China, Japan and Europe will all pursue expansionary monetary policies. That will create divergence, especially in FX markets. BRIC is a term coined by Goldman Sachs to promote the four major, booming emerging market economies of Brazil, Russia, India and China. Today, Brazil and Russia are mired in recession due to the low oil and commodity prices. China is in a slump, while India is improving. Goldman Sachs quietly closed its BRIC fund in September Insight is usually achieved through simplification. BRIC is but a rigid simplification in a world of growth and recession, gains and losses, opportunities and threats all happening at the same time. That was the world of 2015, and that is most likely the environment we will have to navigate going forward for the following reasons: 1. In 2016, the United States will hike interest rates, while China, Japan and Europe will all pursue expansionary monetary policies. That will create divergence, especially in FX markets. 2. In 2016, the traditional manufacturing industry will continue to battle surplus capacity and falling prices. Most recently, the CEO of Fastenal, the well-run, large US manufacturer of a huge catalogue of products ranging from nuts and bolts to just about anything, said that the industrial environment is in a recession. At the same time, the all important service sector is performing very well all over the world. The traditional manufacturing industry accounts for only 12-15% of the US and European economies, whereas in China, the service sector recently became larger than manufacturing. The service sector will continue to grow and to create investment opportunities. 3. In 2016, the oil and commodities sectors will remain under pressure. The price of iron ore is at its lowest level in real terms for more than one hundred years. Significant excess capacity in many different commodities is making conditions difficult. The solar panel industry, on the other hand, is experiencing strong growth. At the same time, the colossus Google (now named Alphabet) is seeing its website-generated revenue surge by 28%. In other words, while some major sectors are deep in recession, others are booming. That means, you cannot just place your money in everything and everywhere. Investing through an index is an uncritical strategy in a many-faceted world. Investing in an equity index can be investing in yesterday s winners. A reflection of something that used to work. It is more important to focus on what will happen in the future, taking a long-term approach to who will be the winners of tomorrow. This is the approach we pursue. This is how we invest. And this is precisely the approach that has helped

3 us achieve world-class investment results over the past 25 years, significantly outperforming the market return. You cannot just place your money in everything and everywhere. Investing through an index is an uncritical strategy in a many-faceted world. Investing in an equity index can be investing in yesterday s winners. A reflection of something that used to work. Market outlook Focused approach creates results It is becoming increasingly difficult to identify stocks and even more difficult when it comes to bonds that can provide a good return even seven years after the big dip equity markets took in March 2009 and after more than a 30-year bond bull market. There is no one region today that is unilaterally generating growth, unlike the situation we have previously seen in emerging markets. You have to have a more specific selection approach, or have someone spot the good opportunities for you. Today, every part of the economic cycle is represented in the group of emerging markets. From certain reform-driven countries enjoying strong demographic tailwinds to countries with distinct demographic challenges combined with entrenched corruption and commodity headwinds. There is no one region today that is unilaterally generating growth, unlike the situation we have previously seen in emerging markets. You have to have a more specific selection approach, or have someone spot the good opportunities for you.

