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Fund Manager Monthly Report - May 2015

23 June 2015

View the latest portfolio and market commentaries from our range of fund managers.

Aberdeen Asset Management (Asia) - Hugh Young

Far East

For the month to end-May, the fund retreated by 1.62% in sterling terms, underperforming the benchmark FTSE World - Asia Pacific index's marginal gain of 0.02%. Both asset allocation and stock selection were negative.

Asian equities ended mixed in May. Chinese A-shares rose on retail buying as Beijing cut interest rates and announced fresh initiatives to liberalise its capital markets. India and Indonesia also advanced, while Japan benefited from encouraging GDP data and the weaker yen. Conversely, Singapore was hurt by investors’ concerns over the banking, property and energy sectors, while Malaysia also fell.

In first-quarter results news, HSBC’s solid earnings were driven by a rebound in the global banking arm and steady performances in its retail and commercial units. In Singapore, City Developments’ earnings were flat as higher contributions from property development and hotels were counterbalanced by an increase in administrative expenses and operating costs. ST Engineering aims to keep 2015 sales and profits stable from the previous year. This was despite continued sluggishness in its US marine division and lower earnings from its land systems unit. The company’s order book remains resilient and cash flows are healthy.

Toyota Motor announced a ¥300 billion share buyback programme and an annual ¥200 cash dividend per share, ¥35 higher than the year before. The company’s full-year results met our expectations, even though total auto unit sales fell. On a positive note, operating profits continued to grow over the last three years, supported by the weaker yen and further cost cuts.

Unicharm’s first-quarter sales grew at a decent pace, although margins deteriorated in key Asian markets due to fierce competition. In May, we received shares in miner South32 via an in-specie distribution from the holding in BHP Billiton. We like South32 for its diversified commodities exposure, potential to extend the lifespan of its mines and cost reduction efforts.

Aberdeen Asset Management – Jamie Cumming

Ethical

In May, the fund fell by 1.06%, underperforming the benchmark’s gain of 0.82%. Both asset allocation and stock selection were negative.

Brazilian lender Banco Bradesco was among the key detractors from relative performance. Its shares dipped amid concerns that tax hikes aimed at financial institutions will pressure profitability across the sector. The government will raise taxes on banks from 15% to 20% in September, in an attempt to meet its fiscal targets. EOG Resources also lagged, after it posted first-quarter results showing a decline in revenue owing to weak oil prices. That said, the oil and gas company has been reducing costs, and is well-placed to benefit from a recovery in crude prices.

Conversely, Cognizant and Vodafone aided performance. Cognizant posted solid first-quarter results, driven by strength in the healthcare and financial industries. The IT services company also raised its earnings forecast for the year. Shares of Vodafone rose amid talks of a possible merger with European cable telecommunications company Liberty Global.

In portfolio activity, we introduced Hong Kong-listed Kerry Logistics, a well-run business with strong warehousing capabilities and opportunities to leverage trade growth. We also added to EOG Resources on relative weakness. Against this, we sold Spain’s Viscofan after it failed the fund’s ethical screens.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

Global markets advanced slightly in May. The UK market did slightly better as it breathed a little easier in the wake of the decisive outcome to the general election. Naturally, some of our politically sensitive stocks, namely Centrica, William Hill and Lloyds, enjoyed a sense of relief at the result.

As we said at the beginning of the year, European QE had a ‘salt on bacon’ risk in that it occurred at the very time that economies were showing signs of recovery and the benefits of the lower oil price had yet to be felt. It is no surprise that bond yields have backed away from their’ deflation for ever’ valuations and are now becoming cognisant of stronger growth and some modest inflation. Clearly, this will herald a period of adjustment for the stocks and sectors that have benefitted most from a flattering comparison with bonds. However, we should be cautious about labelling everything as a ‘bond proxy’ as dividends can grow whereas bond coupons cannot. Longer term, the cavalry should appear in the form of better earnings growth for equities.

Over the month we reduced our holding in Reckitt Benckiser and Novartis and added to Saga and Barclays.

Artisan – Dan O’Keefe & David Samra

Global Managed & Global Unit Trust

Among the largest contributors to performance this month were Lloyds, UBS and ING, all of which are European banks. These shares continued to benefit from the rally in European banking stocks that has been ongoing since the beginning of the year. There were also some positive company-specific developments that were announced when each firm reported quarterly results in May: Lloyds showed strong performance on lending margins and cost control. UBS had good performance across all segments. ING had solid revenue growth and cost control, and it looks increasingly likely the company will begin returning excess capital to shareholders in the coming months.

Among the largest detractors from performance this month were Samsung Electronics and Imperial Oil. Samsung Electronics shares suffered from concerns about the prospects of the company’s newest smartphone, the Galaxy S6®. There are also heightened concerns around management and corporate governance, as the controlling family is orchestrating a number of transactions in the broader Samsung Group to transfer control of the company from the ailing Chairman to his son. Shares in Imperial Oil were negatively impacted by results of the May 5th election in Alberta; there are fears that the newly elected New Democratic Party will be less favourable for the province’s oil industry than the former government.

We did not add any new positions to the portfolio or exit from any existing positions.

Our process remains the same as it has been since the founding of the portfolio. We continue to look for good businesses with good balance sheets that are run by able managers. We aim to buy shares in these companies when they are trading at a meaningful discount to their long-term intrinsic value and sell them once they reach this threshold. Given the elevated valuations we are encountering in most markets, we are finding few undervalued securities. However, we are continuing to build our base of knowledge so that we can pounce on opportunities that will arise when market conditions inevitably change.

AXA Framlington – George Luckraft

Diversified Income & Allshare Income Unit Trust

Following the decisive General Election result UK equity markets rallied with domestic stocks to the fore.  This gain was partly reversed at the end of the month as bond prices fell on the back of a modest increase in European inflation.

The portfolio performed well as various of the small company holdings such as Topps Tiles, Low & Bonar, Vectura, E2V Technologies and Hilton Foods registered strong rises.  An underweight position in Lloyds Banking Group was the biggest negative. 

During the month a new holding was acquired in Amedeo Air Four Plus which offers a very attractive yield.  The holding of GKN was sold while that of Cineworld was further reduced.

US economic data has begun to improve which could bring forward the timing of the first rise in the US interest rates.  Likewise in the US the increase in confidence following the General Election could also lead to an earlier than expected rise.  Any rises are likely to be modest and drawn out.

Babson Capital – Zak Summerscale

International Corporate Bond

Global senior secured bonds continued to generate positive returns in May despite heightened volatility across Treasuries, FX, commodity and stock markets.  The U.S. GDP forecast was revised downwards after disappointing retail sales, but other U.S. economic metrics, namely housing and employment, showed improvement.  We also noted the Federal Reserve’s rhetoric shifted to a more hawkish stance regarding interest rates. Perhaps the most influential development in May was the European Central Bank speech discussing the calibration of bond purchases in order to manage liquidity over the summer months.  This resulted in the German 10 year Bund rallying while also positively affecting the senior secured bond market.

New issue volumes eased somewhat in May with $35bn of new bonds priced in the U.S. high yield market. In Europe, May also proved to be a quieter month for issuance with only €3bn of bonds issued. Global senior secured bond issuance has however, on the whole remained strong, accounting for approximately 40% of European and 21% of US new issue so far in 2015.

In the current low interest rate environment, the fundamental picture in high yield remains sound but credit selection is key. Recent quantitative easing measures in Europe have further reduced government bonds yields, arguably making the relative value for high yield bonds even more attractive. Our strategy is focussed upon taking advantage of the primary market pipeline in conjunction with select secondary market opportunities, which we believe will continue to provide attractive risk-adjusted returns for the International Corporate Bond Fund.

