Baring Focused International Equity Fund

Transcription

1 Baring Focused International Equity Fund 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 30 June Months YTD 1 Year 3 Years 5 Years Since Portfolio Benchmark Inception Portfolio Value (USD) 31 March June 2017 Total Net Flows 345,394, ,086, ,968 Inception: 31 January 2005 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. Performance & Strategy Summary International equities have had another strong quarter of returns making for a quite attractive year to date level of absolute returns. Our portfolio outperformed the benchmark in the quarter and remains ahead over the past year. All international regions delivered positive returns in the quarter led by Europe ex UK. Emerging markets were also strong in the quarter but not as strong as Europe. The weakest region was Pacific ex Japan. All international sectors, except for Energy, delivered positive returns in the quarter. The Energy sector lagged largely because of a decline in the price of oil. Information Technology was the strongest performing sector in the quarter. Our relative performance was driven mostly by stock selection in the Information Texchnology sector. Our holding in Japanese video gaming company Nintendo was our best performing holding as investors got increasingly excited about the growth prospects for its new video gaming platform "Switch". German payments processing company Wirecard also contributed strongly in the Technology sector. For accounts where we hold emerging market stocks, Alibaba was a notably strong performer as the company raised its medium term revenue growth outlook. Dutch listed food retailer Royal Ahold was our biggest detractor from performance in the quarter. Royal Ahold earns over half of its profits from its US food retail business. The shares were weak as investors considered the news that Amazon is to acquire Whole Foods Market, potentially making the US food retail market much more competitive. Shire Pharmaceutical was our second biggest detractor. Competitor Roche Holding released positive data on a potential new haemophiliac drug that threatens Shire's franchise in this therapeutic area. We made few changes to the portfolio in the quarter. We sold out of our holdings in Nintendo as we felt the valuation had become too expensive for the growth prospects. For similar reasons we also sold out of our position in Japanese medical equipment company Hoya Corporation. We added new positions in Norwegian oil services company TGS-Nopec and Chinese blood plasma therapies company China Biologic Products. Both are high return businesses with low capital intensity where we think valuations are reasonable. Market Returns - In USD Terms (%) - Q Europe Ex U.K. Emerging Markets EAFE Japan United Kingdom Pacific Ex Japan MSCI EAFE Region (Net) MSCI EAFE Sector (Net) Information Technology Consumer Staples Health Care Utilities Financials Industrials Telecom. Services Consumer Discretionary Real Estate Materials Energy Source: MSCI, Barings Source: MSCI, Barings 1

3 Performance - Q Total Relative Contributions (%) Key Contributions - Geographic Key Contributions - Economic Sector 0.5 Emerging Markets Pacific Ex Japan Japan -0.4 United Kingdom -0.9 Continental Europe Information Technology Financials Industrials Telecom Services Consumer Staples Allocation Selection Total Allocation Selection Total Emerging Markets 1.0 OW 1.0 Information Technology 0.5 OW Pacific Ex Japan 0.3 UW Financials 0.0 UW Japan 0.0 OW Materials 0.2 UW Middle East 0.0 OW Consumer Discretionary 0.0 OW Cash -0.1 OW -0.1 Real Estate 0.0 UW United Kingdom -0.1 OW Energy 0.0 UW Continental Europe -0.4 UW Utilities 0.0 UW 0.0 Total Cash -0.1 OW -0.1 Health Care 0.0 OW Industrials -0.1 UW Telecom Services 0.0 OW Consumer Staples 0.0 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 Nintendo 0.5 Japan Information Technology Alibaba Group Holding 0.5 China Information Technology Deutsche Boerse 0.3 Germany Financials AIA Group 0.2 Hong Kong Financials Wirecard AG 0.2 Germany Information Technology Negative Contribution Country Sector Royal Ahold -0.4 Netherlands Consumer Staples Shire -0.3 United Kingdom Health Care Pandora -0.3 Denmark Consumer Discretionary Mabuchi Motor -0.3 Japan Industrials Tate & Lyle -0.2 United Kingdom Consumer Staples Source: Barings, Gross of Fees # Aggregated Holding 2

4 Investment Strategy Major Portfolio Positions - 30 June 2017 (%) Geographic Economic Sector Active Start Acct End W Bmk End Wg Relative Weight Active Start WAcct End W Bmk End Wgt Relative Weight Portfolio Benchmark 30 Jun 31 Mar Portfolio Benchmark 30 Jun 31 Mar Emerging Markets Information Technology United Kingdom Cash Cash Consumer Discretionary Middle East Health Care Japan Telecom Services Pacific Ex Japan Consumer Staples Continental Europe Energy Total Real Estate Utilities Materials Financials Industrials Total Region & Sector definitions are based on index classifications. Economic exposure may differ. Largest Positive & Negative Positions - 30 June 2017 Positive Active Position (%) Country Sector Sony 3.1 Japan Consumer Discretionary BT Group 3.0 United Kingdom Telecommunication Services Royal Ahold 2.8 Netherlands Consumer Staples Bridgestone 2.8 Japan Consumer Discretionary Prudential 2.7 United Kingdom Financials Deutsche Boerse 2.7 Germany Financials Shire 2.7 United Kingdom Health Care Julius Baer Gruppe 2.1 Switzerland Financials Wirecard AG 2.0 Germany Information Technology Ontex Group 2.0 Belgium Consumer Staples Negative Active Position (%) Country Sector Nestle -2.0 Switzerland Consumer Staples Novartis -1.4 Switzerland Health Care HSBC -1.3 United Kingdom Financials Roche Holding -1.3 Switzerland Health Care British American Tobacco -0.9 United Kingdom Consumer Staples BP -0.8 United Kingdom Energy Sanofi -0.8 France Health Care Commonwealth Bank of Australia -0.8 Australia Financials Siemens -0.8 Germany Industrials GlaxoSmithKline -0.8 United Kingdom Health Care # Aggregated Holding Source: Barings 3

