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Fund Manager Monthly Report - October 2014

20 November 2014

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

Aberdeen Asset Management (Asia) – Hugh Young

Far East

The fund rose by 1.84% in sterling terms, outperforming the benchmark FTSE World – Asia Pacific Index’s return of 1.72%. At the stock level, Samsung Electronics was the top contributor to relative performance as the stock rebounded
after lagging in the previous month. Indian IT services company Infosys reported better-than-anticipated margins on improved sales and higher employee utilisation. Taiwan Mobile also did well. We are positive about its acquisition of a block of 4G spectrum from Ambit Microsystems, while also taking a 14.9% stake in the company.

Conversely, our underweight to Australia and not having any exposure to the local banks that led the market’s rebound detracted. Not holding the big four Australian banks, which make up the top twenty benchmark components, would always be a swing factor in terms of relative performance. However, over the longer term, we believe there is greater growth potential investing in banks listed elsewhere in Asia.

Meanwhile, Standard Chartered’s shares weakened after the third profit warning in a year as the bank delivered its nine-month results. It blamed high impairment charges as some corporate and institutional clients were hurt by weakening commodity markets. Sentiment was also depressed by speculation that US regulators could re-investigate its alleged sanction violations. However, the company has peerless focus on emerging markets, replete with banking licences and long-term customer relationships, something that cannot be easily replicated. It is an exciting franchise, though we would be unsurprised by a management change.

Aberdeen Asset Management (Glasgow) – Jamie Cumming

Ethical

In October, the fund’s value fell by 0.15%, underperforming the benchmark’s return of 1.97%. Asset allocation, stock selection and the currency impact were all negative.

Standard Chartered was a key detractor. Its stock price weakened after the third profit warning in a year as the bank delivered its nine-month results. It blamed high impairment charges as some corporate and institutional clients were hurt by weakening commodity markets. Sentiment was also depressed by speculation that US regulators could re-investigate its alleged sanction violations. Some of its problems are cyclical and should be resolved in the medium term. More structural ones will require management to reprioritise investments, divestnon-core businesses and streamline riskier portfolios. StanChart’s advantage is its peerless focus on emerging markets, replete with banking licences and long-term customer relationships, something that cannot be easily replicated. It is an exciting franchise, though we would not be surprised by a management change.

Elsewhere, oil and gas pipe manufacturer Tenaris declined on concerns that demand would fall if oil prices remain soft.

In portfolio activity, we sold Korea’s Samsung Electronics as it failed the fund’s ethical screening. Against this, we added to US Cable Company Comcast, Schneider Electric and Canadian telco Telus.

Artemis Investment Management – Adrian Frost & Adrian Gosden

UK & International Income

October was a difficult and volatile month for UK equities although the market recovered its poise in the closing days. Perhaps a decline of almost 1% glosses over some of the stresses and strains being experienced by companies. In effect the “news” was not materially different from what had been known all along – growth is muted and patchy as the US and UK may be entering a period of (marginally) higher rates. The fact that the end of the QE in the US has been declared, and the S&P reached a high is a measure of how much has been discounted.

Our resilience was undermined by the Sanofi profits warning; perhaps some complacency in terms of what constitutes a defensive share. Large capitalisation shares underperformed markedly, which was mainly due to the correction in oils and profit disappointments.

Having been a headwind for the last 18 months, dollar strength should start to become a positive.

We used market weakness to acquire, notable additions being Assura, Melrose and Ashmore. We reduced Deutsche Post and GlaxoSmithKline. Within the international portfolio we bought Entra; a high quality Norwegian property company and Insurance Australia Group; a plain vanilla, cheap market leader in the Australian market.

Artisan – Dan O’Keefe & David Samra

Global Managed & Global Unit Trust

October was a volatile month for world markets. The MSCI All Country World Index declined in the first half of the month, only to rally back in the second half, ending October 1.2% higher (all returns in local terms). There was diverging performance among the major markets, with the US rising 2.4%, Japan up 0.9% and Europe down 1.6%.

The US dollar strengthened against most major currencies again this month, as the world’s central banks embarked on diverging strategies. The US Federal Reserve announced the end to its asset-purchase program known as QE. Later, Japan’s central bank chose to significantly increase its money-printing efforts, which helped boost the Japanese market into positive territory after falling about 7% in the first half of October. The European Central Bank remains somewhat stuck in the middle, with a vague stimulus program that has yet to inspire the European markets.