BlackRock – Luke Chappell

UK & General Progressive

The surprise result of a Conservative majority in the UK General Election had an unusually large impact on certain sectors of the UK stock market, notably the reduced likelihood of property and utility taxes led to short term jump in these sectors. Greek debt negotiations provided a source of volatility in both bond and equity markets, whilst market expectations are for US interest rates to begin to increase later this year.

The Fund underperformed during the quarter as positions in Reed Elsevier, Compass and Reckitt Benckiser fell in response to higher bond yields. These shares have previously been beneficiaries of investors’ search for alternatives to ultra-low bond yields. EasyJet fell as oil prices moved higher and as strikes by French air traffic controllers led to cancelled flights. On the positive side, Next, Wolseley and Sky reported strong earnings growth and BG Group benefited from the agreed takeover approach from Royal Dutch Shell.

Eurozone economic activity is showing signs of improvement with sentiment tempered by uncertainty around Greece, whilst recent macroeconomic data from the UK and US continues to point to growth. We believe this environment is suited to our strategy of investing in concentrated but economically diversified portfolio of best ideas that aims to identify companies with structural growth, and those companies able to positively impact earnings through self-help.

BlackRock – Nigel Ridge

UK Absolute Return

Equity markets and business confidence were boosted from the unexpectedly decisive Conservative majority in the UK Election outweighed any medium term fears arising from a potential European referendum before 2017. In Europe, the intensification of Greece’s debt negotiations with its creditors continued. The rest of the European periphery however saw modest signs of economic recovery continue. The US Dollar bounced back after recent weakness to resume the strong rise seen over the last 12 months while government stimulus helped Chinese equities continue to stretch into further expensive territory.

The Fund added +2.4% in May (net). The positive absolute return was driven by alpha and not beta with stock selection across financials and consumer services driving performance. Industrial positioning also added positively with only small losses seen in the utilities sector and the index future short position. Of the main contributors, the largest was listed private equity business 3i Group released strong results reporting portfolio valuation growth and a dividend beat. Our highest conviction position in cruise line operator Carnival also rose helped by the (choppy) oil price falling rather than company news flow. The largest detractor was a short in a technology software firm with shareholders being supportive a strategy update from new management. A short position within industrials followed, as shares in a lower quality distributor responded positively to an in-line trading statement. The pair book also contributed positively, with the largest gains from the banks and house-builders while only the oil & gas pair positioning posted a negative return.

We have retained gross exposure at around 125% reflecting both conviction of ideas and current financial market conditions with the outlook continuing to be one of modest and uneven growth coupled with low inflation. While employment and M&A activity continue to rise, support from consumer spending or corporate capex remain largely disappointing. The net of around 21% by the end of May remains in line with our consistently low net exposure allowing our selection of stock specific risks to be the main determinant of the performance outcome.

First State – Jonathan Asante

Global Emerging Markets

At a stock level, Uni-President Enterprises (Taiwan: Consumer Staples) rose as results seemed to indicate an improvement in the competitive environment and Housing Development Finance (India: Financials) climbed as it delivered positive results, remaining one of the best capitalised institutions in India. Mahindra (India: Consumer Discretionary) was strong on no particular news.

On the negative side, Standard Bank Group (South Africa: Financials) declined on a short-term focus on results that highlighted increased Nigerian credit impairment charges and Tech Mahindra (India: Information Technology) was weak as the company’s largest clients are in the telecom space which has not been particularly strong. Tiger Brands (South Africa: Consumer Staples) declined for no particular reason.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

European currency high yield bonds delivered a positive return in what was a challenging month for bond markets.  The underlying German Bund market sold off aggressively in the last 10 days of the month, partially due to profit-taking amidst stronger economic data, higher inflation and increased hopes of an agreement between the Greek government and its creditors.  This had a negative impact on bond returns, however high yield debt, which tends to benefit from positive economic data delivered a positive return. Whilst the signs of a potential agreement helped Greek government bonds to rally, other peripheral European sovereigns succumbed to post Quantitative Easing profit-taking.  The European high yield primary market remained buoyant with Barclays estimating issuance of €13.6bn across all currencies.  This brings year-to-date issuance to €52.8bn, a year-on-year increase of 16%.  Data from Merrill Lynch showed the European Currency High Yield bond market returning 0.6% with BB bonds returning 0.5% and CCC and below 1.5%.  European investment grade corporates returned -0.4%. Italian and Spanish sovereign debt returned -1.6% and -1.7% respectively.  Bunds meanwhile returned -1.3% (All returns Sterling hedged.)

