Schroder ISF* QEP Global Quality Q Investment Report

Transcription

1 For professional investors only Schroder ISF* QEP Global Quality Q Investment Report * Schroder International Selection Fund is referred to as Schroder ISF throughout this document.

2 Q2/2018 Schroders Schroder ISF QEP Global Quality In this report The Team Fund Overview Market Summary and Performance Review Portfolio Activity and Policy Portfolio Analysis Market Analysis

3 Portfolio Manager QEP Investment Team Tel: Q Investment Report 3

4 Fund Overview Investment Objective The fund targets a long run return of +3% per annum (before fees) above suitable global indices over a full investment cycle. Investment Approach Global Quality is a more systematic form of growth investing, targeting higher long-term returns with below-market risk. Our approach identifies companies which offer a combination of three key attributes profitability, stability and financial strength. Performance Periods 30 June 2018 Total returns USD 3 months % 12 months % 3 years % pa 5 years % pa Inception % pa Inception % total Fund at closing prices (Gross) MSCI AC World Difference MSCI World Difference Fund inception date: 17 Oct 2007 Returns are shown gross of fees at closing market prices. Fund NAV performance may differ from performance calculated at closing market prices. The fund is index unconstrained and therefore short term performance can differ significantly from market cap indices. Indices are net dividend reinvested (NDR). Q Investment Report 4

5 Performance vs Indices months % YTD % 12 months % 3 years % pa 5 years % pa Inception % pa Inception % total Fund MSCI AC World MSCI World Summary Global equities made gains in a volatile second quarter, as resilient economic and earnings data vied with an unsettling geopolitical backdrop to establish the market's direction. Against this backdrop, markets remained concentrated, led by a small number of consensus growth themes, largely within technology and consumer discretionary, pushing valuations in certain names to even more extended levels. Only the energy sector has managed to outperform these new economy trades over the quarter, as the oil price continued to rally driven by demand dynamics and tensions in the Middle East. Broadly, defensive sectors have struggled year-to-date as momentum and growth remain the strongest styles through 2018, although the divergence between styles narrowed in Q2 compared to Q1. In this volatile environment, the strategy underperformed the reference index in Q2 2018, driven by our positioning in the technology, consumer discretionary and energy sectors, most notably in the US. Offsetting this underperformance to an extent, the strategy benefited from positioning within industrials and financials. Q Investment Report 5

6 Market Summary and Performance Review Global equities advanced in the second quarter of 2018, as equity markets responded positively to economic and earnings data despite the ever-present geopolitical risk. Central bank policy remained a focus for investors. As expected, the Federal Reserve (Fed) raised the target rate for Fed funds by 0.25%, while the European Central Bank announced that it expects to end its quantitative easing programme in December 2018 and that interest rates will remain at current levels through summer In the US, positive earnings momentum and supportive economic data outshone the China-US trade posturing to lift equities. Elsewhere, developed markets posted a positive quarter, with the UK in particular rising sharply as investors reduced their underweight in the country. However, markets were not immune to President Trump's protectionist rhetoric, as threatened tariffs on imported vehicles impacted the auto industry, notably in Europe. Only the emerging markets fell over the period as US dollar strength and escalating trade tensions proved a headwind. From a sector perspective, technology and consumer discretionary stocks continued their strong run from the first quarter, comfortably outperforming most other sectors. This was largely driven by the "new economy" cohort of stocks (in particular the FAANGs - Facebook, Apple, Amazon, Netflix, Google), resulting in momentum and growth once again driving markets. The only sector to better them was energy, which benefited from further increases in the oil price. Against this backdrop, strategy underperformance was driven by the technology, consumer discretionary and energy sectors, most notably in the US. As the technology sector continued to dominate global markets over the quarter, our underweight exposure in US software weighed on returns. Not holding Facebook proved a headwind, as the stock rebounded following Q1's sell off. Meanwhile, lowerthan-index positions in Microsoft and Alphabet detracted, as did our lack of exposure to US hardware giant Apple. Offsetting this, to some extent, our Japanese exposure proved beneficial. The strategy also suffered from positioning within the consumer discretionary sector, where not holding Amazon and Netflix two of the top performing US stocks year-to-date detracted. Neither stock meets our business quality criteria. With the exception of energy, where our low weight in the US Q Investment Report 6

7 detracted as the oil price continued to rally through the quarter, the strategy's cyclical exposure was supportive. Within industrials, a combination of Japanese and UK positioning added value. In the UK, our overweight exposure proved beneficial, while selective Japanese holdings contributed positively, most notably Central Japan Railway, which we favour on both our business quality and valuation metrics. Holdings in our favoured UK miners also added to performance. Positioning in financials also added value. We are very selective within the sector, as high quality investment opportunities remain limited, and maintain a significantly lower weight versus the index. Underweight exposure across continental Europe and the emerging markets contributed positively to performance as the overall financials sector was the worst performer of the quarter. Q Investment Report 7