The major contributors to performance this month were Medtronic, TE Connectivity and MasterCard. Medtronic rose 10.6% during the month due to increased confidence in the consummation of its planned mergerwith Covidien, despite new IRS tax rules that were designed to dissuade US companies from re-domiciling.The shares of MasterCard and TE Connectivity both rose after the companies reported good quarterly earnings results.

Among the largest detractors from performance were Orkla, Tesco and AMEC. Orkla declined 11.3% despite reporting decent third quarter earnings that showed growth in profits at its core consumer branded goods business and progress on its restructuring efforts. Tesco shares fell 5.8% after reporting first half earnings that showed an acceleration of negative like-for-like sales trends. Tesco’s new management team is working to address a number of issues, including competitive pressure on its UK business, accounting misstatements and a worsening balance sheet. The 5.8% decline in AMEC shares was likely due to falling oil prices and concerns about the potential impact on energy-related capital spending.

There were no new additions to the portfolio this month, and we exited our investments Aramark and Tianhe Chemicals. There has been significant movement in the prices of many businesses over the past month. Our team welcomes periods of volatility as prices often become dislocated from business values, offering opportunities to make investments at attractive valuations.

AXA Framlington – Richard Peirson

AXA Framlington Managed & Balanced Managed Unit Trust

The US Federal Reserve Board ended QE(quantitative easing) as expected but the decision of the Bank of Japan to increase significantly its QE program came as a surprise sending the benchmark Nikkei index to a 7 year high and the yen to a 6 year low against the dollar. Pacific ex Japan and US equities were the best performing regions, returning 4.1% and 3.8% respectively. UK equities, which returned -0.7%, were again relatively disappointing with political concerns a negative factor. Resources, both oils and mining, were hit particularly hard by the weakness in oil and iron ore prices.

We commented last month on our sale of Shire as a precaution against the bid from AbbVie being withdrawn. It was subsequently withdrawn and the Shire share price fell by over 30%, giving us the opportunity to buy back into what we consider a good medium term growth situation. We sold our holding of Barratt Developments, which had performed strongly since purchase and in 2014. Although we remain positive about the medium term outlook for UK house builders we are more cautious about the London property market and Barratt has more developments in the London region than our other three holdings which we are happy to retain. We added to a number of existing UK equity holdings, in particular Vodafone which we expect to benefit from a better competitive environment in Europe and from the growth of data via its 4G network. In the US we sold Amazon where growth was slower than expected and we had become frustrated about its capital allocation policy. We bought a new holding in Royal Caribbean Cruises, taking advantage of short term share price weakness. New additions to capacity are light for the foreseeable future, while consumer demand remains strong.

Stock selection was disappointing in October for although we outperformed in European, US and Emerging Markets equities we underperformed our benchmarks in UK, Japan and Pacific ex Japan equities and in bonds.

Recent economic data has not changed the overall background of reasonable growth in the US, minimal growth in Europe and a mixed picture from Japan and the emerging economies. Some form of QE looks likely in Europein due course. Many geopolitical worries remain but these have largely been ignored recently as markets have edged higher. We consider that equities continue to look attractive in relation to government bonds but are only fair value compared to historical valuation measures.

AXA Framlington – George Luckraft

Diversified Income & Allshare Income Unit Trust

October, as often is the case, was a volatile month. Initial weakness was largely reversed by a sharp rally at the end of the month driven by a surprise announcement of a substantial increase in the Japanese Quantative Easing Programme. The collapse of the Shire takeover affected the FTSE 100. Smaller companies lagged the rally underperforming during the month. Economic data from Europe was largely disappointing with falling commodity prices during the month threatening possible deflation.

The Fund slightly outperformed during the month helped by a lack of Shire holding. Latchways were weak on the back of a poor trading statement while Devro rallied on the back of a reassuring update. New holdings were purchased in Ediston Properties and Entu which both offer attractive prospective yields. Prospective interest rate rises are now not expected to occur until the middle of next year at the earliest. This should maintain investors’ desire for yield.

Babson Capital – Zak Summerscale

International Corporate Bond

Despite a volatile month across global markets, the International Corporate Bond Fund delivered a positive return in October. After a particularly unstable first half of the month, market sentiment improved resulting in a bounce back in global senior secured bonds. In the U.S., the Federal Open Market Committee concluded its asset purchase program and took a measured approach in its outlook, taking into account improvements in the labour force whilst remaining of the view that inflationary pressures are still some way off. In Europe, secondary market volatility and mixed macro headlines dominated for large parts of October, although a change in sentiment towards the end of the month was driven by the reports that the European Central Bank would remain supportive of the markets by keeping rates low for the foreseeable future.

High yield new issuance slowed in October against the backdrop of heightened volatility. Year-to-date issuance in the U.S. crossed the $300bn mark, although this is slightly behind 2013’s record pace. The adjusted momentum in the high yield bond market meant that many would-be issuers stuck to the sidelines, particularly in Europe. Overall, despite a slower October the year-to-date volumes remained strong in Europe with €68bn of high yield bonds issued. The top contributors for the International Corporate Bond Fund in October included C&S Group Services, a U.S. provider of wholesale grocery distribution services; Sabine Pass Liquefaction, a U.S. developer and operator of natural gas liquefaction facilities and Chiquita Brands International, a U.S. based producer and distributer of bananas and other produce. Detractors for the month included Takko, a German value fashion retailer; and Towergate Finance, a UK financial advisory firm.

U.S. high yield bonds outperformed their European counterparts in October, with Europe ending the month roughly flat whilst the U.S. was up around 1%. We continue to use these periods of market volatility to selectivelyinvest in attractive investment opportunities for the portfolio. In this continued environment of low interest rates and strong corporate fundamentals, the International Corporate Bond Fund remains well positioned to provide attractive risk-adjusted returns to investors.

BlackRock – Market Advantage team

Alternative Assets

October was a volatile month for markets, with significant volatility during the month as a result of sharply deteriorating sentiment, weakness in global economic growth data and positioning unwinds. The VIX index rose to above 25 for the first time since May 2012. In the US, consumer confidence, employment and housing market data all improved. However, although headline inflation positively surprised the market, increasing 0.1%, retail sales and manufacturing data came in below expectations. The US dollar fell as growth concerns surfaced mid-month, but resumed its rally towards the end of October as the Federal Reserve ceased their quantitative easing programme and released some more hawkish comments. The US Q3 GDP growth estimate of 3.5% announced towards the end of the month also bolstered sentiment. In Europe, the opposite happened, with the ECB starting its programme of bond buying as data deteriorated. Economic activity indicators pointed towards a continued slowdown, with notable weakness from Germany, which cut 2014 growth expectations from 1.8% to 1.2%. Although CPI edged higher, deflation remains a significant risk. UK growth slowed in the third quarter, but economic indicators rebounded and unemployment rates continued to fall. The Bank of England retains an accommodative policy stance. Emerging markets continued to struggle amid falling oil prices and ongoing geopolitical tensions, but outperformed their developed market counterparts during the month.

The fund delivered positive performance during October*. Key positive contributors to performance were property (FTSE EPRA/NAREIT Global Real Estate Developed Index +8.0%) and global infrastructure exposures (Macquarie Global Infrastructure 100 Index +4.4%). Equity sector exposures were mixed, as poor performance from energy commodities meant Clean Energy exposures fell (S&P Global Clean Energy -2.3%) but water and timber exposures delivered positive returns (S&P Global Timber & Forestry and Water indices +6.6% and 3.7% respectively).

BlackRock – Nigel Ridge

UK Absolute Return

The Fund returned -0.1% (gross) in October which is a satisfactory outcome given the volatile equity market environment. A growth scare in the first half of the month saw volatility return and repeatedly spike higher for a number of days. While the US economy failed to show the same levels of concern seen in Europe and China, the prospect of Fed rate rises also contributed to the broad based de-risking.

All three parts of the portfolio, the naked long book, naked short book and pairs ended broadly flat. Stock selection in consumer services (from both the long and short side) provided the strongest returns while the most notable losses were seen in the industrials sector reflecting the aforementioned growth concerns. Even against a backdrop of changing interest rate expectations, buy-to-let business Paragon (financials) was the largest contributor over the month and benefitted from analyst upgrades. This was closely followed by the internationalplumbing and trade distributor Wolseley (industrials) which announced better than expected growth and a dividend increase. Recently merged Dixons Carphone (consumer services) also continued to perform well and has made significant progress in integrating the two businesses. The long book provided most of the top detractors. Essentra (industrials) headed up the list after the company reported softness in its Porous Technologies division (which we believe to be temporary) while the rest of the business continues to grow in line with expectations. This was followed by European real estate player Dolphin Capital (financials) which was impacted by the broad weakness affecting the whole of Europe with recently improving signs from the periphery economies relative to the core making little difference. Further share price weakness was also seen in Better Capital (financials) though we remain hopeful that upside potential can be achieved from current price levels as the private equity group realises assets.

The gross exposure, having been reduced through September given earlier bouts of volatility, was increased to 126% given the opportunity arising from price falls. The net exposure remained in line with its normal trading range. We remain comfortably towards the lower end of our risk range and will continue to flex the portfolio appropriately to navigate, and take advantage of, quite rapidly changing market dynamics. Having seen the Fund appreciate more than 5% (gross) year to date, we have continued belief in our highest conviction ideas despite any individual performance headwinds. At the same time, we are ensuring no unwanted risk from the growing disparity in growth rates (and diverging policy) across geographies is reflected in the portfolio.

Edgepoint – Tye Bousada

Global Equity

When we invest, we focus on key characteristics such as quality of the business, strength of the management team, defendable barriers to entry and of course an appropriate entry price. Most importantly, we ensure we have a proprietary idea about the business that isn’t recognized by others. An excellent example of this is Wabco Holdings Inc.

When we first invested in Wabco, a European-based trucking company, we recognized that Wabco’s products made up a sizable proportion of every truck sold in Europe. As a leading global supplier of technologies and control systems for the safety and efficiency of commercial vehicles, we believed it would benefit from increasingly stringent regulations, particularly with regards to safety and braking. If history was a guide, we thought the rest of the world would eventually follow Europe’s lead and begin to mandate stricter standards. Today China is requiring more trucks to have anti-lock brakes which have long been required in the U.S. and are no longer sufficient in Europe, which now mandates electronic braking systems. The continued move to more advanced technologies around the world provides future growth opportunities that we think Wabco will continue to capitalize on.

October saw the return of volatility to financial markets which we took advantage of in a number of ways. We added to 14 of 34 companies and established two new positions. Further, our cash weight decreased from 12% to 7%. We like to say that volatility is the friend of the investor who knows the value of a business and the enemy of the investor who does not. With that in mind, we were happy to see the return of volatility and remain pleased with the collection of businesses in your portfolio and are excited about their long-term prospects.

First State – Jonathan Asante

Global Emerging Markets

The team recently completed an exercise looking at the valuations of some of the companies we like across Eastern Europe, Africa and the Middle East. It was not a long list reflecting the fact that finding high quality companies in emerging markets is not an easy task. There are many companies we would not own whatever the valuation as there is always a chance that their share prices could fall to zero.

Our work tended to highlight several commodity companies which typically sit at the far end of the curve in terms of quality. As a result we are only likely to have small positions in these kinds of businesses when they are very unpopular with the market and, as the highest cost producers, they start to be valued at very low levels.

The fund owns a little Impala Platinum and some AngloGold Ashanti both of which are run by management that understand the frailty of their franchises and tend to act accordingly.

High quality businesses remain expensive and as a result we continue to hold a significant amount of cash while we wait for better opportunities to invest.

Invesco Perpetual – Paul Read & Paul Causer

Corporate Bond

There was an overall risk off tone to the high yield market through October as lower inflation and weaker economic data pushed out expectations of interest rate rises in the US and UK. Given the market’s risk aversion, high yield credit spreads rose for the first half of the month before falling back in the second half as more positive European economic data helped turn sentiment. Reflective of the overall negative tone, higher quality bonds tended to outperform lower quality bonds and there was some single company weakness through the month. An important area of focus toward the end of the month was the European Central Bank’s (ECB) comprehensive assessment of banks. Overall the results were positive with only 5 of the 130 banks reviewed required to submit plans for recapitalisation. Sentiment was also boosted at month-end by the Bank of Japan’s decision to increase its quantitative easing program. The primary market for high yield was relatively quiet. Barclays estimate for issuance of European currency high yield in October was €0.9bn. According to data from Merrill Lynch, European currency high yield bonds had a total return of 0.2% with BB rated bonds returning 0.3% and CCC and below -0.2%. Peripheral European sovereigns in aggregate returned -0.4%. (Sterling hedged returns).

Fund Strategy

High yield bond yields remain low by historical standards, but they remain relatively high compared to the yields available on core government bonds, like Gilts and Bunds. We did see some cheapening of European and UK high yield bonds over the month and selectively took the opportunity to add some exposure. One sector we do still like is financials, notably in banks and other financials, where we believe aggregate yields offer value relative to the wider market. In our view, ongoing structural and regulatory reform should continue to be supportive of subordinated bank debt. Our strategy is relatively defensive. The fund has a sizable allocation to liquid assets, including cash and short-dated securities. This positions the fund to react quickly as market opportunities arise.