4 There are advisers and investors who systematically buy into stocks that are cheap on P/E-terms. Only a few of them do it well. Buying at a low P/E can be buying a pipe dream. It takes more than that to make money in the equity market. If a company has to invest large sums over time just to support the e (i.e. earnings), it will not be able to generate enough money to pay dividends to its shareholders. It is more important to keep an eye on the free cash flow, how it evolves and if it is sustainable in the years ahead, and to evaluate companies on those parameters. There are always winners and losers but 2016 looks to become a year of considerable divergence. We believe that in order to get a 7 12% return in the current environment, you need to prune your holdings to a very concentrated portfolio of individual stocks backed by thematic tailwinds. A broad portfolio of investments could, in 2016, be tantamount to a year of zero returns with the US dollar as the only possible life boat. There are always winners and losers but 2016 looks to become a year of considerable divergence. The year started off with extremely volatile Chinese equity markets. In periods of turbulence, co-variation is unavoidably high with equities falling across the board. However, when things settle down, the focus returns to individual company performances. The concentrated market is most apparent in the US, the world s leading equity market, where a new term has been coined: the socalled FANG trade, an acronym denoting the most popular and best performing tech stocks that are driving the market: Facebook, Amazon, Netflix and Google. Historically, such a concentration has indicated over-mature markets. On the other hand, it also shows that the market is currently willing to differentiate between winners and losers. The industrial environment in recession in 2016 It took the United States 300 years to develop a banking system with assets exceeding USD 15 trillion. By comparison, China s total debt has risen by more than USD 20 trillion since 2007 and now makes up more than 280% of the country s GDP, according to McKinsey Global Institute. This explosive growth in debt has been driven by the need for growth and exceptionally easy access to cash. High debt levels are a sign of easy access to capital. Consider, for example, the growth in global dollar reserves in the wake of the exceptionally lenient US monetary policy. Ample liquidity and capital exports drove, and continues to drive, a debt boom. This is especially evident in the emerging markets, as production capacity grew in virtually all sectors, and a general investment boom in China. It is common sense that when large amounts of funds are invested, it will also very often bring with it the wrong investments and over-expansion. Figure 1 Trillion USD Trend in World foreign exchange reserves Total international foreign exchange reserves Source: Macrobond, IMF It took the United States 300 years to develop a banking system with assets exceeding USD 15 trillion. By comparison, China s total debt has risen by more than USD 20 trillion since In the initial phase of growth in global currency reserves driven by low interest rates in the developed economies headed by the United States, money migrates to regions offering higher

5 interest rates. That creates an abundance of money with dollars and euros flowing to emerging market economies where they are exchanged into local currencies by the respective central banks and commercial banks. That creates growth, but it also implies a greater risk of misallocation of capital and an accumulation of excess capacity to manufacture physical goods. Currently, we are now well into the relatively difficult phase of the process where the mechanism is reversing; that is, first cutting back and eliminating qualitative easing over the past few years to currently interest rates trending slightly upwards, tightening liquidity and making things a little more difficult for the emerging markets. Combining this with the fact that especially the big spending Western consumers are increasingly demanding digital rather than physical products, helps to explain the very special situation the world is facing in When consumers prefer to spend a weekend in Rome to buying a piece of furniture or a new television set, it creates a significant change in the need for the transport of goods. When people s calendar, watch, books and maps are provided through apps on their mobile phone, it changes the need for physical production and transport. The trend is from physical products to digital products. Put very simply, the volume of transported goods is falling, something that shows in global trade and is reflected in the financial statements of many transport companies whose business relies on trade between Asia and Europe. Combining this with the fact that especially the big spending Western consumers are increasingly demanding digital rather than physical products, helps to explain the very special situation the world is facing in Iron laws According to one of mankind s few iron laws, described in the highly recommended book Sapiens written by professor Yuval Norah Harari, is that man will do anything to make life easier. This inherent ambition drives growth in and the creation of products and services that we expect will make life easier. There are many benefits of having what has become the ultimate product of today, something that has evolved to virtually being an integral part of people today: the smartphone. But has this product made life easier? In some areas, yes, absolutely! But it has also complicated life and continues to do so, creating issues that need to be solved through new products and services and will they make life easier? The things that the most affluent parts of the population have is being craved by consumers in the subsequent ranks of society. In other words, growth lies in digital products and general services that will presumably make life easier. We believe that 2016 will be a year of moderate returns, in which the selective investor can make a big difference just as was the case in We believe that as a general rule it is best to underweight companies that sell or are involved in physical products and instead look towards digital products and services to identify growth. Lower returns We believe that 2016 will be a year of moderate returns, in which the selective investor can make a big difference just as was the case in This approach is reflected in our investment strategy. However, the very basic piece of advice provided by certain advisers of minimising costs and buying index-linked products as your main and sometimes single investment strategy can be an unprofitable strategy in today s world. The principal fundamental risk factor of the global economy that can bring the dull synchronicity back into the equity markets is a recession in the world s most important and psychologically speaking most dominant economy of today, the United States. The good news is that the risk of such a scenario materialising within the next months is relatively small. The long-term indicators that we monitor closely continue to indicate moderate upward economic trends.

