Global Flexible Fund quarterly feedback

By Nedgroup Investments

Brian Selmo of First Pacific Advisors, co-Portfolio Manager of the Nedgroup Investments Global Flexible Fund, provides an overview of the Fund’s performance for the last quarter and its positioning going forward.

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Portfolio composition and performance
The Fund has 46 equity positions, which make up 69.4% of the portfolio. This is up 10% as of Q3 2019. We have 3.0% in credit bonds and 27.7% in cash and cash equivalents, which makes up for the approximate 10% rotation into equities this time last year. Equities North America makes up a high proportion of the equity allocation at 43.1% and these are primarily balance sheet intensive financials and some of the global internet platform companies. Europe ex UK is at 13.6%, Emerging Markets at 5.9%, United Kingdom at 2.2%, Japan at 3% and Asia ex Japan at 1.6%. The Fund’s largest sector weightings are in communication services (18.8%), financials (16.3%) and IT (10.7%).

Performance wise it’s been a tough year and that’s largely been driven by our exposure to financials, aerospace and defence coming in to the year. Much of our aerospace exposure was to commercial aerospace suppliers who remain well positioned and established on various airframes and platforms. Their demand and profit profile for the next year or two is under to be under pressure. Q3 saw the Fund return 3.1% against the MSCI World Index of 7.9%. Over the 12 months the Fund returned 0.9% and 5.6% over the last 5 years.

Q3 contributors and detractors
The top five contributors over the quarter were Comcast Corporation, Charter Communications, TE Connectivity, Broadcom and Facebook. The top five detractors were American International Group, Citigroup, Kinder Morgan, McDermott International and Signature Bank. The largest challenges were in the aerospace and financial sectors with winners being the communications text service companies.

Market commentary
Large growth companies led the way in 2020. We are value investors and the value parts of the market have really suffered with the MSCI ACWI Value Index down 14.5% year to date and the S&P 500 down 11.47%. The top five stocks in the US, Apple, Amazon, Facebook, Microsoft and Google, dominate the market caps. In terms of valuation spreads, there’s quite a bit of dispersion in the market so value names are quite a bit cheaper than they’ve been before. In March, valuation spreads for global and US equities reached their widest levels since 2009. As at 31 August 2020, valuation spreads were still 2.4 standard deviations above the mean. In the past, similar conditions have meant strong absolute and relative performance for FPA’s strategy.

Equity valuation metrics versus the market
The portfolio is cheaper than the various markets a year ago and remains cheaper today. What’s interesting is that the companies we own are fairly dynamic in terms of growth and, as a portfolio basis, our businesses grew faster than the market. Their expected growth is now well ahead of the market. Some of the more cyclical businesses we own saw a depression in their earnings in the first six months of the year, but there’s an expectation that a lot of those earnings will come back over the next two to three years. This would certainly be true of aerospace, some of the metal, mining and materials companies as well as some of the financials that are in our portfolio.