City of Miami General Employees & Sanitation Employees Retirement Trust

Transcription

1 City of Miami General Employees & Sanitation Employees Retirement Trust Quarterly Investment Review Q Contents Summary 1 Performance 2 Investment Strategy 3 Investment Strategy & Outlook 4 Account Management Information 5

2 Summary Performance In USD Terms (%) - Periods To 31 December Months 1 Year 3 Years Since Inception Portfolio Benchmark Portfolio Value (USD) 30 September December 2016 Total Net Flows 22,978,344 27,120,472 4,954,457 Inception: 25 June 2012 Source: Northern Trust / Barings/ MSCI, Gross of fees Periods over 1 year are annualized Benchmark: MSCI EAFE Total, Net Return from July 2, 2012, previously MSCI EAFE Total, Gross Return Past performance is no indication of current or future performance. The above returns and values are based on your investment in the Fund. The remainder of the report is based on the overall investment Fund. Performance & Strategy Summary International equities fell slightly in the fourth quarter with our portfolio underperforming the benchmark. Relative performance over one year remains ahead of the benchmark. In the fourth quarter the individual sector returns for international equities showed a very large dispersion in performance. This was the largest dispersion in sector returns that we have seen since the global financial crisis in Despite being underweight to the top three best performing sectors (Energy, Financials and Materials) our sector allocation did not detract significantly from performance. What detracted from performance was our stock selection in our favored areas of Technology and Consumer Discretionary, and Japan and the United Kingdom. To some extent (but not completely) we think the underperformance of some of our favored holdings was due to their being indiscriminately sold to fund purchases of stocks in the top performing sectors. One exception to this comment was UK listed hospital operator Mediclinic. This stock was the largest detractor from our performance in the fourth quarter. The company downgraded their earnings expectations due to personnel issues within their recently acquired Al Noor Hospitals business. We have reduced the size of our holding in the portfolio. Sony Corporation was the second largest detractor from performance in the quarter. There were no negative developments of consequence for Sony in the quarter and, in our view, the company continues to execute well on its business plan. Their CMOS sensors business, entertainment businesses and gaming business all look to us to have bright prospects and the company remains attractively valued. We added to our holding in the quarter. Not surprisingly given the sector performance, four financials stocks are in our top five performing stocks in the quarter. Rising interest rates have improved the earnings prospects for many banks and insurance companies. We made few changes to the portfolio in the quarter. We sold out of small holdings in Rakuten, SES and Pax Global. All of these holdings had been reduced in recent quarters due to our falling conviction levels about their investment prospects. We added two new positions in the quarter. Japanese company Mabuchi Motor is the global leader in small actuator motors for the auto industry. UK listed Tate & Lyle is a leading artificial sweetener and food ingredients business. Tate & Lyle was recently added to our firm's Global Best Ideas List. Market Returns - In USD Terms (%) - Q Japan Europe Ex U.K. EAFE United Kingdom Pacific Ex Japan Emerging Markets MSCI EAFE Region (Net) Financials Materials Consumer Discretionary Industrials Information Technology Telecom. Services Utilities Real Estate Health Care Consumer Staples MSCI EAFE Sector (Net) Energy Source: MSCI, Barings Source: MSCI, Barings 1

3 Performance - Q Total Relative Contributions (%) 0.7 Key Contributions - Geographic 0.4 Key Contributions - Economic Sector Continental Europe -0.4 Pacific Ex Japan Emerging Markets United Kingdom -1.3 Japan Real Estate -0.3 Telecom Services -0.7 Financials -1.2 Consumer Discretionary -1.5 Information Technology Allocation Selection Total Allocation Selection Total Continental Europe -0.1 UW Real Estate 0.2 UW Cash 0.0 OW Utilities 0.2 UW Middle East -0.2 OW Health Care -0.2 OW Pacific Ex Japan 0.1 UW Consumer Staples 0.3 UW Emerging Markets -0.9 OW Cash 0.0 OW United Kingdom 0.0 OW Industrials 0.1 UW Japan 0.1 OW Energy -0.2 UW Total Materials -0.2 UW Telecom Services 0.0 UW Financials -0.3 UW Consumer Discretionary 0.1 OW Information Technology -0.3 OW Total OW = Overweight UW = Underweight. Relative return is calculated on a geometric basis. Region & Sector definitions are based on index classifications. Economic exposure may differ. Major Stock Contributions To Relative Return (%) Positive Contribution Country Sector AXA SA 0.5 France Financials Mitsubishi UFJ Financial Group 0.4 Japan Financials Actelion 0.4 Switzerland Health Care Prudential 0.3 United Kingdom Financials Julius Baer Gruppe 0.2 Switzerland Financials Negative Contribution Country Sector Mediclinic International -0.5 United Kingdom Health Care Sony -0.4 Japan Consumer Discretionary Japan Tobacco -0.3 Japan Consumer Staples Wirecard AG -0.3 Germany Information Technology KDDI Corporation -0.3 Japan Telecommunication Services Source: Barings, Gross of Fees # Aggregated Holding 2