5 Investment Strategy & Outlook International equities had another strong quarter of performance in the second quarter of Once again all regions and sectors, except for Energy, delivered positive absolute returns. For international equity markets the second quarter was largely a continuation of the first quarter with equity markets responding positively to moderate global economic growth and, specifically, to companies delivering good earnings growth. Also similar to the first quarter, equity markets largely ignored the increasingly noisy and dysfunctional political environment we are seeing in so many regions of the world. We doubt that political risk is permanently at bay and we are not ignoring politics, however, we have doubts about our abilities to predict political events, and in some cases, to predict what their impact on markets is likely to be. Instead, when it comes to politics, we have mostly been continuing to be watchful for portfolio holdings where these risks are not being priced in and adjusting accordingly. As we discussed last quarter, we continue our stagflation watch; not because it seems imminent, because it does not, but because, were it to appear, it would be most damaging to investment markets - bonds and equities - as central banks would be forced to make a choice between raising rates to curb inflation thus hurting growth, or keeping rates low thus allowing inflation to rise. Though widespread stagflation does not look imminent, our being attuned to it has alerted us to several industry verticals where capacity utilisation is growing strongly and where, curiously, capacity additions have not been forthcoming. We are seeing these characteristics in the semiconductor industry, also amongst the silicon wafer suppliers, and also in the packaging materials industry. In some cases we are meeting companies who have manufacturing plants operating at more than 90% of capacity. These areas are interesting from an investment point of view because they highlight the potential for companies with high capacity utilisation to start to meaningfully raise prices (great for profits) or for us as investors to seek investments in the suppliers of capital equipment to these industries as new capacity is finally added (great for new business orders and profits). For both cases we have been looking at new investment opportunities to potentially include in our portfolios in coming quarters. Another focus for us continues to be to look at the vibrant areas of innovative growth that we are seeing in the current global economy. Last quarter we discussed Automatic Driver Assistance Systems (ADAS) and autonomous vehicles - two technologies that ought to grow in prevalence in the coming years regardless of what global automobile sales do. Another area where we have been making investments for our portfolios is in video gaming. It is apparent that a new youth generation has very different preferences for how discretionary free time is spent than older generations did. Where previous generations shopped in malls, watched television or read magazines, the new generation has, amongst other things, embraced video gaming. One of our holdings with exposure to this trend has been Japanese technology company Nintendo. We purchased our initial holding early in 2016 on the back of our belief that the company was beginning to recognise the latent value that existed in the various characters it had created over previous decades - think Mario Brothers, Donkey Kong and Zelda, amongst others. Moreover, the company was seriously beginning to look at ways to monetise the value of these characters beyond just creating gaming titles for Nintendo technology platforms. This saw Nintendo's first successful foray into mobile gaming emerge with the runaway success of Pokemon Go. The result of all this has been very good investment returns for the Nintendo shares as this potential growth and value has been recognised by investors. Today Nintendo shares trade on over 35 times the next 12 months' earnings, a level that exceeds its valuation back in 2006 ahead of the launch of their wildly successful Nintendo Wii platform. As well as they have executed their current business plan we think it will be difficult for Nintendo to exceed the financial success of the Wii. For this reason, despite that we like Nintendo's growth prospects, we felt that it was no longer reasonably priced and we exited the shares. We continue to like the video gaming sector (Sony Corporation which has a strong video gaming business remains in our portfolios) and we continue to look for other reasonably priced growth opportunities here. The rich valuation that Nintendo reached does highlight something that we are seeing currently in markets. A recent analysis that we made of the Japanese Topix index showed that the mean P/E of the index was 15x. Usually we would expect the P/Es of the companies in the index to be distributed normally with a central cluster near to the mean. Today, however, only 5% of the stocks trade near the mean P/E, and instead a cohort of 25% of the market trades at P/Es greater than 20x and another cohort of 24% trades at P/Es less than 10x. We are seeing a similar effect in many other markets we have looked at. As earnings growth for the overall market has been scarce, growth stocks have been getting increasingly highly rated by investors. The discipline of our price targets means that recently we have been taking profits in companies where valuations have become too rich and reinvesting the proceeds in stocks where earnings growth is more reasonably priced. Our ideal reinvestment situation is to find good quality companies with good earnings growth prospects that have been passed over by the market. These are becoming somewhat scarce but we do continue to see some opportunities here. Interestingly, the UK market is one area where we have seen some opportunities. The UK economy is weakening and there is uncertainty surrounding the economic impact of the UK's decision to exit the European Union. We suspect that investors are avoiding the UK market for these reasons. Whilst that logic might be applicable to UK domestic stocks, we are increasingly finding the larger global companies in the UK market, where earnings growth prospects are driven by global, not domestic, factors looking attractive. In the year to date we have added to our positions in Shire Pharmaceutical and food ingredients company Tate & Lyle and we are looking at further opportunities that might emerge. It has been a very good first half of the year for international equities and we have managed to outperform strong index returns. Despite the rich valuations for the growthiest parts of the market we continue to see and pursue opportunities that meet our investment criteria. 4

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 (July 2017) Paul Thompson Oliver Burgel Julian Swayne Chairman, Non-Executive Chief Executive Officer Executive Director Director Tom Finke Non-Executive Director Elizabeth Ward Non-Executive Director Account Management Team Investment Managers David Bertocchi / Jon Greenhill Client Service Team BostonCSMTeam@Barings.com +44 (0) /1271 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: