September, 2023
• The Fund returned -5.05%, net of fees, in September 2023, compared with a return for the Benchmark of -4.01%, with uncertainty and volatility rising across equity markets during the month.
• Nearly all sectors, with the exception of Energy, moved lower in September in unhedged terms; IT being the largest detractors to index returns. For the Fund, the largest relative sector contributors included holdings in Consumer Staples, such as Costco and Couche-Tard, and in Consumer Discretionary, namely Booking Holdings. Relative detractors included underweight positioning and holdings in Financials, such as AIA Group and Prudential, and holdings within Health Care, including Lonza and Edwards Lifesciences. There were no initial purchases or final sales within the portfolio during the month.
• Whilst Hong Kong today might not be firing on all cylinders, reflecting China’s muted post-Covid recovery, looking beyond the next couple of years there is a lot of optimism. Hong Kong sits at the nexus of a number of the Chinese government’s long-term projects: renminbi internationalisation, the Greater Bay Area and the Belt and Road initiative. Each represents a huge opportunity for Hong Kong over the coming decades. That optimism was also a common thread in Walter Scott’s conversations with company executives. Having met with senior leaders from Prudential and AIA Group, amongst others, the tone across the varied businesses was positive. Prudential and AIA both conveyed an upbeat outlook, with AIA noting that economic uncertainty in China has been beneficial as cash that would have been previously funnelled into property investment is directed towards its savings products. Similarly, Prudential outlined a significant market opportunity.
• The economic outlook remains uncertain in much of the world. In the most recent earnings season, there were repeated references to customers delaying purchasing decisions and stalling investment. But Walter Scott’s research trips during September were a reassuring reminder of the longer-term opportunities open to the very best companies around the world. Companies not only with market leadership and deep financial pockets today, but with the ambition and strategy to seize those opportunities in China, SouthEast Asia and elsewhere in the future.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-3-1.pdfAugust, 2023
• The Fund returned 1.99%, net of fees, in August 2023, compared with a return for the Benchmark of 1.60%, with some mid-month volatility reflecting renewed investor caution after the solid gains in many markets of late.
• Nearly all sectors, with the exceptions of Materials and Utilities, moved higher in August in unhedged terms; IT and Health Care made the largest contributions to index returns. For the Fund, the largest relative sector contributors included holdings in Health Care, led by Novo Nordisk, and in Consumer Discretionary, including TJX Companies and Booking Holdings. Relative detractors included holdings in IT, such as Fortinet and Cognex, and an underweight to the Energy sector. There were no initial purchases or final sales within the portfolio during the month.
• Powerful, secular trends, often driven by innovation, continue to feature across a number of businesses in the portfolio. This month, Novo Nordisk briefly knocked LVMH off the top spot as the largest company in Europe by market capitalisation. The pharmaceutical company’s share price jumped sharply after it announced phase-three trial results that showed its obesity drug Wegovy cuts the risk of major cardiovascular events by a more-than-expected 20%. In the US at present, Medicare is prohibited from providing coverage of obesity drugs although there is growing momentum behind efforts to change this (the Treat and Reduce Obesity Act has been reintroduced to Congress). Mainstay products, such as Novo’s GLP-1 diabetes drugs, have been performing well. The company recently announced first-half results which saw sales rising 30% year on year on a constant currency basis while operating profit jumped 32%.
• The potential for higher-for-longer rates amidst an uncertain growth outlook in much of the world suggests that further equity market volatility lies ahead, with earnings now required to catch up with valuations in a few areas. Many portfolio companies have been continuing to display good operational resilience, but earnings delivery is not always linear, and several businesses are experiencing cyclical headwinds. Walter Scott’s conviction in the companies held remains high, thanks to strong balance sheets, market leadership and a long growth runway that will endure beyond the current macro challenges.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-2-1.pdfJuly, 2023
• The Fund returned -0.69%, net of fees, in July 2023, compared with a return for the Benchmark of 2.09%, with investors increasingly taking the view that the monetary policy tightening cycle is near an end following further signs of receding inflation.
• The Energy, Communication Services and Financials sectors saw the largest gains in a positive month for all sectors in the index. For the Fund, the largest relative sector detractors included holdings in Health Care, led by Edwards Lifesciences and Stryker Corporation, and in Financials, such as AIA Group and Prudential; these were partially offset by holdings in Industrials, including ODFL, Automatic Data Processing and Paychex. There were no initial purchases or final sales within the portfolio during the month.
• Walter Scott’s focus remains on businesses capable of delivering long-term growth, notwithstanding challenges they may have to face in the near-term. Edwards Lifesciences, a market leader in the treatment of Aortic Stenosis (AS), a serious heart condition that afflicts millions worldwide, has had to work its way through pandemic-related hurdles such as staff shortages. The first quarter of this year saw transcatheter aortic valve replacement (TAVR) procedures return to a double-digit growth rate, thanks to improved hospital staffing levels and a catch up in procedure volumes. However, in the second quarter, TAVR sales growth did not match the market’s elevated expectations. Overall sales are now expected to grow in the range of 10-13% thanks to improving hospital staffing levels and the launch of a new TAVR valve. Edwards remains well placed to tackle a dangerous, highly prevalent and under-diagnosed condition. Ageing demographics, enhanced awareness, improving diagnosis and new treatment indications will expand the company’s TAVR addressable market, while opportunities in the adjoining transcatheter mitral and triscupid therapy are only just starting to be explored.
• Despite some of the economic challenges, many leading businesses have been continuing to display resilience and growth, judging by recent earnings results. Although not all have been immune from macro headwinds, by virtue of their financial strength, market leadership, pricing power and excellent management, they remain well placed to take advantage of the long-term trends that will drive their earnings over the coming years.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-3.pdfJune, 2023
• The Fund returned 3.06%, net of fees, in June 2023, compared with a return for the Benchmark of 3.12%, with the ongoing resilience of the American consumer and better-than-expected US export growth driving a higher revision of US Q1 GDP data and supporting equity markets.
• Nearly all market sectors rose in June, with Consumer Discretionary and IT representing the largest contributors to index returns. For the Fund, the largest relative sector contributors included holdings in Health Care, such as Edwards Lifesciences and West Pharmaceutical Services, partially offset by holdings in IT, namely Keyence. During the month, Walter Scott completed the final sale of Jardine Matheson, to raise funds for other portfolio companies with more compelling fundamental characteristics.
• Having just reported excellent first-quarter results (sales up 15% and gross margins at an all-time high for the same period) it was little wonder that representatives from Inditex were in a buoyant mood when members of the Walter Scott Research team met with the company in June. Management spoke of the consistency of the business and strong strategy execution that was reflected in broad-based growth across physical stores and online, concepts and geographies. The current strength of Inditex and its Zara brand is in many ways the culmination of a decade-long strategy that pivoted the business towards a pure sales growth model. Central to this was a ‘store optimisation’ program that involved fewer but larger stores supported by an online business utilising the very same logistics infrastructure. Today, Inditex is completely agnostic as to the channel through which consumers choose to shop.
• Investor sentiment arguably reflects a nascent ‘goldilocks’ scenario, founded on hopes of peaking interest rates, and economic growth proving more resilient than expected. The latter has certainly been the case, considering the dire forecasts for global economies of early last year. However, inflation has not been entirely conquered and its lag effect on consumer behaviour may yet to be fully felt, while there is a danger that central banks go too far in their attempts to rein in inflation. Quality companies have shown resilience and indeed growth in the face of this mixed macroeconomic climate, as these businesses benefit from market leadership, financial strength, good management and their adaptability in challenging times. These are attributes that are evident in the portfolio’s companies and give Walter Scott confidence in their ability to deliver strong returns over time.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-1-1.pdfMay, 2023
The Fund returned 0.83%, net of fees, in May 2023, compared with a return for the Benchmark of 1.18%, with equity markets remaining volatile in the face of data which continues to paint a mixed picture of global economic health.
The IT sector was the main driver of positive index returns in May, with most other sectors, led by Energy, Consumer Staples and Financials, detracting. The largest relative sector detractors for the Fund included holdings in Consumer Discretionary, including NIKE and LVMH, partially offset by a lack of exposure to the Energy sector and holdings in Materials, namely Shin-Etsu Chemical. There were no initial purchases or final sales within the portfolio during the month.
Amidst the swirl of global macroeconomic and political currents, it remains the case that across the world many leading companies are getting on with business. The results season has shown how many have adapted and thrived, with leading companies able to tap into growth despite the broader economic environment. The pressure on consumer wallets does not seem to have crimped the appetite for travel, for example. Judging by Booking Holdings’ strong set of quarterly results, demand remains robust, with few signs of a slowdown on the horizon. And despite the significant rise in hotel room rates relative to 2019, there is nothing to suggest that customers are trading down to lower-star hotels. The booking ‘window’ – the time between the date of booking and the date of travel – lengthened more than expected and is now longer than it was pre-pandemic. This meant overall room nights booked came in ahead of expectations at 38% year-on-year. Compared with the first quarter of pre-pandemic 2019, room nights grew 26%. The only slight cloud was a lower margin relative to 2019 (due to higher payment processing) although this should start to trend up from here.
Predictions of a mild global economic slowdown have been baked into the equity market psyche, but there remains scope for volatility. The pace of inflation is slowing, but it remains high. It continues to chip away at incomes and for now central banks are sticking to their tightening mantra. A weaker demand environment and higher interest rates will continue to expose vulnerable, highly geared business models, and emphasises the importance of financial strength and market leadership.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-2.pdfApril, 2023
Performance summary
• The Fund returned 2.47%, net of fees, in April 2023, compared with a return for the Benchmark of 3.16%; the gains in global equities occurred against a backdrop of renewed unease over the durability of growth, with the economic outlook for the US in particular under the spotlight.
• All market sectors advanced in April, with Health Care, Financials and Consumer Staples making the largest contributions. For the Fund, holdings in IT, led by TSMC, Texas Instruments and Keyence, were the largest relative sector detractors, partially offset by holdings in Health Care, such as Intuitive Surgical and Roche, and in Consumer Discretionary, including LVMH and Compass Group. Walter Scott also completed the initial purchase of ODFL, a leading less-than-truckload carrier in the US, whose key competitive advantage is its strong pay-for-performance culture, superb real-estate network and laser focus on service excellence.
• A key attribute of the companies Walter Scott holds is their ability to position for the future. They are leading brands with strong balance sheets, healthy cash flows, and experienced management teams that can seize opportunities. This month, the market responded positively to L’Oréal’s purchase of the luxury personal hygiene brand Aesop. At US$2.5 billion, the acquisition is the cosmetic group’s largest and gives it access to an area of the market where it has only limited exposure at present. Whilst Aesop is more exposed to physical retailing than most of L’Oréal’s portfolio, management has experience of this format through the Kiehl's brand. L'Oréal has a good track record of acquiring solid brands and scaling them globally. L’Oréal saw solid 13% like-for-like growth in the first quarter, with all areas growing strongly with the exception of China.
• So far this year, markets have maintained a positive tone in the belief that a severe economic downturn can be avoided and that an end to monetary tightening might be in sight. A more marked deterioration of growth and/or high-for-longer interest rates would clearly dampen that sanguine outlook. Walter Scott’s focus remains on how portfolio companies are meeting current challenges and positioning themselves for future growth.
File:March, 2023
The Fund returned 6.83%, net of fees, in March 2023, compared with a return for the Benchmark of 3.88%, with the demise of Silicon Valley Bank (SVB) spreading fears of contagion in the banking sector and resulting in a volatile month for global equity markets.
Financials were the sole noteworthy sector detractor from market returns in March, with particularly positive returns for IT, Communication Services, Health Care and Consumer Discretionary. For the Fund, an underweight to Financials and holdings in the sector, namely Mastercard (recently re-classified from the GICS IT sector), as well as holdings in Health Care, led by Novo Nordisk and Intuitive Surgical, were the largest relative sector contributors. These were partially offset by an underweight to Communication Services. During the month, Walter Scott completed the initial purchase of Costco Wholesale, the global leader in membership-only warehouse clubs with a recurring and highly predictable earnings profile, as well as the final sale of SGS, to provide a source of funds for new investment ideas.
With the benefit of a long-term investment horizon, Walter Scott gets to know how businesses work and how they are steered by management as they go through various cycles or execute strategies. This month, the investment team had an update from Kevin Lobo, CEO of medical device maker Stryker Corporation for the past 10 years. During his tenure, the company has pursued the acceleration of organic revenue growth while building a leadership position in several markets through M&A. The company is now well placed, having a strong portfolio of products with no more competitive gaps to fill. ‘‘I do not have to buy anything’’, he declared. The market environment is favourable given the backlog of procedures created by Covid and a reduction of bottlenecks in the form of nursing and component shortages. As a result, Stryker is expected to maintain its impressive revenue growth which will be tilted towards organic revenues with only modest contribution from bolt-on M&A. This, in Walter Scott’s view, should result in lower financial gearing and improving returns and margins.
The events of March have provided a cautionary tale of the unintended consequences of monetary tightening. It remains to be seen if there is any further spill-over from the SVB saga, but higher interest rates will continue to expose frail business models that have binged on debt. The macroeconomic backdrop remains challenging with inflation still squeezing incomes, although so far, consumer expenditure is proving resilient. Whatever the market direction, Walter Scott’s investment focus remains on investing in marketleading companies with strong balance sheets and long, resilient growth runways.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-1.pdfJanuary, 2023
Performance summary
• The Fund returned 2.87%, net of fees, in January 2023, compared with a return for the Benchmark of 2.97%, with equity markets recording a positive start to the year despite simmering inflation and rate hike concerns.
• On a sector basis, the largest contributions to the positive market return included IT, Consumer Discretionary, and Financials, while Health Care notably struggled. For the Fund, holdings in IT, led by Automatic Data Processing and Paychex, and an overweight to Health Care were the largest relative sector detractors, while holdings in Consumer Staples, namely L’Oréal, and a lack of exposure to the Energy and Utilities sectors were the largest relative contributors. There were no initial purchases or final sales within the portfolio during the month.
• Keyence, one of the Fund’s top individual contributors in January, is the world's leading supplier of sensors and measuring instruments mainly used in factory automation. Shares in the Japanese company have performed strongly over the last ten years, but last year reflected the worldwide valuation compression in growth stocks from which Japan was not immune. The company had a better-than-expected first half in its current fiscal year, with 25% organic sales growth and 15% organic operating profit growth, as China rebounded from a lockdown-related lull in the first quarter. While management noted a more uncertain macro environment and some weakness in smartphone customers, they reported that overall, the business was showing resilience. Keyence has an impressive track record at growing its revenues, with a compound annual growth rate of 14% over the last 30 years. Walter Scott believes there is significant opportunity for further penetration of automation solutions both in Japan and overseas markets. This opportunity, coupled with Keyence's outstanding profitability metrics, should result in exceptional levels of internal wealth creation.
• Walter Scott’s positive view on the Japanese companies held in the portfolio, including Keyence as well as SMC Corporation and Shin-Etsu Chemical, derives more from a high level of conviction based on bottom-up fundamentals than from hopes about economic transformation in the country. They are financially strong businesses that compete and thrive on a global stage, with long track records of delivering strong returns over time.
December, 2022
Performance summary
• The Fund returned -3.71%, net of fees, in December 2022, compared with a return for the Benchmark of -5.49%, with investor concerns growing about the economic outlook for next year as central banks cautioned that a longed-for ‘pivot’ in monetary policy would not be forthcoming any time soon.
• The IT and Consumer Discretionary sectors led the market lower in a month without a positive sector contributor. For the Fund, holdings in Consumer Discretionary, including NIKE, Compass Group and Inditex, and in Health Care, such as Novo Nordisk and Stryker Corporation, were the largest relative sector contributors, while holdings in Communication Services, namely Alphabet and The Walt Disney Company, were again the largest relative detractor. During the month, Walter Scott completed the final sale of Colgate-Palmolive, with the company facing cost pressures that have diminished its earnings power, amid strong competition for capital in the portfolio from other businesses with superior fundamental outlooks.
• Several portfolio companies have had to navigate their way through a challenging operational environment; however, their inherent strengths are starting to come to the fore. News that NIKE was making progress on clearing its elevated inventory levels was well received by investors. While the backlog remains high -- up 43% compared to a year ago -- it appears that the peak has passed. Management expects levels to normalise in the months ahead, although gross margins will be squeezed while this happens. Spanish-listed fashion retailer Inditex has shown more than resilience in the face of shrinking consumer wallets, with sales up 20% in constant currency terms in the first nine months of the year. Furthermore, management reported that business conditions since have remained strong. Growth is predominantly coming from recovery in physical store sales in the wake of their post-pandemic reopening, but online sales are also up on prior year levels.
• Predicting economic and market vagaries forms no part of Walter Scott’s investment process. In these turbulent times, it is all the more important the investment team ‘sticks to its knitting’ as they seek out the world’s great businesses that they believe can deliver strong earnings over time. That earnings generation, irrespective of economic and market volatility, will be the driver of portfolio returns.
November, 2022
• The Fund returned 4.35%, net of fees, in November 2022, compared with a return for the Benchmark of 2.02%, with leading companies showing operational resilience despite economies remaining under pressure, and investors increasingly confident that an end game on rising interest rates may be in sight.
• The Energy sector was the sole market detractor in November, as Materials and Financials led the index higher. Holdings in Consumer Discretionary, including LVMH, Nike and Inditex, and in IT, including Taiwan Semiconductor, Microsoft and Texas Instruments, were the largest relative sector contributors for the Fund, while the main relative detractor was holdings in Communication Services, namely The Walt Disney Company. There were no initial purchases or final sales within the portfolio during the month.
• It was a busy month on the road for the Walter Scott Research team, with visits to the US, the Nordic countries, South Africa, Australia, New Zealand, Spain, Turkey and London, speaking to the management teams of companies held and potential portfolio candidates. Walter Scott met with CFO of Finnish elevator and escalator company Kone at their headquarters just outside Helsinki. This global business has a leading position in the Asia Pacific and Chinese markets, and the lockdowns and real estate sector downturn in China have been unwelcome headwinds of late. However major elements of Kone’s business are still performing well, most notably servicing and modernisation, and the company is also benefiting from the adoption of digital services (elevator analytics and smart building technology). Management has been flagging for a long time that new installations in China would eventually slow and that servicing and modernising the existing installed base would grow in importance. That is proving to be the case, and momentum for now is extremely strong.
• The ‘Santa’ rally has started early this year. However, it remains to be seen to what extent equities have discounted an economic downturn and a tighter monetary environment. Walter Scott will stick to the rigour and consistency of their investment approach, one which is based on bottom-up, fundamental analysis as they look to invest in businesses that are capable of compounding high levels of wealth generation over the long term.
October, 2022
• The Fund returned 6.57%, net of fees, in October 2022, compared with a return for the Benchmark of 7.81%, as equity markets rallied on investor hopes that weaker growth, gradual supply chain improvements, and commodity price reversals will eventually bring an end to monetary tightening as the drivers of inflation wilt.
• The IT and Health Care sectors were among the largest contributors to a strong month for the index. Holdings in Financials, including AIA Group and Prudential, and a lack of exposure to the Energy sector were the largest relative sector detractors for the Fund, while the main relative contributors were holdings in Consumer Discretionary, such as TJX Companies, Booking Holdings and LVMH, amongst others. During the month, Walter Scott completed the final sale of Fanuc, to provide funds for more compelling investment candidates.
• Economic turbulence does not yet seem to have blunted indulgence too much, judging by LVMH’s excellent nine-month results which highlighted the resilience of luxury spending and the company’s pricing power. Luxury is not recession proof, but LVMH’s customer base enjoys a differentiated consumption profile compared to the general population. Sales growth was positive across all business divisions, with the all-important Fashion & Leather division (almost half of group sales) growing ahead of expectations. Geographically, Europe, the US and Japan witnessed robust local demand, with sales also helped by the recovery in international travel. While Asia was less buoyant, growth accelerated in the third quarter in response to an easing of pandemic-related restrictions. Mainland China saw ‘‘flattish’’ year-on-year growth, with management expecting trends to recover ‘‘soon’’.
• Markets will continue to ponder the scale and extent of the gathering downturn. Notwithstanding the operational resilience many leading companies have displayed so far, potentially stiffer tests lie ahead, and some may experience earnings volatility. By virtue of their market-leadership, financial and competitive strengths, and management teams experienced in navigating through cycles, Walter Scott remains confident in the ability of portfolio companies to deliver excellent returns over the long term.
September, 2022
• The Fund returned -2.83% in September 2022, compared with a return for the Benchmark of -3.23%, with equity markets facing a turbulent month as concerns about inflation, higher interest rates and a tilt towards recession in Europe preyed on investor sentiment.
• Another monthly fall for the index in September was driven by the IT and Industrials sectors, with Health Care the sole positive contributor. The Fund’s holdings in Industrials, including Experian, SGS, and Kone, and an underweight to Real Estate were the largest relative sector contributors. The main relative detractors, meanwhile, were holdings in Financials, namely AIA Group, and an underweight to the sector. There were no initial purchases or final sales within the portfolio during the month.
