Schroder ISF Swiss Small & Mid Cap Equity

Transcription

1 For professional investors and advisers only Schroder ISF* Swiss Small & Mid Cap Equity Quarterly Fund Update Returns to 30 June 17 (%) I accumulation shares CHF returns Summary The returned 8.0% in the second quarter of 17, outperforming the benchmark SPI Extra by 0.4%. Since the beginning of the year, the fund is 0.8% behind the benchmark. During the second quarter 17, we participated in the IPO of Galenica Santé and increased positions in Clariant, Swatch group and Aryzta. On the other hand we sold Sika and Thurgauer KB and reduced Oerlikon and Flughafen Zurich. 0 Q2 17 YTD 1 year 3 years p.a. Portfolio If there was a period of slow economic growth to come or if markets were to experience a significant decline, central banks and authorities in general would likely run to rescue. We think that there is still a long path for central bank policies to normalise, be it with or without periodic interruptions due to weak market or a weak economy. Schroder ISF Swiss Small & Mid Cap Equity I Acc Swiss Performance Extra SPIEX Q2 17 YTD 1 year 3 years p.a We see positive signals from a bottom up perspective. After a period of approximately 3 years with broadly stagnant company earnings overall, corporate profits in 17 are expected to start growing considerably again. In the course of the first half 17, we saw upwards revisions, for which we expect to get confirmation during the upcoming H1 earnings season. Calendar year returns (%) Portfolio characteristics Fund Fund manager Daniel Lenz Managed fund since 28 June 02 Fund launch date 28 June Fund benchmark SPI Extra Fund size CHF 640.9m Annual management fee Estimated TER n/a 0.07 % p.a Number of stocks in fund Fund base currency CHF Source: Schroders, as at 30 June *Schroder International Selection Fund is referred to as Schroder ISF throughout this document. 1

2 Economic environment For professional investors and advisers only The year 17 has started on a strong basis. Contrary to the previous 3 years, when economic growth forecasts fell into spring, there have been no material disappointments so far. That said, the USA has been one of the few major countries falling slightly behind growth expectations in terms of reported economic growth for the first quarter 17. However, full year GDP growth forecasts for the USA have only slightly changed since, while they have increased for the Eurozone and Japan. Labor market statistics reported for the major economies still seem to suggest a trend towards lower unemployment rates. Switzerland experienced a similar fate as the USA with first quarter GDP growth disappointing due to a very muted 0.1% quarterly growth rate for private consumption. The public sector expanded slightly, while capital expenditure and net exports rebounded strongly. Generally, the industrial sector performed much stronger than the service sector. The GDP deflator rose above zero after having been in negative territory for several quarters and for the years 1 and 16 overall. The Federal Government's Expert Group that publishes its forecasts for Switzerland's economic development on a quarterly basis moderately revised expectations for 17 GDP growth downwards to 1.4% from 1.6%. Forecasts for 18 were left unchanged at 1.9%. The labor market remains rather stable: since mid-13, the seasonally adjusted rate of unemployment has been either 3.2% or 3.3%. In April 17 it dropped back to 3.2%. Projections are for a minor decline of 0.1% towards 18. Market environment Global equity markets advanced in Q2 with MSCI World returning 4.2% (in US dollars). A strong corporate earnings season supported gains. US equities gained despite some mixed economic data and amid political uncertainty over the ability of the US administration to push through its fiscally expansive policies. The Federal Reserve (Fed) looked through disappointing inflation readings and further tightened monetary policy. European equities advanced on reduced political risk, positive economic data and improved corporate earnings. Gains were capped by worries the European Central Bank (ECB) could start to tighten policy, which fuelled a rise of the Euro against the dollar and Swiss franc. In Switzerland, small & mid caps performed strongly with the SPI Extra up 7.6%, outperforming large caps which advanced 4.% (SMI total return). Within small & mid caps, health care, materials, industrials and financials were the strongest sectors in the quarter, while consumer goods, real estate and telecom were below average. Performance review The I Acc returned 8.0% in the second quarter of 17, outperforming the benchmark SPI Extra by 0.4%. Since the beginning of the year, the fund is 0.8% behind the benchmark. In Q2 17, stock selection was positive. Relative performance benefitted from our positions in Belimo, Tecan, Oerlikon and Flughafen Zürich. As well, stocks in which we hold no position like Lindt & Sprüngli, u-blox, Vifor and Swiss Prime Site added to relative performance. Additionally, Sika contributed positively in the period under review. We started to sell our position before the shares were moved out of the small & mid cap benchmark into the SMI index. As a result, there was a positive timing effect. On the negative side, main contributions were from stocks where we hold no positions: Kühne & Nagel, Ems Chemie, Straumann, Idorsia, ams and Lonza. Additionally, our positions in Forbo, Aryzta, Swatch group and Helvetia distracted from performance. *Schroder International Selection Fund is referred to as Schroder ISF throughout this document. 2