Portfolio Activity

During the month of October, we bought new issues in Jaguar 4.25% (auto), Premier Foods 6.5% (food), and VUE FRN (leisure). We also added to our positions in Manutencoop 8.5% (services) and Balfour Beatty 1.875% (engineering).

J O Hambro – John Wood

UK & General Progressive

October was widely described as a volatile month, but with the UK stock market's losses ultimately being fairly modest over the month and the index being flat over the year to date, there remains little to whet our appetite as investors – our high cash balance remains unchanged. Absolute valuations remain at elevated levels unwarranted by the underlying fundamentals exhibited by UK plc and the structurally-flawed UK economy, being grotesquely distorted by the artificial stimulus of quantitative easing. We have been saying the same thing for months, indeed years, on end, but unfortunately while it remains Groundhog Day in the markets, this repetitive message is unlikely to change anytime soon!

Our focus continues to be on identifying companies that can generate above-average returns over the long term through compounding growth. Unfashionably, we seek to buy and hold 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 the low return environment now facing us, but we believe we can achieve attractive long-term returns through the patient process of holding stocks that regularly compound their growth over time.

Loomis Sayles – Ken Buntrock

Investment Grade Corporate Bond

The UK remains one of the faster expanding economies in the G7 as it continues to move forward. Growth has slowed somewhat in recent months, but indicators still reflect solid expansionary levels overall. The UK labor market has continued to heal, though improvements in wage levels are yet to be seen. The Global expansion is currently being led by the US, albeit at a slower pace than many originally expected. Central bank policies should begin to diverge, with the US and UK considering tightening, while the ECB and Bank of Japan are taking more accommodative stances. Fundamentals continue to be supportive of global credit, but signs of deterioration have surfaced in some areas. Middle East tensions, a stagnant euro zone, and Russia-Ukraine conflicts all pose risks to the improving outlook.

UK Investment Grade (IG) bonds posted positive returns in October after a bout of softness in the third quarter. UK IG did underperform governments over the course of the month as spreads widened. Investors’ preference for quality resulted in AAA and AA being the favoured segments within the market, and IG broadly outpaced high yield issues for much of the period.

Covered bonds and Quasi-Government issuers have been the better performing sectors in the UK IG universe as of late, which continued through October. Financials and Utilities have lagged recently after posting strong gains during the first half of the year. The Automotive sector was one of the stronger performing sectors in October, and the fund benefited from its overweight exposure. Names held in the Media, Consumer Goods, and Transportation outperformed their peers.

The UK Gilts curve has generally experienced downward pressure in 2014, which has been positive in terms of absolute performance. This continued in October, but due to neutral duration positioning, the trend has not impacted relative results.

Magellan – Hamish Douglass

International Equity

During the month of October, we reduced the large existing position in Wal-Mart and increased the holding in existing SAP on valuation grounds. Other trading was limited to active portfolio rebalancing. There were no material differences arising from trading during the month.

As at 31 October 2014, the portfolio consisted of 27 investments, with the top-ten holdings representing 46.93% of the portfolio. The portfolio held 10.64% of its assets in cash at the end of the period.

The portfolio is currently positioned to take advantage of the following major ongoing investment themes:

  • Technology/software: We believe that entrenched global software companies enjoy enormous competitive advantages and exhibit attractive investment characteristics.
  • Internet/e-commerce convergence: There are a number of internet enabled businesses that have very attractive investment characteristics with increasing competitive advantages.
  • The move to a cashless society: There continues to be a strong secular shift from spending via cash and cheque to cashless forms of payments, such a credit cards, debit cards, electronic funds transfer and mobile payments.
  • US interest rates normalising: As the US economy recovers, the Federal Reserve will increase the federal deposit rate and begin to reduce the size of its balance sheet.
  • US housing recovery: A recovery in new housing construction should drive a strong cyclical recovery in companies exposed to US housing and also provide a strong boost to the overall economy.
  • Emerging market consumption growth: Through investments in multinational consumer franchises.

During the month, the portfolio returned +1.05% in sterling terms, before fees, this compares with a benchmark return of +1.99%, giving relative performance of -0.93%.

In sterling terms, the largest contributors to performance were Visa (+0.61%), Lowe’s (+0.45%) and MasterCard (+0.36%). Meanwhile, the three largest detractors from absolute performance were Sanofi (-0.75%), eBay (-0.36%) and Tesco (-0.21%).