4 Investment Strategy Major Portfolio Positions - 31 December 2016 (%) Geographic Economic Sector Active Start Acct End Wgt Bmk End Wg Relative Weight Active Start WAcct End W Bmk End Wgt Relative Weight Portfolio Benchmark 31 Dec 30 Sep Portfolio Benchmark 31 Dec 30 Sep Emerging Markets Information Technology Cash Cash United Kingdom Health Care Middle East Consumer Discretionary Japan Telecom Services Pacific Ex Japan Consumer Staples Continental Europe Energy Total Real Estate Utilities Financials Materials Industrials Total Region & Sector definitions are based on index classifications. Economic exposure may differ. Largest Positive & Negative Positions - 31 December 2016 Positive Active Position (%) Country Sector Shire 3.1 United Kingdom Health Care Deutsche Boerse 3.0 Germany Financials Prudential 2.8 United Kingdom Financials Mobileye N.V. 2.8 Israel Information Technology Sony 2.8 Japan Consumer Discretionary Royal Ahold 2.7 Netherlands Consumer Staples Julius Baer Gruppe 2.7 Switzerland Financials Taiwan Semiconductor Manufacturing 2.6 Taiwan Information Technology AXA SA 2.2 France Financials BT Group 2.1 United Kingdom Telecommunication Services Negative Active Position (%) Country Sector Nestle -1.8 Switzerland Consumer Staples Novartis -1.3 Switzerland Health Care HSBC -1.3 United Kingdom Financials Roche Holding -1.3 Switzerland Health Care BP -1.0 United Kingdom Energy British American Tobacco -0.9 United Kingdom Consumer Staples Commonwealth Bank of Australia -0.8 Australia Financials Siemens -0.8 Germany Industrials Sanofi -0.8 France Health Care GlaxoSmithKline -0.8 United Kingdom Health Care # Aggregated Holding Source: Barings 3

