June, 2023
Our relative performance suffered from growth stock market dominance, a few disappointing investments (discussed below), and no specific holdings that kept up with the surging tech leaders. Putting this surge into perspective, the NASDAQ gained 12.8% during the quarter and had its second strongest first half in history. The greatest sources of negative attribution in our portfolio came from the technology, consumer discretionary, communication services, and financials sectors.
Technology (-232 bps) was the greatest detractor, primarily because of what we did not own; Nvidia (+52%), Apple (+18%), and Microsoft (+18%) combined for over 150bps of negative attribution. Consumer discretionary (-115 bps) suffered by not owning Amazon and Tesla (each +26%) and poor performance by holdings Advance Auto Parts and Alibaba. Advance Auto Parts, an auto aftermarket retailer, is well positioned to capitalize on an aging car fleet and robust miles driven. Poor inventory management and a botched direct sourcing initiative caused margins to plummet. We sold our position, as we lost conviction in management’s ability to close the margin gap to peers. Alibaba continues to improve profitability but has struggled to grow sales amid an uncertain Chinese economy and increased competition. Management is taking steps to drive sales growth while improving shareholder value via increased returns and monetizing non-retail assets.
In communication services, not owning Meta (+35%) and Alphabet (+16%) detracted 76 bps from performance. Additionally, Baidu was adversely affected by the slow Chinese recovery, and Liberty Global faced slowing cash flow growth amid delayed pricing initiatives, contributing to our underperformance.
Several of our financials (-72 bps) stocks performed well, but some insurance holdings (Hanover Insurance, Everest RE, Chubb) were weak on fears of peaking profitability. We remain confident in the underlying fundamentals and expect rising demand, continued price hikes, and higher interest rates to generate resilient returns for investors in the medium term.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2023-2Q-Commentary_USD.pdfMarch, 2023
Global equities delivered strong gains during the first quarter as investors shrugged off two of the three largest bank failures in US history and the collapse of once venerable Credit Suisse. The proximate cause for the rally is a belief that inflation risk is vanquished, interest rates have peaked, years of extraordinary financial stimulus can be normalized painlessly, and the global economy will not experience a downturn. This implies a tremendous amount of confidence in policymakers.
The Altrinsic Global Equity portfolio gained 4.3% (4.1% net), lagging the MSCI World Index’s 7.7% gain, as measured in US dollars. i Headline index gains masked significant underlying volatility in sector and style performance (Chart 1), as market leadership came from an unlikely combination of the longest duration growth stocks (a proxy for lower rates) and nonfinancial cyclicals (a proxy for economic growth – or at least a soft economic landing). Traditionally defensive sectors including utilities, health care, and consumer staples lagged. Growth indices far outpaced value indices, and high beta was the best performing factor.
The primary source of our relative underperformance was our lack of growth stocks, an underweight exposure to high beta non-financial cyclicals, and poor performance by our financials investments. Probing deeper into growth stocks’ role in performance this quarter, the three best performing sectors were information technology (led by Apple, NVIDIA, Microsoft), communication services (Meta, Alphabet), and consumer discretionary (Tesla, Amazon). In fact, those seven stocks contributed to over half the MSCI World Index’s gain and almost all of our relative underperformance (~300bps).
Some of our investments in these industries lagged as well – notably Gen Digital (IT) and Advance Auto Parts (consumer discretionary). Gen Digital declined on fears of a revenue slowdown despite improving profitability and cash flow generation following its acquisition of cybersecurity firm Avast. The temporary revenue slowdown is an unhelpful consequence of the merger that will improve over time. Until then, expenses remain in check and cash flow is increasing. Advance Auto Parts declined as company initiatives to
improve customer service will lead to temporarily heightened inventory levels and lower cash flow. We look favorably on the inventory investments, as improved availability should drive sales growth closer to peer levels in the structurally sound auto parts aftermarket.