In sector terms, Information Technology (+0.79%), Consumer Discretionary (+0.72%) and Financials (+0.37%) made the largest positive contributions, while Health Care (-0.76%) and Consumer Staples (-0.08%) detracted.

Geographically speaking, the United States (+1.99%) was the major contributor to performance, while France (-0.67%), the United Kingdom (-0.20%) and Germany (-0.07%) detracted.

Majedie – James de Uphaugh

UK Growth & UK & General Progressive

The portfolio outperformed moderately in October, albeit being very slight down in absolute terms: -0.2% vs -0.7% for the FTSE All-Share index. On the face of it, this looks like a quiet month; the reality was quite different, with markets selling off alarmingly as Chinese data worsened, Eurozone growth looked weak, with Greece’s woes re-emerging into the global conscience, before bouncing back as the ECB moved to expand its balance sheet and investors woke up to the benefits of a lower oil price.

Given our relatively defensive positioning, you might be forgiven for expecting us to do a little better in these circumstances. The reality is that our definition of ‘defensive’ – large, liquid stocks on low valuations and out of favour with the market, yet where we can see evidence of improvement, which should lead to re-rating – includes UK Food Retail (Tesco and WM Morrison) which, as has been well-documented, came under further pressure. Whilst kicking ourselves for investing in the stocks rather too early, we have retained the positions and, in the case of Tesco particularly, we expect to see disposals and a refocus of the business. Indeed, at the time of writing there are signs of stabilisation; WM Morrison’s Q3 results were better than expected. These small ‘beats’ can translate into significant share price re-ratings. The traditional defensive areas of tobacco (BAT) and global drinks companies (Diageo and SABMiller), which we have long eschewed due to their reliance upon Emerging Markets (EM) for their growth, were favoured by investors during this market volatility, despite their relatively high valuations; not holding these stocks counted against our relative performance.

More favourably, not holding Shire – whilst painful earlier in the year – helped relative performance as AbbVie reconsidered its bid, as did not holding miners (BHP Billiton) and EM-facing financials (Standard Chartered); CSR, one of our treasured mid-caps, received a bid from US chipmaker Qualcomm, which saw a 30% uplift in the share price.

We have good levels of conviction in our current positioning, especially amongst our consumer stocks, which should benefit from a lower oil price; we continue to avoid Emerging Market exposure where possible.

Manulife – Paul Boyne & Doug McGraw

Global Equity Income

U.S. equity markets rose over the period as many companies reported third-quarter earnings that exceeded analysts' estimates but European markets fell. The European Central Bank announced that in November it would begin buying asset-backed bonds, while the Bank of Japan signalled that it would increase the pace of its quantitative easing. The U.S. Federal Reserve Board announced an end to its quantitative easing program, but said that it plans to keep short-term interest rates near zero “for a considerable time.” Consequently, the U.S. dollar strengthened sharply.

The Fund's holdings in the consumer staples, materials and information technology sectors had a positive impact on performance. Individual contributors to performance included Eaton Corp., Whirlpool Corporation and Philip Morris International Inc. Eaton’s earnings were in line with expectations following earlier misses, while Whirlpool’s earnings were slightly below expectations but the company’s outlook improved.

Holdings in the health care, consumer discretionary and energy sectors had a negative impact on performance over the period. Individual detractors from performance included Sanofi S.A., Statoil ASA and Honda Motor Co., Ltd. Sanofi's share price fell as its key drug, Lantus, endured increased competition and the company’s CEO was removed by the Board. Statoil struggled with decreasing oil prices and the announced departure of its CEO to BG Group plc in the U.K.

We sold the Fund's positions in Eni S.p.A. and Tyco International Ltd. as both stocks reached our estimate of fair value.

Oldfield Partners – Richard Oldfield

High Octane

In the early days of October the markets seemed to be influenced by two opposite views, one that with US quantitative easing over interest rates would soon rise and the other that growth worldwide, including in the US, was looking worse – the latter prompted by a retail sales figure in the US and industrial production figures in Germany. As so often happens the US market fell and other markets fell more. When a more optimistic mood emerged - that interest rates were unlikely to rise soon, the US economy was in reasonably good shape and Europe was not necessarily subsiding into recession (three positions which are not irreconcilable) – all markets recovered but that still left the US the only major market in positive territory for the month, outperforming Europe and Japan by nearly 4%.