6 Carnegie Worldwide Fourth Quarter Commentary Overview Carnegie Worldwide closed out 2015 with a positive Q4 return of 2.9% (AUD), outperforming the benchmark MSCI AC World Index, which gained 1.4% (AUD)*. As a result, our investors can look back at a year in which the net asset value rose by 20.2% (AUD), whereas the MSCI AC World Index rose by 9.8% (AUD).* The outperformance was mainly driven by our high weighting in US stocks and our lack of exposure to energy and commodity stocks. The biggest contributions came from individual stock-picks such as Visa, Alphabet (formerly Google), Home Depot, HDFC and Novo Nordisk. There were also a couple of stocks, such as Sensata, Vivendi and Union Pacific, that failed to meet our expectations. After a period of weakness in the second and third quarters, equity markets recovered in the fourth quarter despite the first hike in US short-term interest rates in nine years. Hardly taking many by surprise, the rate hike confirmed the US economic recovery. Growth in China, however, is slowing rapidly, combining with weak commodity markets to create severe problems for emerging markets. Europe is trending upward, albeit slowly, not surprisingly positioning the US dollar and the US stock market strongly. Current investment strategy We expect that market volatility could continue as a result of macro-economic uncertainty. We are most concerned about the weak earnings trend seen in several companies and sectors. As a result, we have a high exposure (about 60%) to US stocks and our focus is on unique, high quality solid growth companies. We believe that the US economy, the biggest in the world, will keep its momentum, which, from our perspective, is the most important parameter for a long-term positive view on equities. Portfolio changes In the fourth quarter, we sold our successful investment in Walt Disney, as we believe the company is no longer immune to important changes in the media world (due to streaming etc.). Instead, we initiated a position in tobacco company Reynolds, based on its strong growth prospects in the US following the acquisition of peer Lorillard. We also sold railway operator Union Pacific due to slumping freight volumes, making room in our portfolio for AIA. AIA and Prudential are some of Asia s leading health and life insurance providers. In Asia, this type of insurance is particularly important, as welfare systems in the region do not adequately safeguard families in the event of sickness or accident. Our biggest themes remain connected lives, financial recovery and US housing. We do not have positions in energy, telecoms or utilities. *Past performance is not a reliable indicator of future performance.

7 Carnegie WorldWide Global Equity Composite Gross of Fees Key figures 31-Dec Sep-15 More information AUM, m AUD 11,041 12,102 Launch date: 29-Jun-90 Read more: Annualised return in % # 1 year 3 years 5 years 10 years Lifetime Return on Portfolio Return on Benchmark Active return (arithmetic) Investment philosophy The investment objective of the portfolio is to achieve long-term capital growth exceeding the return of the market with a moderate risk profile as measured by standard deviation. The aim is to have a portfolio s standard deviation level at or below that of the market. Annualised risk 3 years 5 years 10 years Lifetime SD Portfolio SD Benchmark Investment Performance Graph (Indexed) # AUD Logarithmic 2,000 1,000 Our experience in managing focused portfolios has taught us that a concen trated portfolio of 25 to 30 high con viction stock picks ensures a sufficiently high risk diversification. The portfolio endeavours to understand and ca pitalize on the trends of the future. Most importantly though is to be opti mally prepared for the future with a robust portfolio of unique stock picks. 200 The portfolio invests in equities listed on global stock exchanges and has no geographic or sector restrictions^ Carnegie WorldWide Global Equity Composite (gross of fees) MSCI ACWI incl. net dividends (In January 2010 the benchmark was changed from MSCI World incl. net dividends). Carnegie WorldWide Global Equity Model Portfolio US & Canada UK Continental Europe Pacific Emerging Markets Total Benchmark* Energy Materials Ecolab Industrials Sensata 1.6 Fanuc Consumer Discretionary Home Depot 5.1 Vivendi 2.3 Rakuten L Brands 4.2 Consumer Staples CVS Health 3.6 Reynolds 3.0 Health Care Gilead Sciences 3.7 McKesson 3.0 Financials AIG 3.2 Citigroup 3.0 TD Ameritrade 2.0 Wells Fargo 3.5 Information Technology Alliance Data 1.7 Facebook 3.8 Alphabet 4.4 Visa 7.8 BAT 3.8 Diageo 2.7 * MSCI All Country World Index incl. net. dividends. The number behind the name of the share states the percentage of the portfolio s holdings. Nestlé Novo Nordisk Prudential 3.4 UBS 4.0 AIA Group 3.1 HDFC Amadeus IT 1.8 Keyence Telecommunication Utilities Others Total Benchmark* # Past performance is not a reliable indicator of future performance. ^ There is no guarantee that the investment objective will be achieved.

