Douw joined Old Mutual Investments in 1991 as an equity analyst, where he spent the next fifteen years. During this time his responsibilities included that of head of industrial sector research and the management of a variety of equity portfolios. During his last five years with Old Mutual, Douw was responsible for the management of all of its value style mandates, including the Old Mutual Value Fund and the Old Mutual High Yield Opportunity Fund. Douw joined Orthogonal Investments as one of its founding shareholders upon its inception in 2007.
Denker SCI Global Dividend Feeder Fund - Jun 19
Global equity markets experienced another relatively good quarter, albeit with more modest performance than in the first quarter (Q1). Looking at the indices in US dollars – on a total return basis the S&P 500 Index gained 4.3%, the MSCI World Index gained 4.2% and the MSCI Emerging Markets Index, lagged again, closing up only 0.7% this quarter. The surprising decline in long dated developed market government bond yields, which started in Q1, did not subside. Yield on US 10 year maturity bonds declined from 2.4% at the end of Q1 to 2.0% at the end of Q2 and the yield on 10 year German bonds declined from -0.1% to -0.3%.
In late June, the Federal Reserve (the Fed) indicated that it might cut interest rates sooner than previously thought by cutting the word ‘patient’ out of its policy statement. It added that it would ‘act as appropriate’ to sustain economic expansion. President Trump has often taken to Twitter to share his exasperation with the Fed’s previous rate increases.
Prime Minister Theresa May announced that she would step down as leader of the ruling Conservative Party in the United Kingdom after successive failures to deliver an acceptable Brexit deal. Boris Johnson and Jeremy Hunt are in the race to replace May as leader. Both Johnson and Hunt have claimed that they can renegotiate the withdrawal deal with the European Union and get it through Parliament before the expiry date of 31 October 2019.
While the market recorded a pleasing gain during the quarter, it was by no means a smooth ride. Uncertainty about the direction of interest rates in the United States combined with President Trump’s open criticism of the Fed’s actions meant that investors were subjected to a rollercoaster ride which saw monthly returns of +3.6%, -5.8% and +6.6% respectively from the MSCI World Index. The fund, likewise, experienced somewhat of a topsy-turvy quarter - underperforming the overall market during the up months and outperforming during the down month. Given the fund’s customary relatively defensive positioning, due to its focus on yield, this is not surprising.
The largest positive contributions to the fund’s performance came from its holdings in Lockheed Martin (+22%), American International Group (+24%), Unilever (+10%), JP Morgan Chase (+11%) and ageas SA (+12%), while the biggest detractors from its performance came from Imperial Brands (-30%), Royal Ahold Delhaize (-13%), British American Tobacco (-14%), Philip Morris International (-10%) and Altria (-16%).
Lockheed Martin reported first quarter results that were significantly better than expected by the market in late April. This surprise stemmed from above consensus revenue growth and operating margins combined with a lower tax rate. In addition, new orders booked during the period exceeded deliveries made by a healthy margin, leading to the company raising its guidance for the rest of the year. Beyond the current year the company’s prospects continue to look encouraging, based largely on the scheduled increase in production of the F-35 fighter and continued robust demand for the F-16 fighter and C-130 transport plane.
American International Group performed well during the period as evidence of broad-based insurance pricing improvements at an industry level, as well as within their portfolio, continues to emerge. We believe that the benefits of this improving pricing environment have not yet been fully realised and that other ongoing turnaround efforts are also still to bear fruit for shareholders.
The prices of all the global tobacco companies were under sustained pressure during the period, despite all of them reporting earnings and cash flows that were in line with consensus expectations and their guidance. The factors that appear to have weighed heavily on market sentiment were the slightly disappointing growth in sales volumes of so-called ’next generation products‘, such as e-vapour and heat-not-burn devices, and an apparently much sharper than anticipated decline in sales volumes of traditional cigarettes in the United States (US) market as reported by market research company Nielsen. During interviews with three of the US market participants the companies all admitted that volumes were declining at a rate of 4-5% and were adamant that the 8-10% decline pointed to by the Nielsen survey results were inaccurate. Tellingly, Nielsen admitted in mid-June that their survey did not adequately sample the convenience store retail channel in order to provide an accurate picture of cigarette sales volumes. While it appears likely that the company’s version is the correct one, the admission that their market is an inherently declining one and the uncertainty created is expected to continue to depress their valuation multiple. Having said that, the current valuation of the entire group appears to be factoring in an overly pessimistic outlook, which suggests that now is not the time to panic.
The market currently appears to be discounting a rate cut before August by the Fed as a certainty. Such conviction creates the opportunity for disappointment from which a defensively positioned portfolio such as ours should stand to benefit.
The portfolio will invest in assets in liquid form and in participatory interests of the SIM Global Equity Income Fund under the Sanlam Universal Funds PLC approved by the Irish Regulator in September 2004. The portfolio will have foreign exposure of at least 85% at all times.