Northstar SCI Global Flexible Fund - Dec 19
The Northstar Global Flexible Fund delivered a return of +4.97% in US dollars for the 3 months to end-December 2019, which compares with the average fund return in the Morningstar EEA USD Flexible Fund peer group of +3.97%.
For the 12 months to end-December 2019 the Fund returned +21.35%, also meaningfully ahead of the Morningstar peer group return of +13.59%. The Northstar Global Flexible Strategy return over 3 years of 12.78% p.a., ranks it amongst the top 2% of peers and ahead of both the MSCI World Index and Barclays Global Aggregate Bond Index returns of 12.57% and 4.27% respectively.
Equity markets enjoyed a strong close to an already good year, with the nascent third quarter rally in emerging markets and cyclical sectors largely sustained. The MSCI Global Emerging Markets Index returned 11.74%, ahead of the broad MSCI World Index of developed markets, which returned 8.68%. The FTSE 100 Index (+10.82%) experienced a positive quarter, with a strong Conservative majority raising the prospect of a decisive conclusion to the protracted Brexit saga.
Developed markets, more specifically the US, fared best over the course of the year, with the S&P 500 Index (+31.48%) the only major market index to deliver a higher return than the MSCI All Country World Index (+27.3%). Sector leadership was equally narrow, with only the MSCI ACW Information Technology (+47.46%) and Consumer Discretionary (+28.2%) indices performing better than the market overall. While the Fund benefitted from being ‘overweight’ the US and both these sectors, this was entirely the outcome of our bottom up equity selection process, rather than by design. In this regard, it is pleasing to note that, while the underlying equity component of the Fund (+8.25%) lagged the broader market (+9.05%)1 over the past quarter, outperformance of over 700bps2 over the year was almost entirely attributable to equity selection. Blackstone (+96.3%), Moody’s (+71.3%) and LVMH Louis Vuitton Moet Hennesy (+60.2%), outperformed meaningfully and were the largest contributors to both absolute and relative performance over the course of the past year. Our decision not to buy back the shares in Apple we sold at $208 in Aug-18 proved costly following an 89% rally during the calendar year. Boeing (+3.3%) and Reckitt Benckiser (+9.0%) were the other notable relative underperformers. Fund Positioning:
We continue to run the Fund with an equity centric approach, aiming to participate broadly in equity market upside, with downside protection in mind. Our approach to the risk stance or overall equity allocation in the Fund is informed by the absolute attractiveness of equities as an asset class, more specifically, the weighted intrinsic value discount of the Northstar Global Equity Buy List.
Following a widening of the intrinsic value discount towards the end of the previous quarter, owing to a retracement in global markets, we raised the equity allocation in the Fund from 58% to 65% early in the fourth quarter. While this proved fortuitous, given the strong rally in equities over the subsequent months, it seems likely that we will once again moderate our risk tolerance, owing to a fairly modest margin of safety.
Cash remains the default asset in the Fund and to the extent that we continue to consider global bond valuations someway off fair value, we would expect to see the cash balance in the Fund increase. We will, however, continue to widen the net for cash and fixed income instruments, to best utilize these growing balances, as we did in the past quarter, were we included two short-dated inflation-protected Treasuries offering real yields in excess of 2%.
The portfolio will apart from assets in liquid form invest in participatory interests of the Northstar Global Flexible Fund established under the Sanlam Global Funds PLC. The Northstar Global Flexible Fund invests in global equities which will primarily be common stocks and other securities with equity characteristics, comprising preference shares, as well as depository receipts, global bonds (fixed and/or floating; government and/or corporate; rated and unrated), real estate investment trusts (REITS) and cash and cash equivalents. The fund will be managed with a bias towards global equities due to the superior longterm returns from this asset class. If prospective returns from equities are unattractive, exposure to other asset classes, such as real estate, bonds and cash will increase. The Fund is not focused on any specific geographical area, industry or sector and may invest in equities of companies across the full spectrum of market capitalizations. The portfolio may also invest in financial instruments for the exclusive purpose of hedging against exchange rate risk.