Investec Worldwide Equity Feeder comment - Jun 13
Market review In financial markets good news can sometimes become bad news. This proved true in the second quarter of 2013. The good news - better economic data - prompted the US Federal Reserve (Fed) to indicate that it may start to wind down its quantitative easing (QE) programme. The bad news was the reaction by markets. Fears that such a withdrawal would drain some of the liquidity currently supporting markets, led to a massive sell-off in the bond market. Fed Chairman Ben Bernanke's announcement that the central bank could begin to slow the pace of its asset purchases if unemployment drops as projected, led to a sharp upward move in bond yields. The period witnessed large outflows from fixed income funds. As panic spread, global equity markets were also impacted as anxious investors rushed to sell their holdings. This pushed down all markets, with emerging market equities particularly hard hit. The MSCI AC World NR Index returned -0.4% in dollars over the quarter. Emerging market equities underperformed developed market equities, with the MSCI Emerging Markets NR Index losing 8.1% over the quarter.
Portfolio review The portfolio produced positive returns over the quarter, ahead of the MSCI AC World NR Index. The best performing sector over the quarter was consumers, driven mainly by healthcare equipment & services and pharmaceutical stocks. Global health service company Cigna outperformed on better than expected earnings growth, while Valeant Pharmaceuticals was boosted by its recent acquisition of eye care company Bausch and Lomb. Elsewhere, personal care provider Nu Skin continued to deliver strong operational results. The financial sector also performed well. Although Brazilian banks Banco do Brazil and Itau Unibanco were impacted by civil unrest in the country, good stock selection in diversified financials contributed to returns. ING Groep benefited from its IPO and good investment returns within its life insurance business, while Moody's and JPMorgan also performed well. The resources sector was the largest detractor over the quarter due to our energy holdings. US refiners, including Valero Energy and Marathon Petroleum, fell on concerns that narrowing oil price differentials might affect their profitability. The services sector also dragged on performance. Despite consumer durables & apparel adding to returns, we suffered from not holding a number of Japanese automobile stocks, such as Toyota Motor, Fuji Heavy Industries and Mazda Motor, which benefited from a weaker yen.
Portfolio positioning Talk of a wind down in QE, as a result of an improvement in US employment and leading economic indicators, has sparked a material shift in the investment landscape. A sharp upward shift in yield curves around the globe implies that the easing policy, which has seen 520 cuts in interest rates around the globe over the past six years, has been a success. Inflationary expectations have been raised and the global economy is moving towards a renewed growth trajectory. However, evidence of this, as yet, is rather scarce on the ground. Quarter after quarter, equity investors have seen companies beat earnings expectations, but only through cutting costs. Sales estimates have been reduced and outlook statements have been broadly pessimistic. With the second quarter earnings season approaching, it will be interesting to see if the central banks are right to shift the rhetoric from 'we will do whatever is needed' to a tapering down of QE. Either way, the sell-off in bond markets has been particularly severe as sellers rushed to be first out of the door and the fear factor pushed through, perhaps unfairly, to equities. Inflection points of any kind do tend to be accompanied by a jump in volatility, but the stock market sell-off seemed a little contradictory, given that a QE pullback was driven by higher growth expectations. Despite renewed uncertainty, stock markets generally seem well supported. If growth does not materialise we get more QE; if growth does pick up the outlook for profits improves. If inflation rises then equities are a more attractive asset class than fixed income. So, besides the recent volatility, what is there not to like?
The Ninety One Global Strategic Equity Feeder Fund's primary objective is to grow capital over the long term, whilst providing a reasonable level of income. The fund aims to outperform the benchmark, measured over three year periods. This rand-denominated fund invests in shares listed worldwide. Exposure to international equities is obtained by investing directly into the Ninety One Global Strategic Equity Fund. The majority of the fund's investments are in developed markets, such as the United States, Europe, UK and Asia. The focus is on individual stock picking. The investment team uses Ninety One's proprietary 4Factor™ process to assist in the screening and selection of companies. The emphasis is on valuation, strategy, earnings dynamics and technical analysis.