In terms of positioning we are defensive. Our exposure is skewed toward higher quality, well established high yield issuers, predominately rated BB.  Many of the holdings are in the financial sector, which we think have the type of defensive qualities we are seeking while still achieving a reasonable level of yield.  The fund also has positions in Italian peripheral Europe, as we seek to benefit from a further tightening of the yield spread over German Bunds.

In a busier month of trading, we participated in new issues in Fiat 4.5% 15/04/20 (Auto), RWE 2.75% 21/04/75 (Utility), Moy Park 6.25% 29/05/21 (Food), Levis Strauss 5% 01/05/25 (Retail) and Senvion 6.625% 15/11/20 (Industrial). We bought new positions in Time Warner 5.25% 15/07/42 and Marfrig 8.375% 09/05/18 (Food). We sold our positions in Equiniti Cleanco Ltd 7.125% 15/12/18 (Services) and J Sainsbury’s 1.25% 21/11/19 (Retail).

Invesco Perpetual – GTR team

Multi Asset

Fund performance was marginally negative in May. The Norwegian Krone vs UK Pound idea detracted from performance as demand for the UK currency surged following the outright win of the Conservative Party in the UK general election, which called an end to political uncertainty. In the volatility space, our Australian dollar versus US dollar idea hurt performance. The idea is implemented by buying volatility on the AUDJPY cross rate and selling volatility on the USDJPY cross rate. However, the month saw heightened volatility as the US dollar extended its gains against most major currencies.

Conversely, our US dollar versus Canadian dollar idea benefitted from the strength of the US currency. During the month, we have implemented a number of changes to the portfolio. Two new ideas have been added in the equity space. One of them expresses our preference for emerging markets equities over US equities. Based on historical data, we believe that emerging market equities are good value relative to US equities, and have the potential to outperform on the upside as the global economic recovery continues. Structural reform that has a more long-term focus is also taking place in many emerging market nations which has further improved the outlook of these economies. Meanwhile, the strength of the US dollar is expected to hurt the profits of US-based multinational companies. US economic growth has also slowed, and we expect this to continue in the short term.

The other idea we have added highlights our preference for equities within the US consumer staples sector over the US consumer discretionary sector. We anticipate that the more defensive staples sector should perform better than the discretionary sector in general in light of a weakening US economy.

J O Hambro – John Wood

UK & General Progressive

It will not surprise long-standing clients and regular readers of our factsheets that we remain firmly of the view that a financial tsunami is coming, albeit the precise timing and catalyst, as with the bursting of most financial bubbles, remains unclear. We are convinced that our clients' interests are best served by us staying on the higher ground and sticking to our strict absolute valuation discipline, as reflected in our high cash balance. Absolute valuations within the UK stock market, artificially inflated by quantitative easing and extreme monetary policy, continue to be unattractive to us as fundamental investors in the absence of an improvement in underlying corporate fundamentals.

Our focus continues to be on identifying companies that can generate above-average returns over the long term through compounding growth. We aim to do this by buying and holding stakes in companies characterised by high quality franchises that generate plentiful free cash flow and which have solid balance sheets marked by low levels of debt. High return investments are scarce in today's low return environment, but we believe we can achieve attractive long-term returns through the patient process of holding stocks that regularly compound their growth over time.

And patience does indeed remain our watchword. We will return to the beach to trawl through the wreckage after the financial tsunami has done its damage, as it surely will.