8 This document has been prepared by Carnegie Asset Management Fondsmæglerselskab A/S ( Carnegie ). Carnegie is regulated by the Danish Financial Services Authority under Danish laws, which differ from Australian laws. In Australia, Carnegie is exempt from the requirement to hold an Australian Financial Services Licence by operation of ASIC relief. Carnegie is permitted to provide financial product advice in certain classes of financial products to wholesale clients. This document is distributed in Australia by BNP Paribas Investment Partners (Australia) Limited ABN , AFSL ( BNPP IP ). It is produced for general information only for the exclusive use of wholesale investors and does not constitute financial product advice, nor an offer to issue or recommendation to acquire any financial product. You should seek your own professional advice in relation to any financial product referred to. This document is distributed in New Zealand by BNPP IP. BNPP IP and Carnegie are exempt providers under the Financial Advisers Act 2008 that are permitted to provide financial adviser services to wholesale clients as overseas financial advisers as they do not have places of business, and do not provide any financial adviser services to retail clients, in New Zealand. In New Zealand, this document is only being provided to wholesale clients for the purposes of the Financial Advisers Act 2008 (New Zealand). Any opinions included in this document constitute the judgment of the document s author at the time specified and may be subject to change without notice. Such opinions are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient and are not intended to provide the sole basis of evaluation of any investment. The contents of this document are based upon sources of information believed to be reliable, but no warranty or declaration, either explicit or implicit, is given as to their accuracy or completeness. BNPP IP and Carnegie, to the extent permitted by law, disclaim all responsibility and liability for any omission, error, or inaccuracy in the information or any action taken in reliance on the information and also for any inaccuracy in the information contained in the document which has been provided by or sourced from third parties. Past performance is not necessarily indicative of future performance. This document may not be copied, distributed or passed on, directly or indirectly, to any person without the express consent of BNPP IP and Carnegie. BNP PARIBAS INVESTMENT PARTNERS (AUSTRALIA) LIMITED 60 Castlereagh Street, Sydney NSW 2000 Tel: (Australia) or Fax: IP_AU@bnpparibas-ip.com CARNEGIE ASSET MANAGEMENT FONDSMAEGLERSELSKAB A/S Dampfaergevej 26 DK-2100 Copenhagen Tel: carnegieam.com Carnegie Asset Management Fondsmaeglersaelskab A/S claims compliance with the Global Investment Performance Standards (GIPS ). To receive a list of composite descriptions of the company and/or a presentation that complies with the GIPS standards, please contact us at , or write to Carnegie Asset Management Fondsmaeglerselskab A/S, Dampfaergevej 26, DK-2100 Copenhagen, or info@carnegieam.com. The Firm is defined as that part of Carnegie Asset Management Fondsmæglerselskab A/S, which manages third party assets and where the portfolio manager is located in Copenhagen.