Schroder ISF* US Large Cap Quarterly Fund Update

Transcription

1 Marketing material for professional investors and advisers only Schroder ISF* US Large Cap Quarterly Fund Update Second Quarter 2018 Cumulative returns to 30 June 2018 (%) A Accumulation shares USD returns Summary Positive earnings momentum and currency strength in the US trumped the escalating US- China trade posturing, and US equities gained in Q2. The portfolio generated a positive return overall in Q2 and outperformed the market. The outperformance was primarily attributable to stock selection months 1 year 3 years 5 years Portfolio Index 3 mths 1 yr 3 yrs 5 yrs We believe equities remain fundamentally supported but that a number of risks have the potential to destabilise markets. Ultimately, volatility and short term market drawdowns simply serve to increase the opportunity for fundamental bottom up managers. We will look to capitalise on periods of excessive negative sentiment to build or buy into opportunities where earnings progression looks clear, but underappreciated. Schroder ISF US Large Cap Standard & Poors 500 Net TR Lagged Portfolio characteristics Fund manager Frank Thormann Managed fund since 7 November 2017 Calendar year returns (%) Fund Index Quartile Fund launch date 2 August 1993 Fund benchmark Standard & Poors 500 Net TR Lagged Fund size $1,942 million Ongoing charge 1.59% 1 Source: Schroders, as at 30 June Based on the last year s expenses for the year ending December Source: Schroders, bid to bid, with net income invested. Quartile data source: Morningstar. *Schroder International Selection Fund is referred to as Schroder ISF. Schroder ISF* US Large Cap Second Quarter

2 What happened in the market US equities advanced in Q2, with positive earnings momentum and supportive economic data ultimately outshining escalating US-China trade posturing. Consumer confidence remained strong and retail sales data suggested a rebound in consumption from a softer Q1. The unemployment rate also reached an 18-year low of 3.8%, accompanied by robust wage growth. Average earnings in May were 2.7% higher than a year earlier. As expected, the Federal Reserve (Fed) raised the target rate for Fed Funds by 0.25% and marginally increased its 2018 forecasts for growth and inflation. It now anticipates two further rate increases for this year and three for next. Performance attribution (%) The positive economic data was, however, balanced by moves from the Trump administration to impose tariffs on Chinese imports, and withdraw from the Iran nuclear accord. In combination, the steps amounted to a more combative trade posture from the US, driving oil prices higher, and weighing on longer-term growth expectations. Over the quarter, energy, consumer discretionary and technology stocks performed well, while a rotation into more traditionally defensive areas supported real estate and utilities. Industrial stocks were weaker given the discussions surrounding trade sanctions, and financials were weaker due to a flattening of the yield curve. Allocation effect Selection effect Sector Total effect Consumer Discretionary Information Technology Materials Health Care Telecoms Consumer Staples Utilities Real Estate Industrials -0.6 Energy Financials Source: FactSet, average positions over the quarter by GICS Industry. The portfolio generated a positive return overall in Q2 and outperformed the market. The outperformance was primarily attributable to stock selection, although portfolio positioning also supported returns. Positions in the consumer discretionary and technology sectors contributed most significantly. The financial and energy sectors detracted slightly. Occidental (OXY) was amongst the portfolio s strongest positions in Q2 supported by rising oil prices and quarterly results that indicated strong execution across the business, resulting in upgrades for production, chemicals and the pipeline divisions. OXY has leverage to oil price upside but has demonstrated its strong cash-flow profile and attractive growth profile. The stock is increasingly benefitting from the company s investment in pipelines and integrated infrastructure in the Permian basin. We believe that the market continues to underestimate near-term cash generation and production. Amazon also contributed positively. The company continues to perform strongly across its existing segments and geographies, while demonstrating an Schroder ISF* US Large Cap Second Quarter

3 ongoing ability to find new sources of revenue growth. As well claiming further share of US and international online retail sales - the firm now dominates almost half of all US online retail and over a third of online sales globally - Amazon s Web Services division (AWS) also continues to take share within the global cloud market. In June, the company announced its acquisition of online pharmacy PillPack, which was seen as potentially disruptive to the US drugstore business. The move further signals Amazon s intention to push further into the health care industry Hewlett Packard (HPE) was a weaker holding, despite reporting sales growth of 10% year-on-year. The market reacted to cautious near-term guidance given tougher comparisons, amongst other things. We continue to believe that the market underestimates the new management s appetite to maximize free cashflow per share via corporate restructuring, buybacks and a reduced restructuring expense as the effects of recent corporate activity dissipates. Our position in Caterpillar was another significant detractor. Shares in the company struggled despite positive momentum in operating and financial performance. Its share price performance in Q2 served to demonstrate the current psychology of the market, as shares sold off despite reporting very strong Q118 results, with sales and revenues up 31% on solid demand across all the company s business segments and end-markets. Despite solidly beating consensus expectations, the market chose instead to focus on comments suggesting softening endmarkets. Top stock contributors (%) Top stock detractors (%) Stock contributor Total return Contribution Stock contributor Total return Detraction NetApp Hewlett Packard Netflix, Caterpillar Facebook PNC Financial Occidental BlackRock Amazon Estee Lauder Source: FactSet Portfolio positioning as at 30 June 2018 (%) Fund Index Sector ing (%) Q on Q change Materials Information Technology Consumer Discretionary Health Care Energy Telecommunication Services Industrials Financials Real Estate Utilities Consumer Staples -3.2 Source: FactSet. Schroder ISF* US Large Cap Second Quarter