So our emphasis on European and Japanese companies is continuing, so far, not to help. The effect was compounded by sharp falls in Barrick Gold (-19%), Eni (-10%) and Tesco (-6%). Barrick’s fall reflected, but disproportionately, the 5% fall in the price of gold. The gap between the company’s enterprise value per ounce of reserves and the price of bullion has never been greater. Eni’s fall likewise reflected the 10% drop in the oil price. The company reported excellent quarterly figures helped by its strong exploration business but with a yield of 7% and the recent fall in the oil price, investors are questioning the sustainability of its current dividend. We remain committed to the company: the recently appointed chief executive has made changes that should help to improve financial performance over the next few years. These include major changes to the loss-making refining business and plans to divest non-core businesses like Saipem, Eni’s oil services company, to deleverage its balance sheet.

Tesco's travails continued. In the near future profit margins in the UK business may well approach zero. A priority, expressed by the new chief executive, is to hold market share and that means lowering prices. In other respects Mr Lewis has been understandably reluctant to be too specific about strategy; but in our view there are plenty of options. There appears to us to be nothing in the current share price for the UK operations: the value of the Asian and European businesses, the bank, and Dunnhumby together come to approximately the present market capitalisation of the company.

The strong performers included East Japan Railway, Samsung, and Staples, all up 5%. At the end of the month East Japan Railway benefited, as did the other Japanese holdings, from the announcement by the Bank of Japan governor Mr Kuroda that there was to be a second round of easing which would add an additional ¥20 trillion to the monetary base, on top of the current annual addition of ¥60 trillion. In particular, some of that easing is to be focused on purchasing equities in the form of exchange traded funds and real estate investment trusts.

QE is dead; long live QE. In Japan, as in Europe, there is much more QE to come. Many are sceptical about the effect of QE on the economy, as opposed to asset prices, and we certainly subscribe to uncertainty about the consequences of the unprecedented worldwide experiment, hence our interest in gold. But it has to be observed that the two countries with apparently the healthiest position in terms of economic recovery are the US and the UK which have also had the most QE, while the Eurozone and Japan have had the most fragile recovery and the least QE. Moreover in Japan, the government pension fund has announced that in the medium term it will take its allocation to domestic equities up to 25% from a level below 14% at the start of the year. In the Japanese companies whose shares we hold – together 30% of the portfolio - we continue to see ample distance between present share prices and values, evidence that managements are bothering increasingly about closing that gap, and government and central bank policies which are helpful. 

Orchard Street – Chris Bartram

Property Unit Trust

The portfolio valuation as at 31st October 2014 was up 0.3% month on month.

We have completed the acquisition of the freehold interest in Rockingham Gate Industrial Estate, Bristol for £10.7m reflecting an initial yield of 5.95%. The property comprises four units totalling 104,000 sq ft and is fully let to four tenants.  

We have completed a new 20 year lease to Domino’s at Westhill Shopping Centre in Aberdeen. In addition we have extended the lease of Lloyds Pharmacy by a further 10 years.

The portfolio vacancy rate is 2.1% compared with 9.5% for IPD and the initial yield on the portfolio is 5.6% which is the same as IPD.

Life & Pension Property Funds

The portfolio valuation as at 31st October was up 0.6% month on month.

We have sold Unit 5 at Trinity Trading Estate, Hayes for £3.275m which was 9% ahead of the pre- sale valuation. In addition, the remaining estate benefited from a ‘divorce’ valuation uplift of £400,000.   

At Junction One, Rugby, planning consent was granted for the installation of a mezzanine floor, a condition of the Agreement For Lease with Matalan. This enables us to now serve notice on the existing tenant, American Amusements, to vacate on the 5th January and undertake works prior to Matalan’s occupation. The valuation increased by £500,000 to reflect this.

We have completed two new leases with a combined rent roll of £135,000 at St Catherine’s Walk, Carmarthen, the first to Tiger for 5 years and the second to Prezzo until 2027. 

At the Brewery Quarter in Cardiff we have completed a new ten year lease of Unit 1 to Starbucks which has lengthened the trading hours of the scheme.

The initial yield on the portfolio is 5.3% compared with 5.6% for IPD and the vacancy rate is 8.1% against 9.5% for IPD. 