8 Relative Fund Performance vs MSCI AC World Sector 3 months to 30 Jun 2018 Industrials Materials Financials Consumer Staples Real Estate Health Care Energy Utilities Telecommunications Services Consumer Discretionary Information Technology SS (%) AA (%) Stock Selection (%) Asset Allocation (%) Region 3 months to 30 Jun 2018 Japan Continental Europe Emerging Latin America Pacific Ex Japan United Kingdom Emerging EMEA Emerging Asia North America SS (%) AA (%) Stock Selection (%) Asset Allocation (%) Sector 12 months to 30 Jun 2018 Industrials Materials Financials Real Estate Telecommunications Services Utilities Energy Consumer Staples Health Care Consumer Discretionary Information Technology SS (%) AA (%) Stock Selection (%) Asset Allocation (%) Region 12 months to 30 Jun 2018 Emerging EMEA Japan Emerging Latin America United Kingdom Continental Europe Emerging Asia Pacific Ex Japan North America SS (%) AA (%) Stock Selection (%) Asset Allocation (%) Source: Schroders & Investment Team Classifications Q Investment Report 8

9 Portfolio Activity and Policy The strategy remains positioned in companies generating high and relatively stable profits, and with strong balance sheets. As a result, we hold relatively large positions in healthcare, consumer staples and telecoms. Within healthcare, we continue to see a broad range of attractive opportunities in US and European pharmaceuticals and US healthcare providers. We have reduced our positions in the consumer discretionary sector, which now becomes one of our larger underweight exposures. Although the US market contains a surfeit of high quality companies, on the whole these companies are more expensively valued than their counterparts in other geographies. Therefore, from a regional point of view, the strategy remains underweight the US market versus the reference index. This underweight position in North America (both Canada and the US) largely funds our high allocation to the UK versus the reference index, where concern over Brexit has led to a number of high quality companies now trading on discounted valuations. Q Investment Report 9

10 Portfolio Characteristics Characteristics Fund Index at 30 Jun 2018 Active Share 75.6% Weight in non-index stocks 14.9% Ex ante Tracking Error 1.9% Number of stocks 346 2,781 Company Market Cap 77, ,988 Dividend Yield 2.8% 2.4% Carbon Intensity (CO2 t/m$ Sales) Source: Schroders & MSCI. Tracking Error is sourced from Style Research. Index: MSCI AC World Q Investment Report 10

11 Portfolio Analysis Portfolio Weightings Market Capitalisation (%) at 30 Jun 2018 Mega-cap >US$20bn Large-cap US$5bn to US$20bn Fund Index Mid-cap US$1bn to US$5bn Small-cap US$250m to US$1bn Fund MSCI AC World Sector (%) at 30 Jun 2018 Information Technology Fund Index Health Care Industrials Consumer Staples Consumer Discretionary Telecommunication Services Insurance & Asset Mgt Banks Energy Materials Real Estate Utilities Fund MSCI AC World Region (%) at 30 Jun 2018 North America Fund Index Continental Europe United Kingdom Japan Emerging Asia Pacific Ex Japan Emerging EMEA Emerging Latin America Fund MSCI AC World Source: Schroders & Investment Team Classifications Q Investment Report 11

12 Market Analysis MSCI AC World Index Returns 3 Months 12 Months Sector (USD, %) to 30 Jun 2018 MSCI AC World Index Information Technology Energy Consumer Discretionary Materials Industrials Real Estate Health Care Financials Utilities Consumer Staples Telecommunication Services Months 12 Months Region (USD, %) to 30 Jun 2018 MSCI AC World Index USA Japan Emerging Asia United Kingdom Canada Pacific Ex Japan Emerging EMEA Europe Ex UK Emerging Latin America 3 Months 12 Months Months 12 Months Source: Factset, Schroders & Investment Team Classifications Q Investment Report 12

13 Notes Responsible Investment: Schroders Socially Responsible Investment and Corporate Governance policies can be found on our website We also publish regular articles on Socially Responsible Investing, which can be found on Schroders Talking Point Important Information This document does not constitute an offer to anyone, or a solicitation by anyone, to subscribe for shares of Schroder International Selection Fund (the "Company"). Nothing in this document should be construed as advice and is therefore not a recommendation to buy or sell shares. Subscriptions for shares of the Company can only be made on the basis of its latest prospectus together with the latest audited annual report (and subsequent unaudited semi-annual report, if published), copies of which can be obtained, free of charge, from Schroder Investment Management (Luxembourg) S.A. An investment in the Company entails risks, which are fully described in the prospectus. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested Schroders has expressed its own views and opinions in this document and these may change. This document is issued by Schroder Investment Management Ltd., 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Conduct Services Authority. For your security, all telephone calls are recorded. Third party data is owned or licensed by the data provider and may not be reproduced or extracted and used for any other purpose without the data provider's consent. Third party data is provided without any warranties of any kind. The data provider and issuer of the document shall have no liability in connection with the third party data. The Prospectus and/or contains additional disclaimers which apply to the third party data. Risk Considerations The capital is not guaranteed. Investments denominated in a currency other than that of the share-class may not be hedged. The market movements between those currencies will impact the share-class. Investments in small companies can be difficult to sell quickly which may affect the value of the fund and, in extreme market conditions, its ability to meet redemption requests upon demand. The Fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. Emerging equity markets may be more volatile than equity markets of well-established economies. Investments into foreign currencies entail exchange risks. The Fund may be leveraged, which may increase its volatility Please see our Privacy Policy to learn how we handle personal data (