September, 2023
The market has been playing out an echo of early 2022 with oil prices up, rising bond yields, a strong US dollar and equity markets retreating accordingly.
Further OPEC supply cuts early in the quarter saw crude prices gain 30% feeding concerns that higher energy prices will keep inflation elevated. This was exacerbated by recent central banker language striking a ‘higher for longer’ tone, suggesting that while rates may be close to peaking, persistent sticky inflation will necessitate restrictive policy for longer than expected.
With rate cuts in the US pushed further out, the yield curve steepened with 10-Year yields hitting 4.8% just after quarterend, a 16-year high. Annual returns on the 10-Year Treasury bond are on track for a third straight year of losses which has never occurred in 250 years of US history (per Bank of America). 30 Year mortgages are now 8%, driving implied housing affordability to its lowest level for many decades.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/6528ab10105aa95943b24d6e_Cooper-Investors-Global-Equities-Fund-Hedged-September-2023-Quarterly-Report.pdfJune, 2023
While the concept of ‘AI’ has been of growing interest in technology circles for several years it blossomed into the dominant ‘new Paradigm’ for equity markets this quarter after bullish outlook statements from several large industry players.
Financial news, social feeds and broker commentary are now awash with ways to play this theme, suddenly every company claims AI is part of their strategy no matter which sector they’re in. All seem agreed that we have crossed the Rubicon and that AI will change the world from here on.
“We implement an overweight to AI as a mega force.” Blackrock, June ‘23
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/64b09aac6f638e1c0303815b_30062023-CI-GLOBAL-EQUITIES-FUND-HEDGED.pdfMarch, 2023
The portfolio returned 7.28% in the quarter, versus the benchmark return of 6.60%.
The biggest contributors to portfolio return were Salesforce (profit margin expansion from cost efficiency efforts rapidly showing in numbers), Booking Holdings (strong Q4 results with gross bookings +58% year on year) and Rentokil Initial (uplift in organic growth guidance and Terminix synergies).
The biggest detractors to return were Frontier Communications (sold off on broker downgrade two days before month end), Eurofins Scientific (lag between higher costs and pricing to impact FY23 margins) and Danaher (market concern over a rumoured acquisition).
This quarter proved once again that equity markets can climb a ‘wall of worry’, rallying despite universally awful headlines. 2023 has so far seen the 2nd and 3rd biggest US bank failures in history, the hastily arranged rescue of Credit Suisse by UBS, ongoing interest rate hikes from central banks, nuclear rhetoric from Russia in Ukraine and the first indictment of a US President on criminal charges. Yet the overall index had a fine start to the year.
In truth market breadth was extremely narrow, reminiscent of 2020/21 where the market was propped up by NASDAQ. The outperformance of US tech in 2023 versus medium and smaller businesses is stark, March saw the second widest spread in the past 20 years with NASDAQ +7% versus Russell 2000 -5%.
Given the portfolio’s underweight to mega-cap tech and overweight in medium and smaller-sized businesses, we would typically expect the portfolio to lag this type of market move. As an indication, the top 10 index weights accounted for 4.2% of the benchmark’s 8.6% gain. In other words, the top 15% delivered almost 50% of the return.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/31032023-CI-GLOBAL-EQUITIES-FUND-HEDGED.pdfJanuary, 2023
The Fund will invest in global equities where we identify a compelling value proposition through the application of our VoF investment process. We focus on stocks with management that display proprietorial behaviours such as family and founder-linked companies, owner-operator business models or focused teams charged with driving change. The Fund may differ significantly from the benchmark, will generally hold 30-50 stocks and be fully invested. The Fund may invest in stocks of any size however investments will typically be in medium or larger-sized companies (US$5-75bn market capitalisation).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/Global-Hedged-Fact-Sheet-Jan-2023.pdfDecember, 2022
The portfolio returned 6.24% in the quarter, versus the benchmark return of 7.08%.
