Global Equity Fund quarterly feedback

Global Equity Fund quarterly feedback

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Article highlights

  • The Fund’s low exposure to tech companies and large aerospace holding negatively impacted its Q3 performance
  • The Fund’s since inception results are, however, still above those of the MSCI World Index
  • The Fund is now fully invested and confident that their aerospace holdings will recover, despite short-term demand impacts, as that industry starts to normalise

Andrew Headley of Veritas Asset Management, Fund Manager of the Nedgroup Investments Global Equity Fund, provides an overview of the Fund’s performance for the last quarter and its positioning going forward.

To listen to this conversation, go to Nedgroup Investments Insights on Apple Podcast, Google Podcast and Spotify. To watch a recording of the webinar go to YouTube .

Q3 Fund performance overview
It’s been a particularly interesting year as a result of Covid with huge declines in equity markets in Q1, followed by very rapid rises, particularly in growth and momentum companies, with tech companies doing particularly well. The Fund performed very strongly in Q1 during the declines at around 5%-6% ahead of the market. As the market has recovered, we haven’t been as exposed to the companies that have been recovering, such as the big tech names. We are now slightly behind the market year to date with performance of 0.76% versus the MSCI World Index at 1.70%. We tend to take a longer term view and our since inception results (end September 2010) continue to be strong at 10.07% compared to the MSCI World Index of 9.37%.

Q3 attribution
The two factors that negatively impacted us over the last three months and contributed to our marginal underperformance was firstly our small weighting in IT, which was the strongest performing sector. Our average IT weighting was 5% compared to the Index weighting of almost 22%. The second factor that impacted us negatively was our large position in aerospace companies, which is our industrials exposure. Many industrials performed well post the decline, whereas aerospace companies have not. All of these companies offer very good value, with mid to high IRR’s over the next five years. While the market is worried about people not wanting to fly, we believe that once a vaccine is available and people feel comfortable, one of the first things they will do is get back on an aeroplane. We believe that these companies will perform extremely well over the next five years.

Contributors and detractors
It’s no surprise that the biggest contributors were Charter Communications, Facebook and Alibaba, all of which we think are attractively valued. While there were no clear themes regarding the negative contributors, Safran, Vinci, Raytheon Technologies and Airbus are all transport related in either aerospace or toll roads and were all negatively affected by the virus. We’ve seen short-term demand impacts on all of these companies, but feel that over a sensible time horizon for investment, these companies will perform well and are extremely cheap.

Transactions in Q3
We have been very active in the Fund year to date. Coming into the year, we had about 13% in cash due to valuation and not Covid. We used the Q1 declines to become fully invested, buying a wide number of positions in very high quality companies, such as Mastercard, Cochlear and Beckitt Dickinson. Over the last quarter, we made further changes to the portfolio with purchases in Catalent, a healthcare company that develops and manufactures pharmaceuticals and is a leader in a fast-growing market, Fiserv, which is a fintech company that processes payments, and Vinci, a French conglomerate that largely does toll roads and airports. We bought Vinci post Covid when the share price had declined substantially and we feel it is extremely well placed over the next 5-10 years with very long dated concessions in toll roads and airports.

In terms of portfolio sales, we removed Altice USA in favour of Charter Communications, which we see as a better quality cable company. We also sold Raytheon so we could concentrate our aerospace exposure in the companies that were most exposed to Covid. Reckitt Benckiser reached our valuation target so we sold that. We also sold Cigna, a US health insurer, because of political risk. We’re seeing a greater likelihood that Biden will win the US presidency and it’s possible there will be a Democrat clean sweep of the Senate and the House of Representatives, in which case some of these health insurers might be impacted. Cigna is mainly exposed to private health insurance and not government run health insurance, and we think the Democrats will try to expand government run health insurance, which could negatively impact Cigna.

Portfolio composition
There has not been much movement in terms of our top positions and sector positioning since Q2. Healthcare remains a very large position at 30.1% with cash down to 1%. Our top ten holdings remain similar with Charter Communications (8.1%), Alphabet (7.5%), Safran (4.8%), Unilever (4.5%), Mastercard (4.4%), BAE Systems (4.4%), Canadian Pacific Railway (4.2%), Alibaba Group (4.0%), United Health (4.0%) and Baxter International (3.9%).

When Covid struck, we spent time understanding the liquidity of the companies that we held that were most impacted – could they survive a couple of years with very limited demand? We felt that they would. We then looked at their recovery prospects and our view is that we will see a recovery in air travel back to 2019 levels by 2023. This is supported by domestic travel in China and Russia, which is already higher than pre-virus levels. As soon as a vaccine is in place, we should see Airbus and Safran’s share prices recover substantially and we are well placed for that.

Fund positioning
The Fund’s key themes include aerospace, big data/mobility, consumer staples, financial services, infrastructure/networks and value-based healthcare. Companies that the Fund looks for are characterised by distinct growth drivers, barriers to protect future cash generation and high levels of recurring revenue.