The greatest sources of positive attribution came from investments in the consumer staples (Heineken, Danone) and materials (CRH, Akzo Nobel) sectors. Heineken announced results showing continued growth in volume, sales, and profits through their ongoing premiumization strategy. Additionally, FEMSA (an economic owner of 15% of Heineken) announced their intention to sell 40% of their position, with Heineken buying back a quarter of that stake. This decision removes an overhang and highlights management’s (and investors’) confidence in the company. Danone results were better than feared, demonstrating that the new management team has regained investor trust to embark on their growth and efficiency efforts. Akzo and CRH benefitted from declining input costs while maintaining pricing power and improved return potential.
CRH was further aided by the announcement about moving their listing from the UK to the US, which will highlight the valuation disconnect from its closest peers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2023-1Q-Commentary_USD.pdfJanuary, 2023
Our investment activity leading up to 2022 largely involved companies whose future growth was not highly dependent upon the broad economy and/or companies with idiosyncratic drivers of value creation that were within their control. There was dangerous crowding in the popular “growth” stocks and extreme valuations for the large index constituents. These conditions, coupled with our investment discipline, led to a materially different portfolio than benchmark indices, including below-market risk (beta), and was the primary source of our relative outperformance in 2022.
At a more granular level, the most significant sources of positive attribution in the quarter were our investments in the financials, consumer discretionary, and information technology sectors, offset partially by our investments in the traditionally defensive health care and consumer staples sectors.
In the financials sector, our insurance-focused holdings rallied due to continued positive competitive momentum, particularly in reinsurance. Insurance broker Willis Towers Watson (WTW) continued to improve operational performance following its failed merger attempt with Aon. With that distraction removed, WTW is focused on employee recruitment and retention as well as increased efficiency. Insurers Everest Re and Chubb were strong performers as the dynamics within the insurance industry continued to improve. Rising rates are forcing competitive discipline and weeding out weaker underwriters, while Chubb’s and Everest Re’s efficiency and scale are accruing to the benefit of customers and shareholders.
In the consumer discretionary sector, our performance was positively impacted by China’s move away from zero-COVID restrictions. The abrupt turnaround buoyed travel and leisure businesses Trip.com and Las Vegas Sands. Although a return to normalcy will not follow a straight line, with the worst-case scenario eliminated for each company, we expect vastly improved 2023 operational performance. Not owning highly valued market darlings Amazon and Tesla also benefited performance. We greatly admire their products and services, but valuations were – and remain – impediments.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2022-4Q-_-Commentary_USD.pdfDecember, 2022
Our investment activity leading up to 2022 largely involved companies whose future growth was not highly dependent upon the broad economy and/or companies with idiosyncratic drivers of value creation that were within their control. There was dangerous crowding in the popular “growth” stocks and extreme valuations for the large index constituents. These conditions, coupled with our investment discipline, led to a materially different portfolio than benchmark indices, including below-market risk (beta), and was the primary source of our relative outperformance in 2022.
At a more granular level, the greatest sources of positive attribution were investments in the financials, consumer discretionary, and energy industries, offset partially by our investments in the materials and real estate sectors.
In the financials sector, Julius Baer and KB Financial benefitted from improving economic sentiment and insurers Everest Re and SCOR provided evidence of improving industry discipline through better pricing.
In the consumer discretionary sector, our performance was positively impacted by China’s move away from zero-COVID restrictions. The abrupt turnaround buoyed travel and leisure businesses Trip.com and Sands China. Although a return to normalcy will not follow a straight line, with the worst-case scenario eliminated for each company, we expect vastly improved 2023 operational performance.
Within the energy sector, TotalEnergies continued to deliver steadfast cost control in a difficult operating environment and laid out a roadmap to deliver higher cash returns to shareholders without its Russian assets. This strategy was well received by investors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-International-Equity-2022-4Q-_-Commentary_USD_.pdfSeptember, 2022
The downturn in markets continued during the third quarter as concerns over tightening monetary policy, inflationary pressures, weakening economic growth, and geopolitical risks intensified. Despite strong gains early in the quarter, the MSCI World Index declined 6.2% (as measured in US dollars), ending approximately 22% below peak levels reached in September 2021. The Altrinsic Global Equity portfolio declined 8.2% over the same period.i
Greed has given way to fear. We have not reached a stage of extreme capitulation, liquidity unwinds, or distress, but fear emanating from headlines and market declines is reflected in poor investor sentiment and the growing presence of value.
