PSG Global Flexible Feeder - Jun 17
Given the backdrop of elevated market valuations, global stocks continued their strong performance during the second quarter, with the MSCI World Index delivering a positive return of 9.43% (11.01% including dividends) year to date. The tech-heavy Nasdaq index outperformed comfortably (+14.67%), while an acceleration in European growth, coupled with a market-friendly election outcome in France and dollar weakness, drove European stocks 15.91% higher. Emerging markets also ended two years of underperformance and returned 18.55% year to date. (All returns quoted in US dollars.)
This does not necessarily mean that all markets and all market sectors had an easy year. Value stocks, which outperformed last year on the back of higher growth, inflation and interest rate expectations post Donald Trump’s election, underperformed the broader market as the likelihood of effective policies to drive US growth diminished significantly. Continued threats of disruption (both perceived and real) by online retailers and lower-cost competitors have also driven the prices of US retailers down by 7% at an index level. In addition, while most emerging markets have seen their currencies and stock markets appreciate considerably this year, countries such as Brazil and South Africa continue to excel at scoring political own goals. Markets in both these countries have underperformed both emerging and global market peers.
We inherently like to buy high-quality companies with attractive growth prospects, at attractive valuations. We do not consider very expensive stocks that are deemed to be defensive as low-risk investment opportunities, and we expect muted long-term performance from such stocks. Rather, we think the risk is lower (and the opportunity better) in quality assets that are currently out of favour, yet offer excellent long-term prospects. This is reflected in the construction of the portfolio.
In fact, the divergence in valuations between the most expensive parts of the markets relative to the cheapest is still as extreme as it was during the dot-com bubble (as shown in the charts below). This warrants caution, but also presents stock-picking opportunities away from the popular crowd.
Our portfolios are constructed from the bottom up and are diversified across regions, industries and currencies. We continue to have strong conviction in our large portfolio holdings, namely Brookfield Asset Management, Cisco Systems, Yahoo Japan and AIA Group. We are also well exposed to some high-quality cyclical companies on low levels of earnings. Finally, while cognisant of the risks, we are finding great opportunities in the United Kingdom, emerging markets and areas such as agricultural commodity producers.
Complacency and significant amounts of greed in some parts of the market have allowed us to reallocate capital out of securities where valuations have approached or exceeded our estimates of intrinsic value, into investment opportunities where fear and uncertainty have driven prices to attractive valuation levels. We have exited or significantly reduced our positions in Apple, Mastercard, Microsoft, Sainsbury’s and J.P. Morgan, while allocating capital to companies such as Discovery (an outstanding global opportunity in our view), The Mosaic Company (the world’s largest potash and phosphate producer) and Babcock International (the UK’s leading defence and engineering outsourcer).
A backdrop of rising asset prices and expensive valuations for the world’s best companies informs our relatively high levels of cash. At the end of June, the PSG Global Flexible Fund had 29% of the fund in cash.
The world remains an uncertain place, with the impacts of US policy changes, balance sheet normalisation by central banks, geopolitical tensions and many other factors, yet unknown. The securities in the fund are trading at a significant margin of safety and we are ready to deploy large amounts of firepower once further investment opportunities that satisfy our strict criteria become available.
The PSG Global Flexible Feeder Fund is a Rand denominated Feeder Fund, feeding solely into the PSG Global Flexible Sub-Fund, denominated in US Dollars and a sub-fund of PSG International Funds SICAV plc. The fund aims to achieve superior medium to long-term capital growth through exposure to selected sectors of the global equity market and/or bond market and/or money market, and exposure will vary in accordance with changing markets and economic trends.