Loomis Sayles – Kenneth Buntrock

Investment Grade Corporate Bond

UK economic data has remained consistent with a solid expansion, although a few survey indicators suggested some softness in April and May. The outlook for the Bank of England was little changed, with markets pricing a first rate hike by the MPC in the first half of 2016. Consumers remained a key driver, with jobs and wages growing, cheap oil, and continued growth in home prices supporting consumers. Inflation held at 0% in February and March, and below 0% in April for the first time in half a century (1960). Inflation is well below the BoE's 2% target, with low global oil prices a key contributor for most of early 2015. Forecasts by the Bank of England released in May suggested inflation could be back to 2% by mid-2017, under the anticipation of wage growth and higher oil prices.

May was a fairly uneventful month for GBP spreads. The index was 1 bp wider for the period. Looking into the details, an overweight allocation to Telecomm (ex-cable) was a modest detractor from a sector allocation standpoint as this was one of the worst performing segments. However, within the industry, the reversal of TWC performance led to a positive security selection factor. TWC spreads were ~50 bps tighter MTD, retracing around a third of the widening pre-Comcast collapse. Some of this strong performance was viewed as a selling opportunity and exposure was trimmed slightly. Selections among Utilities and Banks also lifted relative performance.

Petrobras reversed some of its recent gains, which weighed on results for the month. Tesco continues to trade soft, but exposure has been reduced and the overall negative impact has been mild as result. A modest relative overweight in high yield helped to support positive performance, albeit only slightly.

Majedie – James de Uphaugh

UK Growth & UK & General Progressive

Your portfolios rose 2.5% during May, outperforming the FTSE All-Share index return of 1.4%. The lead up to the UK General Election produced less market volatility than some expected (we had remained sanguine based on the international nature of the UK market), and the result – a business-friendly majority government – has been generally well received by investors. Our focus is now on Sterling, which we feel is vulnerable given the twin current account and budget deficits.

Performance was driven by Vodafone: part of a broad exposure across our portfolios to the European Telecommunications sector, which is benefiting from less onerous regulation allowing consolidation at national level, and a greater ‘bundling’ of the services offered to consumers. Over the month Vodafone announced solid if unspectacular results, but speculation of a tie up with Liberty Global in Europe stoked the share price. Another strong performer was Marks and Spencer, whose operational improvement is now being reflected more richly in its share price, indeed a Q1 trading update during the month was well received by investors; we have taken the opportunity to reduce our holding, feeling that consensus has caught up, and perhaps the UK consumer’s optimism is becoming a little extended. FirstGroup, a company that – on the surface at least – has not been without its problems in recent years (loss of rail franchises), has been steadily improving operationally, particularly within its UK and US bus franchises; the shares are up over 30% since the end of March.

As always, it was not all plain sailing: energy (BP) and mining (Rio Tinto) companies struggled as the US dollar rallied (demand for commodities tends to fall in such circumstances) and HSBC gave back some of the ground it made during a strong run in April.

We continue to favour the UK bank sector, as we mentioned last month, but we have also been reducing our underweight in the mining sector, where we feel, selectively, that valuations now offer an attractive risk reward ratio.

Majedie – Chris Read

UK Income

During the month we saw subdued commentary from one of our top ten holdings, Easyjet. The softer announcement took the market by surprise, which impacted the share price; the main issue is a need to reduce costs, an area in which the business has a rather mixed track record over the past 2 -3 years. Over the month we had a good meeting with the CEO Carolyn McCall, during which she outlined plans to target better cost control alongside her new Finance Director. Overall, we are comfortable holding onto the position as the business continues to gain good ground in Europe and the shares pass our ‘four tests’. Separately, not holding Vodafone or Lloyds Bank also detracted from performance. Vodafone performed strongly as a long talked about deal, with cable company Liberty Global, gained further momentum when its Chairman said they would be open to a deal. On the positive side we saw strong performance from Qinetiq, which had a good set of results leading to broker upgrades. Also, Royal Dutch Shell continued to feel the pressure of a lower oil price outlook; we do not hold the shares.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

Stock selection within the industrials and financials sectors contributed to performance. Individual contributors included Mondelēz International, Inc., The PNC Financial Services Group, Inc. and Eaton Corporation, PLC. Mondelēz’s share price rose as the company’s sales and operating margins came in strong. PNC’s share price rose as its profit margins expanded. Eaton’s share price rose after the company posted a strong earnings report.