Risk factors could certainly deteriorate, with the greatest ones emanating from 1) geopolitical developments (Russia/Ukraine, China/Taiwan) and 2) deteriorating confidence in policymakers as they attempt to juggle both inflationary and recessionary pressures amidst a surging US dollar. While headline valuations look very enticing, we expect many companies to revise earnings downward – quite meaningfully in some cases.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2022-3Q-_-Commentary_USD.pdfJuly, 2022
The Altrinsic Global Equity portfolio’s outperformance was broad-based with positive attribution derived from our differentiated positioning in the consumer discretionary, information technology, and communication services industries.
Positive attribution in the consumer discretionary sector was driven by our Chinese investments (Trip.com, Alibaba), which recovered from depressed levels on easing COVID-19 restrictions and an improving regulatory outlook. Outperformance within technology was due to a stock-specific story (Check Point, which operates with more defensive revenue characteristics) and our underweight allocation to expensive high-growth technology stocks. Our holdings in communication services outperformed, led by Baidu and Vodafone, which reported better than expected results and stand to benefit from potential easing of regulatory pressures. Materials and utilities were modest sources of negative attribution. Within materials, negative attribution was the result of Kinross, a Canadianbased gold miner, which faced Russian mine-related losses and is experiencing continued cost inflation. Utilities were a source of negative attribution due to our underweight exposure to the defensive sector.
New investment activity was modest during the quarter, as we initiated one new position – Deutsche Post AG (Germany) – and eliminated Siemens Energy (Germany).
Deutsche Post, commonly known as DHL, is a European logistics company previously prone to execution missteps. Management has transformed the company by improving its business mix and increasing cost efficiencies. No longer reliant on German post, express shipping is DHL’s key profit driver (50% of profits), and the company occupies the leading position in a three-player oligopoly with high barriers to entry. The current valuation assumes an excessive decline in DHL’s profitability once global freight capacity and rates normalize, and it undervalues DHL’s secular growth opportunities from increasing e-commerce penetration and supply chain complexity.
Siemens Energy was sold as we lost confidence in the company’s ability to offset significant cost inflation despite compelling opportunities in wind and other forms of low-carbon energy. 0% 20% 40% 60% 80% Price to Book Price to Earnings Price to Sales Chart 9. % of Global Stocks Trading Below 10-year Average Valuations Jun-22 Dec-21 As of 06/30/22; Source: FactSet; Based on 1,450+ global stocks 10 11 12 13 14 15 16 17 18 19 Sep-01 Dec-03 Apr-06 Aug-08 Nov-10 Mar-13 Jul-15 Oct-17 Feb-20 Jun-22 Chart 10. Altrinsic Global Portfolio Price/Earnings (FY1) As of 06/30/22; Source: FactSet, Company data We took advantage of the equity market weakness to add to select cyclical businesses within our existing portfolio that offer a combination of structural integrity and improving business models: HDFC Bank (India), CRH (Ireland), Medtronic (Ireland), Siemens (Germany), Makita (Japan), and Akzo Nobel (Netherlands).