4 Key portfolio activity We sold our holding in Carnival, given disappointing demand from the Chinese market and doubts over the firm s ability to pass on rising fuel costs. We have also sold Oracle. Although the firm continues to boast robust margins and cash flows, an ongoing lack of innovation means that we cannot identify a driver of upwards earnings surprise. Conversely, we believe Intel bought in the period can deliver ongoing earnings surprise, relative to conservative consensus expectations, driven by growth in its datacentres and stronger sales of PCs underpinning demand for its chips. Key stock positions (%) Overs Sector Danaher Health Care +2.8 Thermo Fisher Health Care +2.8 Home Depot Cons Discretionary +2.5 Unders Sector Apple Info Technology -1.9 Berkshire Hathaway Financials -1.6 Exxon Mobil Energy -1.5 Las Vegas Sands Cons Discretionary +2.3 Wells Fargo Financials -1.1 Facebook Info Technology +2.3 AT&T Telecoms -1.0 Source: FactSet Outlook and strategy Looking to the remainder of 2018, we believe that over, they are doing so from significant highs and little has materially changed in terms of are still, in aggregate, pointing to expansion rather fundamental support for equities. However, the than contraction. Market participants have number of risks has increased. Corporate results however become increasingly nervous about the remain positive and economic data remains path of growth and the rhetoric about US-China benign. Valuations, having adjusted lower as a are simply serving to exacerbate such concerns. consequence of recent market falls, are now less of Additionally, caution over under-currents of a concern than they were previously. While still not populism in Europe especially in the case of Italy cheap, share prices factor in more of the macro but also in Spain has the potential to trigger risks that have been dominating investors further bouts of weakness. Italy s tribulations in attention over recent weeks, in our opinion. establishing a coalition government and investor concern about the fiscal agenda have also induced Economic growth remains robust at present, and increased market risk. while some lead indicators have started to roll- Spread of Italian 10-year BTPs over German 10-year Bunds Schroder ISF* US Large Cap Second Quarter

5 Furthermore, while the above example of the widening spread of Italian BTPs over Bunds is illustrative of the region s political risk, the gradual tightening of global policy means that upward pressure on bond yields is also building globally. This introduces a number of factors pertinent to the equity market. First, the low interest rate environment has had a major effect on the pricing of risk. Consequently, equities with bond-like characteristics have been valued at a premium. This has started to reverse. Related to this, demand for equities has been supported by the relative attractiveness of equity yields compared to bond yields. This is also starting to reverse and may accelerate as bond yields climb further. Finally, as interest rates and bond yields rise, the consequence of leverage and free cash flows become more pronounced. Nowhere is this more evident than in the media space. Debt burdens for major distributors have increased markedly as firms seek to secure the content pipelines needed to remain competitive. We are highly vigilant of firms with elevated debt burdens. Earlier this year, we highlighted our expectations for an acceleration in capex underpinned by rising CEO optimism, positive growth outlook and aging capital stock, amongst other things. This has started to play out driving an uptick in investment from depressed levels. Changes to the tax code and expansionary policies in the US have added further momentum and supported a significant improvement in capex intentions. However recent trade war fears have weighed on business confidence and currently remain the biggest risk to corporate spending trends. Overall, while we believe that robust fundamentals warrant an optimistic view for equities, we believe investors should expect periods of volatility to become more common than in This comes with its own advantages. The market s focus so far this year has been narrow, with US markets stronger than most other major regions. Within the US market itself, gains have been limited to a handful of major tech firms. We are looking for areas of the market that have been overlooked, such as some firms within the consumer staples segment. Ultimately, volatility and short term market drawdowns simply serve to increase the opportunity for fundamental bottom up managers. We will look to capitalise on periods of excessive negative sentiment to build or buy into opportunities where earnings progression looks clear, but underappreciated. 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. The fund will not hedge its market risk in a down cycle. The value of the fund will move similarly to the markets. 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 Key Investor Information Document and 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 Financial Conduct Authority. For your security, communications may be taped or monitored. Schroder ISF* US Large Cap Second Quarter