Stock selection within the health care sector and consumer discretionary sectors detracted from performance. Individual detractors included Statoil ASA, Viacom Inc. and Total S.A. Statoil and Total struggled with volatile oil prices. Viacom’s share price declined as analysts lowered the company’s 2015 earnings outlook.

Oldfield Partners – Richard Oldfield

High Octane

The nine strongest performers in the month were all Japanese, reflecting the strength of the Japanese market which was up 5% in local currency terms but 1.3% in US dollar terms and 2% in sterling terms, the weakness in the yen eroding much of the gain. Nonetheless for nine companies from one country to feature at the top of a list of 21 makes it a unique month.

Among the underperformers were Samsung (-7% in local currency terms), Lukoil (-6%), Barrick (-6%), Tesco (-4%) and Microsoft (-3%). Samsung’s recent results have been encouraging and we are a little surprised at the share price weakness. Deducting cash from the market capitalisation, the shares have a price earnings ratio of about six, and we think this represents outstanding value in spite of concerns about possible erosion of the company’s market share in smartphones and also the peak, at some stage, in the semiconductor cycle. Lukoil oscillates with perceptions about Russia and oil, more the former than the latter. With an enterprise value per barrel of oil reserves of only $3, we continue to feel that the prospect of a high return in the medium term is good. We have said much about Barrick and Tesco in recent reports. After the early enthusiasm (in which we share) for the new broom, we are not altogether surprised at anxiety returning about Tesco’s ability to become profitable again in the UK. We have suggested before that this will take some time and that the initial, necessary, steps which the new chief executive has been taking are not good for margins: competing aggressively on price and improving service through increases in staff as well as other measures. However, the initial steps do give us confidence that in due course profit will return, and we are holding to our assumption that in two to three years UK trading margins will be around 3.5%. If this is so, the shares are severely undervalued.

At the other end of the portfolio, the three Ks, all recent purchases, were among the leaders, Kansai Electric Power (+14%), Komatsu (+2%), Kyocera (+8%). The first of these is a small holding, and is likely to remain small because of limited liquidity. Since the Fukushima earthquake in 2011, all nuclear power generation in Japan has been shut down. The government is keen on restarting, and it seems likely that some of Kansai’s nine nuclear plants will restart during the next two years. If this happens, Kansai seems capable of producing operating profit of nearly $3 billion, and its market capitalisation is less than $11 billion. Komatsu, like Kyocera, has benefited from the depreciation of the yen, and its profit margins are likely to grow to record levels over the next year.

Orchard Street – Chris Bartram

Property Unit Trust

The portfolio valuation as at 31st May 2015 was up 0.7% month on month.

We have completed the acquisition of 70 New Oxford Street for £36.5m. The property comprises 18,650 sq ft of comprehensively refurbished Grade A offices over four floors with two retail units on the ground and basement floors totalling a further 7,400 sq ft.

We have completed the annual RPI rent review at Woolley Edge Service Station in Wakefield and as a result the capital value has increased by £600,000 over the month. 

We have surrendered the existing lease and simultaneously granted a new 10 year lease of Unit 4 Commerce Way, Croydon. The rent payable is ahead of ERV and the scheme remains fully let.

The portfolio vacancy rate is 7.4% compared with 8.6% for IPD and the initial yield on the portfolio is 4.9% which compares with 5.3% for IPD.

Property Life and Pension funds

The portfolio valuation as at 31st May 2015 was up 1.7% month on month.

At Avro Way, Weybridge we have completed a new 15 year lease to Selco Trade Centres at the 55,900 sq ft warehouse previously sublet to EHD. The rental level is ahead of ERV and has had a significant effect on the capital valuation, increasing it by £2.4m.