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2022-2Q-_-Commentary_USD.pdfMarch, 2022
The Altrinsic Global Equity portfolio declined 0.1% during the first quarter, outperforming the MSCI World Index’s 5.2% decline, as measured in US dollars. Just as most nations began lifting COVID-related restrictions and returning to normal, tensions intensified amidst surging inflationary pressures, tightening policy measures in the US, lockdowns in China, and Russia's invasion of Ukraine. Corporate earnings have been robust, but we expect these to come under pressure as the year progresses owing to slowing revenue growth, increasing cost pressures, and lofty embedded expectations. Tightening financial conditions and downward earnings revisions could also contribute to growing market volatility. We continue to see the most compelling investment propositions among attractively valued and well capitalized businesses with durable and achievable earnings prospects and among those going through underappreciated efforts to further strengthen their financial productivity.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2022-1Q-_-Commentary_USD.pdfDecember, 2021
Beginning with the January insurrection at the US Capitol and ending with the rapidly spreading Omicron COVID-19 variant, 2021 provided much for markets to digest. Nonetheless, equity markets continued their rise with support from re-opening economies, strong corporate earnings growth, and stimulative monetary and fiscal policies. US equities and “growth” stocks continued to lead markets during the fourth quarter, but important transitions are underway that are supportive of a long overdue broadening away from this leadership in markets.
The Altrinsic International Equity portfolio gained 1.7% during the fourth quarter, as measured in US dollars. By comparison, the MSCI EAFE and MSCI All Country World ex-US indices gained 2.7% and 1.8%, respectively1. Weakness among companies exposed to China and COVID-related slowdowns weighed on relative performance. These same companies have significant long-term upside potential and began to recover late in the quarter. Both popular growth stocks and deep cyclical businesses remain highly valued and most vulnerable, with the greatest opportunity among durable businesses that are less driven by the broad economy and among well-capitalized companies executing on underappreciated initiatives to further strengthen their quality.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-International-Equity-2021-4Q-_-Commentary_USD.pdfApril, 2021
Equity returns were strong in the first quarter, supported by positive economic and corporate earnings revisions that offset the negative impact of rising interest rates. The Altrinsic Global Equity portfolio gained 6.1%, as measured in US dollars, compared with the MSCI World Index’s 4.9%. The most significant market developments were a continued rotation into cyclical and leveraged equities, a surge in commodity prices (S&P GSCI +14.2%), increased inflation expectations, and negative returns for bonds (FTSE WGBI - 3.2%).
Following a 10+ year run dominated by a small group of highly-priced "growth" stocks, a long overdue broadening out began in the fourth quarter of 2020 and continued into 2021. The early beneficiaries have been leveraged and highly-cyclical companies in sectors such as energy (+22.3% in Q1), banks (+19.0%), financials ex. banks (+9.0%), and industrials (+7.5%). Charts 1-4 below illustrate the extent to which cyclical companies and those in the bottom quartile of balance sheet strength outperformed
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2021-1Q-_-Commentary_USD_0.pdfDecember, 2020
Global equity markets delivered strong gains during the fourth quarter with the Altrinsic Global Equity portfolio and the MSCI World Index both returning 14.0%, as measured in US dollars. Financial markets continued to be bolstered by unprecedented amounts of fiscal and monetary stimulus that are aiding the general economy and inflating financial assets. The most notable development during the fourth quarter was the approval of multiple COVID-19 vaccines, a remarkable achievement as a typically 7-10-year process was accomplished in a matter of months.
The depth and pace of biological understanding and scientific innovation is transforming health care and will be an important source of investment opportunities in the years ahead. Despite this impressive showing, health care stocks generally lagged the strong performance of cyclicals during the fourth quarter and technology stocks during the full year.
This weighed on our relative performance given our meaningful exposure to companies throughout the health care ecosystem. While political uncertainty in the US was a contributing factor, the new administration’s past association with the Affordable Care Act, public statements, and narrow Congressional mandate suggest any changes will be incremental and manageable. Outside of health care, negative attribution was derived from exposures in the technology and materials (gold miners) industries.Positive attribution was delivered in all other sectors, led by communications, financials, and consumer staples. Investment activity involved more sales than purchases during the quarter.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2020-4Q-_-Commentary_USD.pdfOctober, 2020
The Altrinsic Global Equity portfolio gained 3.3% during the third quarter, as measured in US dollars, lagging the 7.9% increase by the MSCI World Index. Not following the crowd weighed on relative performance during this period due to our lack of holdings among popular and pricey e-commerce and other "new economy" stocks. Simply not owning Apple, Amazon, Tesla, and Facebook negatively impacted performance by almost 200 basis points. Weakness in health care (Astellas, Glaxo, Sanofi, and Ionis), consumer discretionary (Nordstrom), and financials (Chubb, AXA, Hartford, and Zurich) were also sources of negative attribution.