3 Portfolio positioning as at 30 June 17 * Sector Cons. Disc. Cash Industrials Telecom Utilities Financials Basic Materials Cons. Staples Technology Healthcare Real Estate Relative weights -.7% -2.% -2.6% -3.1% -0.3% -1.2% Source: Schroders. * Data can differ from our factsheet due to different sources. 2.4% 1.2% 4.8% 3.7% 3.3% Top overweights For professional investors and advisers only Relative weight (%) Top underweights Relative weight (%) Forbo 2.8 Lindt & Sprüngli -. Logitech 2.6 Kühne & Nagel -3.8 Sunrise 2.4 SPS -2.6 Tecan 2.3 Straumann -2.6 Flughafen Zürich 2.0 EMS-Chemie -2.1 Orior 1.9 Partners Group -1.9 Bell 1.8 Vifor Pharma -1.8 VZ Holding 1.8 AMS -1.7 Daetwyler 1.7 Temenos -1. Belimo 1.6 PSP -1. Key portfolio activity and positioning During the second quarter 17, we participated in the IPO of Galenica Santé and increased positions in Clariant, Swatch group and Aryzta. On the other hand we sold Sika and Thurgauer KB and reduced Oerlikon and Flughafen Zurich. With Galenica Santé, the drug retail and wholesale business of the Galenica group was separately listed on the stock exchange. We participated in the IPO and afterwards increased our position. Galenica Santé is an attractive and steady dividend play with a leading market position in Switzerland, including well known drug retail chains Amavita and Sun Store. We increased our position in Clariant after the announcement of a merger with the US chemical company Huntsman. While we don t believe it is the best strategic fit, we see upside to the shares due to the synergy potential. As well, we increased our positions in Swatch group (slight improvement in the luxury watch environment) and Aryzta (first steps taken for the turnaround). We sold Sika, as the company exited our benchmark SPIEX due to its inclusion in the SMI. As well, we sold Thurgauer Kantonalbank as our fair value is reached. We reduced our holdings in the industrial company Oerlikon, as we believe its new strategy to invest significantly into the nascent additive manufacturing technology bears high risks of sunk costs. Additionally, we partially took profits in Flughafen Zurich. On a sector view, the biggest overweight sectors are consumer discretionary and industrials. The biggest under-weight sectors are real estate and healthcare. Our cash level was at 3.7% at the end of the quarter (previous quarter 4.6%). 3

4 Outlook The first half of 17 has been quite positive for equity investors so far. Since the late stages of the US presidential election campaign, markets have embarked on a reflation trade. President Trump's promises of tax cuts, infrastructure spending and deregulation drove equity prices and interest rates higher. However, the declining trend in year US bond yields since early in 17, suggests that investors have lost some faith in the president's ability to deliver timely: Changes to the Affordable Care Act seem difficult to agree upon and as a result budget reforms have been delayed. Volatility remains very low despite political uncertainty and the Fed s tightening policy. One explanation might be that liquidity is abundant and that the flow of central bank money has put a floor under prices. The Chicago Board Options Exchange (CBOE) Volatility is a fear gauge, which tends to be low in rising markets and typically spikes up during market declines. The obvious question from the chart below is whether investors are becoming complacent. Chart 1: Fed tightens, but volatility falls % Fed taper tantrum RMB devaluation Oil price slump Fed, RMB, Oil Vix US base rate (rhs) Source: Thomson Datastream, Schroder Economics Group, 24 June Some observers argue that volatility is low because investors are now comfortable with the three primary factors that have driven volatility in recent years. Specifically, concerns about the Fed tightening monetary policy, China s currency policy and the oil price have all eased. We would add that the current low level of volatility today also owes something to favourable political outcomes in Europe where there has been no swing toward populism. In the 1990ies, the US economy has experienced less volatility, only to be derailed twice in the decade thereafter. Therefore, we are sceptical that the goldilocks period will last forever. The next shock may not be driven by the Fed, oil or China. It could be due to geopolitics or other origin. Does it mean that the end to this bull market is near? We do not think so: central banks, despite tapering are still injecting large sums into asset markets. Central bank balance sheets are expected to continue to grow. Chart 12: Global liquidity to continue to rise Central bank balance sheet assets, USDtn US UK Eurozone Japan Switzerland China Sweden Source: Thomson Datastream, Schroders Economics Group, 26 June 17. 4

5 If there was a period of slow economic growth to come or if markets were to experience a significant decline, central banks and authorities in general would likely run to rescue. We think that there is still a long path for central bank policies to normalise, be it with or without periodic interruptions due to weak market or a weak economy. We also see positive signals from a bottom up perspective. After a period of approximately 3 years with broadly stagnant company earnings overall, corporate profits in 17 are expected to start growing considerably again. Expectations at the beginning of 17 have even proven to be on the conservative side, - an atypical pattern and unusual for widespread human overconfidence. In the course of the first half 17, we saw upwards revisions, for which we expect to get confirmation during the upcoming H1 earnings season. 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. The offering of shares in certain jurisdictions may be restricted and accordingly persons are required, by the Company, to inform themselves of and observe any such restrictions. 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). The prospectus and the key investor information document(s) for Switzerland, the articles of association, the annual and semi-annual reports can be obtained, free of charge, at the offices of the Swiss representative, Schroder Investment Management (Switzerland) AG, Central 2, P.O. Box, CH-8021 Zurich (authorised and regulated by FINMA) and the Swiss paying agent, Schroder & Co. Bank AG, Central 2, P.O. Box, CH-8021 Zurich. An investment in the Company entails risks, which are fully described in the prospectus. The Company has its registered office in Luxembourg and is regulated by the Commission de Surveillance du Secteur Financier. Past performance is no indication of future fund performance. This depends on the trends in markets, investment returns and exchange rates (if relevant), and how successful the asset manager is in implementing the investment policy. The performance shown does not take account of any commissions and costs charged when subscribing and redeeming units. Prices of shares and the income from them may fall as well as rise and investors may not get back the amount originally invested. This document is issued by Schroder Investment Management (Switzerland) AG, Central 2, P.O. Box, CH-8021 Zurich. For your security, communications may be taped or monitored. Risk Considerations The capital is not guaranteed. 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.