The biggest contributors to portfolio return for the quarter were Ferguson (completed re-list from UK to US market with possible inclusion to S&P 500 in 2023), APi Group (revised margin targets for Chubb at IR Day indicate material upside) and Vantage Towers (takeover offer came in at €32 a share – see Stock News section).
The biggest detractors to return for the quarter were Brookfield (volatile moves around December spin-off event), Salesforce (two senior executives announced exit in Q3 results) and London Stock Exchange Group (underperformed after a broker downgrade).
As the below chart from the FT shows, 2022 was a very challenging year for investors and unique in that the large draw-down in equities was matched by an equally awful year for the bond market. Other than holding US Dollar cash or Energy stocks, there were few places to hide.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/31122022-CI-GLOBAL-EQUITIES-FUND-HEDGED2.pdfSeptember, 2022
The portfolio returned -4.77% in the quarter, versus the benchmark return of -5.52%. Profound US Dollar strength was a feature of the period; the A$ fell -6.5%, Yen -6.1%, Euro -6.3% and the Pound - 8.1%.
The biggest contributors to portfolio return for the quarter were HOYA (ongoing strong trends in EUV mask-blank business along with increased buyback), Workday (solid results, confident guidance and reducing share-based comp) and Arthur J Gallagher (“hard” insurance market characterised by increasing premiums continues to be supportive for insurance brokers).
The biggest detractors to return for the quarter were Comcast (flat growth in broadband subscribers in Q2), Eurofins Scientific (Q2 organic growth came in a touch light) and Sony (soft gaming trends in June quarter with quiet game launch slate).
The ‘bear rally’ of July faded as the quarter progressed with equities falling sharply in September and volatility continuing to rage in currency and bond markets. Sentiment around stocks is now of pervading bearishness. The market feeling is that we’re only sort of half way through this bear market, with the sell-off thus far reflecting evaporation of frothy market multiples pumped up by loose monetary policy and pandemic stimulus – the ‘P’ in the P/E ratio coming down. While the market is not exactly cheap, at 17x trailing earnings the S&P at least has returned back to around its 20-year average.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/30092022-CI-GLOBAL-EQUITIES-FUND-HEDGED2.pdfJune, 2022
To say the last 12 months has been a game of two halves is understatement bordering on farcical. For the 6 months to 31 December 2021 the portfolio gained 11.7% versus the Benchmark which rose 6.2%. In the 6 months to 30 June 2022 the portfolio declined 25.6%, versus the Benchmark which fell 18.7%.
Positive contributors to return for the quarter were Yum China (relief as Shanghai lockdowns eased), Arthur J Gallagher (ongoing strong operating trends for insurance brokers) and Ferrovial (traffic beating forecasts in tollroad and airport assets).
The larger detractors to return for the quarter included Workday (phasing of some growth pushed into H2), Techtronic (market implying sharp deceleration expected in power tools) and ICE (has de-rated around 25% since the Black Knight deal announced in March). Over the last decade the CI Global team has undertaken extensive global travel hunting for Value Latency and building a unique relationship network and Watchlist of opportunities. We stand behind a track record of careful stewardship of investor capital, outperforming 9 of 11 years from 2011 to 2021 and typically outperforming 70-80% of down months.
In that light the performance of the fund in this year’s sell-off has been somewhat disappointing. We do not get everything right – we may misjudge a management team, misinterpret an industry trend change or be too early or late in a decision.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/30062022-CI-GLOBAL-EQUITIES-FUND-HEDGED2.pdfMarch, 2022
After a year of strong and steady asset prices 2022 has begun with an ice bucket over the head for equities investors. The Benchmark fell 5.09% for the quarter which, while on the surface appears an average sized correction in the context of history actually conceals severe volatility beneath the service. The reality is many parts of the market have seen material value destruction over the last few months.