5 Investment Strategy & Outlook International equities produced a slightly negative return in the fourth quarter but with enormous variation in the underlying sector returns. The one year return for the benchmark finished slightly positive. Absolute returns for international equities by region were negative in all areas, very slightly so in Japan and Europe and more so in the Emerging markets and Pacific ex Japan. The real story in the quarter was the tremendous dispersion of sector perfomance. Returns were strongly positive for Energy and Financials and sharply negative for Consumer Staples, Health Care, Real Estate, Utilities and Telecommunications services. The sector moves were pronounced in the fourth quarter and ostensibly triggered by the surprise election of Donald Trump as president. But to our eye, sector rotation and changing style leadership from growth to value began as early as the second quarter of Trump's election brought renewed economic hopes and may have been one catalyst, but the underlying cause was more likely valuation. The prolonged period of extremely low interest rates that we have seen across much of the world led to high quality defensive stocks (bond proxies) being bid to high valuation levels. We had been aware of this and it is the main reason that we have been consistently underweight to the Consumer Staples sector over the past year. Though in the fourth quarter it was not just Consumer Staples but a host of other quality sectors, as mentioned above, that corrected sharply. We mentioned that style leadership may have begun to shift from growth to value as early as the second quarter of We believe what caused the recent acceleration in this shift has been the pronounced rise in longer term interest rates that we have seen in a number of markets, but best exemplified in the US. To our recollection this past quarter saw the largest dispersion in sector returns (favoring value sectors) that we have seen since the global financial crisis in Moreover, looking at MSCI EAFE Value versus MSCI EAFE Growth this quarter saw Value outperform Growth to a greater extent than anytime going back to June 2000 during the unwind of probably the biggest style bubble in market history. Theriseinratesmayhavebeencausedbyanumberoffactors. Certainly the US Federal Reserve's rhetoric and recent quarter point hike in the Fed funds rate points to a tightening interest rate cycle. Supporting this move is a generally strong labor market in the US, the emergence of real wage growth and the increases that we have seen in core inflation. Further adding to the rate rise momentum has been the optimism surrounding Trump's potential economic policies - particularly the expectation of fiscal stimulus through tax cuts and infrastructure spending - leading to a stronger economic recovery and obviating the need for ultra low interest rates. All of this may come to pass and we may be on the verge of the first substantial rate rise cycle in a very long time. If rate rises come with strong economic growth then the recent shift in sector leadership will be justified and may well continue.. If instead rate rises cause consumers to curb their spending then economic growth could remain muted and the recent underperformance of quality defensive stocks could abate Considering the possibilities, we can say up front that we don't know which outcome will prevail. For that reason we have been focused on finding investments that are not dependent on any particular economic outcome or where valuations support investment regardless of the economic outcome. For instance, if higher rates prevail then we would become increasingly cautious about Consumer Discretionary areas like housing and automobiles that are credit dependent and where credit conditions have been very loose. Even without higher rates we have felt that US auto sales at around 17m per annum is close to a peak level. This is reflected in our investments in theautosectorwherewearefocusedmoreoncompaniesthat are growing their content (Mabuchi Motor with actuator motors and Mobileye with autonomous driving technologies for example) rather than pure volume plays like the automobile manufacturers. If strong employment and wage growth continues then even with higher rates we expect that food retailers could be in for better times. We continue to like our holding in Dutch listed retailer Ahold-Delhaize where 60% of their earnings come from their high quality US food retail business. If overall economic growth is curtailed by rising rates then the formerly expensive quality defensive sectors may again look like interesting investment opportunities. To that end we have been adding to our holding in UK listed Shire Pharmaceutical. On our estimates, Shire currently trades on less than 12x earnings for 15% per annum EPS growth over the next 5 years. Regardless of how the economy behaves over the next year we think the potential for strong absolute returns from this investment looks good. Some (but not all) formerly expensive high quality stocks have performed very poorly in the past quarter. We have not owned many of these stocks in recent years but will be looking at whether valuations today mean the stocks now meet our investment criteria. Also, as the new US administration's policies begin to take shape we will be looking at potential new opportunities for our portfolio. One such area may be related to infrastructure spending but there may be other opportunities as well. Finally, last quarter we highlighted to you how we feel we are in a period of very strong innovative growth - this despite generally weak overall economic growth. Innovative growth companies continue to be a focus area for our research and we expect these types of investments to continue to be an important part of our portfolio in

6 Account Management Information Investment Objective The objective of the Baring Focused International Equity Fund (the Focused International Fund ), is to seek long term capital appreciation and a return in excess of that achieved by the Morgan Stanley Capital International Europe Australasia Far East Index (the EAFE Index ) - Total Return with Net Dividends in USD terms. There can be no assurance that the Fund will achieve its objective. Other Information Baring Asset Management Limited Board (January 2017) Paul Thompson Oliver Burgel Julian Swayne Chairman, Non-Executive Chief Executive Officer Executive Director Director Russ Morrison Tom Finke Elizabeth Ward Executive Director Non-Executive Director Non-Executive Director Account Management Team Investment Managers David Bertocchi / Jon Greenhill Client Service Team BostonCSMTeam@Barings.com Important Information This document is issued by Baring Asset Management Limited, authorised and regulated by the Financial Conduct Authority and in jurisdictions other than the UK it is provided by the appropriate Baring Asset Management company/affiliate whose name(s) and contact details are specified herein. Investment involves risk. Past performance is no indication of current or future performance. The performance data does not take account of the commissions and costs incurred on the issue and redemption of units. Please note, changes in the rates of exchange may have an adverse effect on the value, price or income of an investment. This is not an offer to sell or an invitation to apply for any product or service of Baring Asset Management and is by way of information only. The information in this document does not constitute investment, tax, legal or other advice or recommendation. This document may include forward looking statements which are based on our current opinions, expectations and projections. We undertake no obligation to update or revise any forward looking statements. Actual results could differ materially from those anticipated in the forward looking statements. Version 13/SD The MSCI information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. The MSCI information is provided on an as is basis without any warranties of any kind. None of MSCI, its affiliates and any other person involved in or related to compiling, computing or creating any MSCI information shall have any liability. Baring North America LLC, Independence Wharf, 470 Atlantic Avenue, Boston, MA , Tel: , Fax: