M&G Global Basics Fund

Transcription

1 Quarterly Review M&G Global Basics Fund Third quarter 2017 Lead manager Jamie Horvat Co-manager Randeep Somel Overview The fund outperformed the composite index during the quarter, benefiting from both positive stock selection and sector allocation. Holdings in the healthcare sector (which is not part of the fund s composite index) added value, as did Chinese manufacturer of electric vehicles and batteries BYD Company. Global stockmarkets were generally firmer over the third quarter, with Latin American markets and China and Russia featuring particularly strongly. The S&P 500 Index ended the quarter at a record high despite increased tensions between North Korea and the US. At the start of the review period, we initiated two holdings in the energy sector Suncor and Schlumberger are examples of quality names in an area of the market, which at the time, had materially underperformed.

2 Fund commentary Global stockmarkets were generally firmer over the third quarter, with Latin American markets and China and Russia featuring particularly strongly. Many developed markets were also in favour, including the US, where the S&P 500 Index ended the quarter at a record high. This was despite an increase in tensions between North Korea and the US, which rattled markets for a time. Investors appear encouraged by the synchronised improvement in global economic data, which had the effect of lifting cyclical sectors such as materials and technology. The energy sector also performed strongly on the back of a higher oil price. On the other hand, defensive sectors in particular consumer staples and healthcare lagged the broader market. Against this background, the fund outperformed the composite index during the quarter, benefiting from both positive stock selection and sector allocation. Holdings in healthcare (which has a zero weight in the custom benchmark) contributed positively. Australiabased Starpharma did particularly well as the company posted a successful result in advanced clinical trials of its lead product, Vivagel. Chinese electric vehicle and battery manufacturer, BYD Company, was also a strong positive contributor

3 following news that China is working on a timetable to ban production and sales of fossil fuelled cars. Meanwhile, shares in Japanese brewer Kirin continued to perform strongly, having raised profit guidance earlier in the year. On the other hand, Hochschild Mining shares detracted from performance on the back of broker downgrades, after being a strong performer earlier in the year. Australian manufacturer of protective products, Ansell, also sold off during the quarter. Shares in G4S declined after the company released numbers which highlighted a slowdown in spending in both the Middle East and India. Spending in the Middle East has been affected by the fall in the oil price and in India by the withdrawal of the 500 rupee note. Investors also took advantage of the rally in the company s shares, which have risen sharply over the past year. After proving beneficial earlier in the year, the underweight to the oil & gas sector detracted, as the oil price bounced on the back of stronger demand. Performance year-to-date The fund has performed strongly year-to-date and has outperformed its composite index. At a stock level, relative performance has benefited from holdings in Hutchinson China MediTech, Kirin and BYD Company. Hutchison China Meditech has become the first China-based biotechnology company to take a drug from discovery to production. Fruquintinib which has been developed alongside US pharmaceutical giant Eli Lilly increases the chances of overall survival for colorectal cancer patients who had previously been treated with two rounds of chemotherapy. Conversely, holdings in Core Laboratories, Ansell and Scotts Miracle-Gro detracted. Core Laboratories is one of the largest service providers of core and fluid analysis in the petroleum industry. Its shares weakened following negative comments by a prominent hedge fund investor. Having been a very strong performer in 2016, shares in Scotts Miracle-Gro fell back, despite the company announcing solid quarterly results. Last year, Scotts share price was boosted by optimism about the potential growth from its investments in hydroponics businesses. Fund activity We aim to identify the companies which are set to benefit from long-term structural changes within economies, industries and societies that happen over time. This is achieved through the analysis of global macroeconomics, demographics and government policies and spending, among other considerations. In this way, our aim is to avoid investing in companies which operate in industries that are structurally challenged. At present, we are focusing on four main themes: Health (the challenges and opportunities posed by an aging population); Security (particularly cyber security and food security); Infrastructure (the growing need for improved transport links); Environment (the increasing requirement for energy efficiency and pollution control). The stock selection process is designed to identify well-run companies that are attractively valued and have sustainable growth prospects. At the start of the review period, we initiated two holdings in the energy sector. The purchases of Suncor and Schlumberger are examples of quality names in an area of the market, which at the time, had materially underperformed. We believe Suncor is a relatively safe, low risk, integrated oil & gas company, which has already invested heavily in its production facilities and has low gearing. Meanwhile, Schlumberger provides a range of services to exploration and production companies globally. Towards the end of the quarter, we initiated a small position in Australia-based iron ore producer Fortescue Metals. At the same time, we closed a position in European aerospace and defence company Airbus. Given heightened geopolitical tensions and in particular recent actions by North Korea, defence stocks have performed well. We took the opportunity to sell this holding, while retaining other positions with exposure to defence, such as Raytheon. LafargeHolcim, a building materials firm, also left the portfolio. LafargeHolcim was a small position and has performed strongly as benefits of the merger between Lafarge and Holcim were realised.

4 Outlook We remain concerned about the investment backdrop faced by investors, particularly geopolitical and economic risks. Specifically, stockmarkets have experienced some short term volatility as tensions between North Korea and the US have escalated. Elsewhere, in the UK, there are a number of uncertainties around Brexit and in Europe there are concerns over the health of some of the banks. In the US, we are scrutinising the path of the economy, in particular, the pace of growth and implications for inflation and the direction of interest rates. During the past year, there have been three interest rate rises of a quarter of a point (in December 2016, March and June 2017) and we are awaiting the Fed s decision on additional interest rate rises and the Long-term performance impact this will have on financial markets. Regardless, many company valuations look stretched in our view. In particular, highly leveraged companies may struggle to roll over their debt as it becomes due, and as interest rates increase their borrowing costs. Companies that have increased borrowings to pay generous dividends or enhance earnings per share through buying back shares may be especially vulnerable. However, we note that European equities appear more attractively valued than some other markets, which may provide support and manufacturers are benefiting from the continued growth of the US economy. Past performance is no guide to future performance. The value of investments and the income from them will fluctuate. This will cause the fund price to fall as well as rise. There is no guarantee the fund objective will be achieved and you may not get back the original amount you invested. The fund invests mainly in company shares and is therefore more likely to be subject to sudden and large falls in value than funds that invest in bonds and/or cash. As a result, you could lose the total value of your initial investment.

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