During the quarter the Fund established a position in Cintas Corporation, a market leader in uniform rental services across North America (Mcap $44bn). This service provides workwear for large corporate and government clients, for example managing supply and laundry of uniforms for the nationwide employee base of customers such as Home Depot. Uniform rental is a tough local business (Cintas has a million customers) but management have built a high quality business operating with stable and growing recurring revenues and have consistently delivered for shareholders. They have the scale and a superior service offering which drives a unique and attractive return profile, including mid-to-high single digit sales growth, 40% returns on tangible funds employed, and earnings per share that have risen for an impressive 50 of the last 52 years.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/31032022-CI-GLOBAL-EQUITIES-FUND-HEDGED1.pdfJune, 2021
After a wild 18 months the June quarter saw relative calm return to financial markets, with levels of volatility returning to pre-COVID19 levels. Equities markets remain in their bull trend with June seeing fresh all-time highs recorded across US and European indices, while Asia including Japan had a more flat quarter. The ‘inflationary boom’ price action that drove markets from November to March, characterised by sharply rising bond yields and an equities rotation from ‘Growth and Quality’ towards ‘Value and Cyclical’ appears to have stalled with Growth and Stalwart-type businesses outperforming once again this quarter. For the 3 months and 12 months to June 30th the Fund returned 7.97% and 32.87% respectively. This compares to the benchmark which returned 7.05% and 35.32%.
Significant contributors to return for the quarter were Intuit (continued strong operating trends in the Quickbooks Online business), Danaher (strong trends in life sciences markets plus M&A – see Stock News) and IQVIA Holdings (continuing strong results).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/30062021-CI-GLOBAL-EQUITIES-FUND-HEDGED.pdfMarch, 2021
Stocks have responded with the action in recent months characterised by an internal rotation away from hyper-growth technology names and COVID-winners into ‘reopening beneficiaries’. In short – last year’s losers have been this year’s winners so far, with year-to-date performance leaders including:
• S&P 500 Energy Index +29% • KBW Bank Index +23% • Dow Jones 20 Transportation Index +18%
The portfolio has continued to generate solid absolute returns. The portfolio is up +3% for the quarter, +42% over 12 months and+39% over 3 years cumulatively. Whilst on a 3 year and greater timeframe, the portfolio is ahead of the benchmark, on a 1 year and less timeframe it is behind. While we always prefer to outperform, these deep cyclical rallies may be a period where the portfolio lags a little.
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/31032021-CI-GLOBAL-EQUITIES-FUND-HEDGED.pdfDecember, 2020
Notwithstanding the level of media and investor attention paid to Corporate Governance reform in Japan it is our view that fundamental revivals in Focused Management Behaviour from unfocused to exhibiting strong elements of Proprietorial behaviour are exceedingly rare. We see portfolio holding Sony as one such example but find the majority of reforms more about making less value destructive decisions than more value accretive ones. So our attention was triggered when we observed successive decisions taken by Olympus management this year, including divesting their Imaging business and numerous bolt-on M&A transactions that appeared to signal something deep had taken root.
Olympus’s core asset today is their gastrointestinal Endoscope business, a leading global Medtech business with a 70% market share, attractive economics and a moderate growth outlook. The quality of this asset was proven in its strong performance during the years of crisis.
The company has traversed the “hubris-to-humility” cycle, suffering a cathartic event during the 2011 accounting scandal which led to the removal of the Board and Senior Management. In the intervening years Olympus made significant progress in addressing their governance structure but not in increasing management focus, evident during our meetings with the company on previous research visits. But the appointment of Yasuo Takeuchi as CEO in April 2019 (along with influence from activist investor ValueAct) has changed this. Takeuchi-san has spent his entire career at Olympus but crucially the majority of that was outside Japan and outside the powerful engineering clique – similar to the situation we observed at Sony (insiders with an outsider’s mentality). This has enabled Takeuchi-san to take on internal vested interests and commit to the transformation plan.
Given the authentic changes we see underway Olympus today represents a Low Risk Turnaround with a very high quality core business underwriting latencies from an improving cost structure and growth in the Therapeutic Division and we initiated a position this quarter.
We first met with Cosmos Pharmaceutical (“Cosmos”) in December 2019 at their HQ in Fukuoka, southern Japan. As the senior executive described the company’s history, culture and business model we were immediately struck by the strong signals of proprietorial management behaviour in his language. Following additional research throughout 2020 we initiated a position this quarter.