We have completed a new letting on Unit 188 at Trinity Trading Estate in Hayes ahead of ERV and as a result there is only one vacant unit remaining.

The portfolio vacancy rate is 7.4% compared with 8.6% for IPD and the initial yield on the portfolio is 4.7% which compares with 5.3% for IPD as at 31st May 2015.

 SW Mitchell Capital – Stuart Mitchell

Continental European, Greater European & Greater European Progressive Unit Trust

Our broad range of company visits over the past month confirms our very positive outlook for European equities.

Economic recovery is gathering momentum right-across the region, with many management teams that we have spoken to ‘surprised’ by the intensity of the rebound. Most notably, banking activity has picked up significantly with, for example, BNP reporting a 2% growth in first quarter domestic lending growth. This was supported by Intesa San Paolo who spoke of ‘evidence of significant recovery in the first quarter’. We continue to believe that most analysts have failed to appreciate the intensity of the recovery which, as earnings growth becomes increasingly ‘visible’ throughout the year, should lead to significantly higher share prices. At the same time, the Eurozone moves ever closer to normalisation. Many investors have struggled to accept how deeply companies and governments have restructured at the periphery of Europe. Just look, for example, at the 40% reduction in costs that IAG achieved at Iberia. At the same time, German wage growth is beginning to accelerate quite quickly. The recent 3.4% pay award struck by employers and the highly influential IG Metall trade union is the highest since 2007. In fact, a significant proportion of peripheral Europe’s productivity gap with Germany has now been eliminated over the past few years. Closer to the core, furthermore, Matteo Renzi and Francois Hollande are beginning to make real progress with reform. We are also hopeful that the recent election of Syriza in Greece will ultimately lead to a sensible restructuring of the country’s debts. The market, however, remains compellingly valued with shares pricing in an unusually bearish decline in returns on capital into perpetuity. Even more strikingly, the more domestically orientated companies are trading at, in many cases, a 50% discount to their counterparts in the US. We continue to find the best opportunities in the more domestically orientated areas of the market.

Companies from the periphery of Europe make-up 29% of our investments. On a recovery basis, for example, the Italian media group, Mediaset, represents great value. The same holds true for our holdings in Sacyr and Banco Popular.

Banks constitute a further 18% of the funds. We still believe that the market has failed to appreciate the benefits of a rapid recovery in financial margins coupled with draconian cost cutting and easing regulatory pressures. We have focused on the strongest retail banking franchises such as Intesa and BNP where we believe that returns should rather rapidly return to pre-crisis levels.

Telecom companies represent 15% of the fund including investments in the telecom groups Orange, Deutsche Telekom and Telecom Italia.

Our favourite growth companies, such as Amadeus and Essilor make up the remainder of the portfolios.

Wasatch Advisors - Ajay Krishnan

Emerging Market Equity

Emerging-market equities declined in May on concerns of slowing global growth and decelerating credit demand across less-developed countries. Inflows of foreign capital into emerging markets have fallen off in recent months as the prospect of higher U.S. interest rates made the search for yield among international investors less urgent. While our long-term outlook is optimistic, recent economic figures in countries such as Indonesia, India, Brazil and Mexico have fallen short of our expectations.

Despite the weak backdrop, our stocks held up much better than the benchmark. We believe this was a result of the types of companies we seek when selecting investments for the portfolio. In particular, we favour companies with strong business models, sustainable competitive advantages and growing demand for their products. Consequently, our stocks tend to react less to global economic news and more to the underlying company fundamentals. Growth prospects for our companies remain favourable in our view and helped drive the portfolio’s outperformance in May.

As we research new investments in areas such as mainland China and Hong Kong, we continue to seek high-quality, long-duration businesses that we believe are well-situated to outperform over the long term.

The information contained herein represents the views and opinions of our fund managers and not those necessarily held by St. James’s Place Wealth Management.

FTSE International Limited (“FTSE”) © FTSE [2015]. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.

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