SW Mitchell Capital – Stuart Mitchell

Continental European, Greater European & Greater European Progressive Unit Trust

We remain optimistic on the outlook for European equities. Investors have been unsettled by the combination of a weak German services PMI in September, modest initial take-up of the TLTRO and continued low inflation data. At the same time, however, there is a wealth of data suggesting that the recovery is proceeding as we might have expected. Notably, the economies of the periphery continue to rebound. Spanish house prices, for example, are now rising for the first time in six years. Mortgage approvals also rose by an impressive 28% in July. In fact, dramatically improving construction confidence suggests that the Spanish economy could grow by some 3% next year. Credit conditions, furthermore, appear to be improving across the region. The TLTRO and purchases of asset backed securities and covered bonds should help lower bank funding costs, most notably, in the periphery of Europe. The recently published ECB lending survey was also very encouraging. The results of the AQR, furthermore, suggest that the financial system is better capitalized than many had feared.

The recent, almost 10%, fall in the value of the Euro relative to the Dollar should also help support the export sector. The sharp fall in the oil price should likewise help stimulate growth. More importantly, both second and third quarter earnings have tended to surprise on the upside. Our recent calls with managements have in most cases suggested that business is better than might have been expected. This has been confirmed by our extensive meetings with a broad range of companies over the past few months. Our most upbeat management meetings have, interestingly, often been with those from the banking sector.

We are, as a consequence, confirmed in our long held view that recovery is gradually taking root across the region – as in Spain – especially in a number of economies which have embraced austerity. From a company earnings point of view, a mixture of recovering revenues combined with stringent cost control and strict capital discipline, should generate surprisingly strong earnings growth. This is at a time when expectations are still framed by fears of a ‘Euro crisis’, and valuations are at mostly at historically extremely compelling low levels. In fact, share prices currently imply that almost 50% of European companies will face declining ROCE’s in the future.

Where high valuation levels still prevail, however, is among more internationally orientated companies. These still trade on ‘cultish’ valuations with many investors continuing to put their trust in continuing vigorous emerging market growth. Our company visits suggest, however, that the growth outlook from the emerging world has slowed significantly.

We therefore remain committed to more Europe-centred, domestically orientated, companies. These now constitute almost two thirds of our investments. Companies from the periphery of Europe represent 30% 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 Intesa Sanpaolo and Banco Popular.

Banks make up a further 25% of the fund. 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 BNP and Santander where we believe that returns should rather rapidly return to pre-crisis levels. Utilities now constitute a growing 26% of the fund including investments in Orange, RWE and Eiffage. Our favourite growth companies, such as Zodiac and Essilor make up the remainder of the portfolio. 

Wasatch Advisors – Ajay Krishnan

Emerging Market Equity

Brazil’s financial markets remained volatile as they responded to events surrounding the country’s presidential elections. Despite a slim victory by incumbent Dilma Rousseff over market-friendly challenger Aécio Neves, the Brazilian stock market rallied strongly when the final results were known. Brazil – which was a significant contributor to the portfolio’s total return in October and the portfolio’s second-most heavily weighted country – faces macroeconomic challenges that include above-target inflation, a widening budget deficit and an ongoing recession. With the election behind her, investors now hope that Rousseff will be free to enact reforms that will be good for the country, although less popular politically.

For our part, we believe the weak backdrop in Brazil will continue to depress its currency. While the outlook for our Brazilian companies remains essentially positive, we anticipate maintaining and potentially increasing our weighting in exporters that stand to benefit from further currency depreciation in the Brazilian real.

With respect to the portfolio as a whole, our companies continue to post strong earnings growth. After having increased approximately 17% in the first quarter of 2014, company earnings captured in the portfolio increased over 15% during the second quarter. In the long run, we believe earnings drive stock prices, and that companies compounding their earnings growth at attractive rates will outperform over time.

Woodford Investment Management – Neil Woodford

Income Distribution, UK Equity and UK High Income UT

The stock market sell-off that had started in September continued into the first half of October as the Federal Reserve neared the end of its QE program, economic data continued to disappoint and fears of deflationary pressures in Europe became more widespread. The market staged a surprisingly rapid recovery towards the end of the month, however.

The portfolio is positioned cautiously and performed as one might expect in such volatile conditions – generally outperforming its benchmark as it declined during the first half of the month, but then tending to lag its recovery. Our holdings in tobacco companies proved to be typically resolute and our healthcare exposure also performed relatively well.

In these volatile conditions, the market is in no mood for disappointment and any company that fails to meet earnings expectations is being punished brutally. In particular, Rolls-Royce fell sharply following an unexpected and disappointing trading update.

The end of Fed QE has, in the past, prompted renewed volatility in asset prices and we would not be surprised to see the same happen again in the near term. We feel the portfolio is positioned appropriately for this eventuality and remain very confident about long-term return prospects. 

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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