Cosmos operates drug stores in suburban Japan but unlike peers they derive no sales from dispensing pharmaceuticals – they this consider a poor allocation of selling space due to government regulations which limit turnover. Instead Cosmos generate 60% of sales from food (sold at a lower price than local supermarkets and drug stores) and the rest from “daily necessities” including health and personal care products (HPC). The low prices on food (sold at low margins) attracts customers with profits then generated from higher margin HPC products.
This model has thrived in Cosmos’ home Kyushu region, which is known as the most price competitive retail market in Japan, making it an excellent proving ground for low cost retail models. Today Cosmos has around 55% of their stores in Kyushu which represents less than 15% of Japan’s population. Thus we see significant latency in the store roll out strategy, including in larger prefectures of Kanto, Kansai and Chubu. Cosmos is a Founder-led Company, with Founder and Chairman Masateru Uno maintaining around a 50% stake in the company. We see Cosmos as having attractive Stalwart characteristics with very stable cash flows underwritten by the resilient nature of food a strong competitive position and a
significant and steady runway for store growth.
September, 2020
Equities markets continue to recover their losses from earlier this year with strong index moves in July and August tempered somewhat by a pullback in September. Attention has shifted from government support packages and easy monetary policy to the uncertain outcome of the US Presidential Election, along with second waves of COVID-19 creating ongoing disruption in Western economies. The MSCI All Countries World Index has just about recovered its losses for 2020 (in local currency) though this conceals significant divergence at the regional and sector level. While the S&P 500 recorded a new alltime high in early September the majority of markets across Europe, Asia and elsewhere remain down, some in excess of 20%. The year has been notable for positive benchmark returns becoming ever more concentrated into a shrinking number of mega-cap technology businesses. The portfolio returned 9.18% for the quarter versus 6.94% for the benchmark. Over a rolling 12 months the portfolio has returned 8.74% while the benchmark has returned 9.05%. It is worth noting the Fund only owns one of the top 25 benchmark weights (2.4% weight versus 24% of the index) and in that context the portfolio’s ability to outperform calendar year to date has been encouraging, indicating strong relative returns from some of our more ‘outside the mainstream’ names. The biggest contributors to outperformance in the quarter were Danaher (stronger than expected earnings), Techtronic (results for the half-year significantly better than peer group and market expectations), and TSMC (continued strong trends including potential outsourcing by Intel for 7-nanometer chips). The biggest detractors to performance included Ferrovial (COVID 2nd wave impact to transport infrastructure assets), Baxter and RELX (social distancing-driven headwinds on Exhibitions business).
File: https://commentary.quantreports.net/wp-content/uploads/2020/10/30092020.-CI-GLOBAL-EQUITIES-FUND-HEDGED.pdfticker: CIP0001AU
commentary_block: Array
factsheet_url:
https://www.cooperinvestors.com/our-funds/cooper-investors-global-equities-fund-hedged/
https://www.cooperinvestors.com/funds/cooper-investors-global-equities-fund-hedged
release_schedule: Quarterly
fund_features:
Cooper Investors Global Equities Fund’s objective is to outperform the benchmark over the long term. The Fund will be constructed with limited reference to the benchmark, and therefore the fund’s returns may vary significantly from the Benchmark’s return.
- The Manager aims to invest in the most attractive investment opportunities identified by CI’s VoF research philosophy, through the lens of a long term investment horizon.
- Is a long only portfolio of 30-50 global stocks.
- The Manager’s vision and strategy is the global application of the CI Way, its equities value and capital application model.
- Central to the CI Way is VoF, a discipline to process complex qualitative and quantitative information on stocks and industries.
- VoF stands for: Value latency, Operating, industry and strategic trends, Focused industry and management behaviour.
manager_contact_details: Array
asset_class: Foreign Equity
asset_category: Currency Hedged
peer_benchmark: Foreign Equity - Currency Hedged Index
broad_market_index: Developed -World Index
structure: Managed Fund