Health care was the most notable underperformer given the uncertainty around the US presidential election and delayed consumer spending amidst COVID-19 worries. Our position in Astellas Pharma fell 12.9% during the quarter as a recently-acquired gene therapy drug was put on clinical hold, and the company revised operating profit due to COVID-19 headwinds. These issues are temporary, obscuring the fact that its prospects and pipeline are robust – more than making up for pending patent expiries. GlaxoSmithKline reported weak quarterly results as the COVID-19 benefit seen in Q1 consumer health sales reversed and routine vaccine (pediatric, shingles, and travel) sales plummeted. Resolving the uncertainty around the US election and the direction of health care policy should help sentiment toward the sector as key policy proposals still preserve the link between innovation and pricing power.
Given the global economy’s precarious underlying condition, we would expect to see even more dislocations and distressed assets. However, policy stimulus (24% of GDP) and measures that in many ways nationalized investment-grade credit risk have not only elevated valuations but also kept natural market forces from playing out. This has prevented the global economy from sinking into depression, but we are still in a fragile, quasi-recessionary environment.
Our discipline leads us to less crowded areas of the market. On this path we see greater investment propositions among attractively-valued and often misunderstood businesses with the scope for long-term value creation and improving returns. These opportunities are more challenging to uncover and therefore underappreciated in the public markets. The greatest representation of these ideas is currently in the financials, health care, consumer, technology, communications, and industrial industries. Table 1 provides a cross-sectional view of the portfolio's geographic and industry risk exposures.
Following our most active episode ever, during the depths of the COVID-19 meltdown, the pace of new purchases has since slowed but remains healthy. We established new stakes in AutoZone and Cisco Systems and sold our positions in Willis Towers Watson and Baker Hughes.
AutoZone is the largest retailer in the consolidating auto parts aftermarket with a proven track record of industry leading ROIC. The company has a long runway to achieving a compound EPS at a mid-teens rate by simplifying inventory complexity and accelerating commercial sales. AutoZone is a quality compounder with significant optionality on accelerating growth in the auto parts aftermarket.
Cisco Systems is the leading Western networking equipment company. Its products are mission-critical with demand driven by the continued growth in internet usage and bandwidth requirements. The company also has a large installed base that is difficult to displace. Under the leadership of CEO Chuck Robbins, Cisco is transitioning its business to a higher mix of recurring and software-related revenue, supporting margin expansion and a valuation re-rating.
Having executed on its long-term transformation, and with its pending acquisition by AON, Willis Towers Watson reached our estimate of intrinsic value and assets were therefore deployed elsewhere. Our small position in Baker Hughes was redeployed to other higher-conviction ideas.
File: https://commentary.quantreports.net/wp-content/uploads/2021/01/Altrinsic-Global-Equity-2020-3Q-_-Commentary_USD.pdfticker: ANT0005AU
release_schedule: Quarterly
commentary_block: Array
factsheet_url:
https://www.altrinsic.com/insights
fund_features:
The investment objective of the Altrinsic Global Equity strategy is long-term growth of capital. Altrinsic’s investment philosophy is based upon time-tested principles of fundamental, bottom-up investment management.
- Constructing a portfolio of 60-100 holdings, we identify opportunities at the company-specific level through in-depth, industry-based global research.
- Looking beyond short-term market distractions, our investment team applies a long-term approach to public equity markets.
- Focusing on the meaningful drivers of returns, we analyze undervalued securities over a 3 to 5 year timeframe as if we are owners of the businesses in which we invest. Company focus, industry depth, and global frame of reference are our key investment strengths.
manager_contact_details: Array
asset_class: Foreign Equity
asset_category: Large Value
peer_benchmark: Foreign Equity - Large Value Index
broad_market_index: Developed -World Index
structure: Managed Fund