• ‘‘Good in good times, but better in not so good times’’. So said Oscar Garcia Maceiras, CEO of Spanish-based retailer Inditex in a conference call after the company’s excellent first-half results which saw sales up 25% (including an impressive 16% in the second quarter), and operating profit rise 44%. Reflecting on the current environment, he stated the concerns about macro conditions and consumer behaviour are understandable, but history suggests that macro conditions are not a good proxy for Inditex’s results. Discretionary spending is clearly under pressure, particularly in Europe, so Inditex is competing for a smaller consumer wallet against peers but also against non-apparel spending alternatives. Growth in the first half of the year was driven by a rebound in traffic in physical stores. Online sales were roughly flat in the period. In the post-period trading update sales strength continued, so in that context management still believes there is the potential for strong sales in the second half of the year. In some markets Inditex has seen some trading down from consumers from higher price points into Inditex stores, but in general there has been no significant change in consumer behaviour.
• The coming months will test the mettle of many companies as the full extent of the downturn unfolds. Balance sheet strength, a high margin cushion, a market-leading position, the ability to offer a differentiated product or service, pricing power, good cash flow generation, and management teams experienced in navigating through cycles and crises are hallmarks of the companies held in the portfolio. They are attributes which investors are increasingly likely to focus on in a fraught market and economic environment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/191770612.pdfJuly, 2022
The Fund returned 7.04% in July 2022, compared with a return for the Benchmark of 6.40%, with global equity markets staging a rebound this month despite mounting evidence that the post-pandemic recovery is losing momentum, and amidst fears that for some countries, recession appears to be lurking just around the corner.
• All GICS sectors saw positive performance in July, in particular IT and Consumer Discretionary. For the Fund, holdings in Communication Services, including Alphabet and The Walt Disney Company, and in Health Care, such as Intuitive Surgical and Waters Corporation, were the largest relative sector contributors. Relative detractors from performance included holdings in Consumer Discretionary, which lagged the rise of the broader sector. There were no initial purchases or final sales within the portfolio during the month.
• A key concern for investors remains the continued Russian political weaponisation of gas supplies, as the Putin administration seeks to undermine the coalition of European nations opposing the invasion of Ukraine. Should Russia turn off the taps to a greater degree, the prospect of energy rationing in winter will have a tangible impact on economies as well as further dampening business and consumer sentiment. Energy-intensive industries will be affected by rationing, with the chemicals sector likely to be one the hardest hit as natural gas is a key feedstock. Industrial gas giant Linde has 25% exposure to EMEA markets, of which Europe comprises a significant portion, but management has highlighted that 66% of overall sales are defensive, with the company enjoying long-term supply agreements with high-quality customers and fixed fee arrangements. Its recent second-quarter results statement saw an almost US$1bn impairment for Russian assets, but excluding that, adjusted earnings per share rose 15%. Painting a resilient picture of the business with little impact from supply disruptions expected, management also lifted guidance slightly for the full year despite its expectation of zero economic growth.
• In the face of mounting inflation, supply chain and demand concerns, key corporate attributes will come to the fore and they are evident across the portfolio. Walter Scott focus on companies that enjoy market leadership, pricing power, with high operating margins that can mitigate cost headwinds, while financial strength allows their business to weather tougher conditions at times of macroeconomic stress
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/189766689.pdfJune, 2022
The Fund returned -4.14% in June 2022, compared with a return for the Benchmark of -4.64%, as fears continue to mount that the postpandemic recovery is being eroded by the squeeze on consumer wallets and persistent supply chain hurdles.
• Most market sectors were lower in June, though Health Care and Consumer Staples remained resilient. For the Fund, holdings in Financials, namely AIA Group, and an underweight to Energy were the largest relative sector contributors. Relative detractors included holdings in Consumer Staples, owing to Alimentation Couche-Tard, and in Consumer Discretionary, such as Booking Holdings and NIKE. During the month, Walter Scott completed the initial purchase of West Pharmaceutical Services, a global leader in primary containment consumables for injectable drugs. Growing healthcare demand, molecular complexity and regulatory stringency will drive long-term growth for this business, with rising profitability as more complex needs require higher-margin products.
• Meeting companies is Walter Scott’s bread and butter, and the investment team had a number of encouraging conversations this month. In a reassuring update, Henrik Ehrnrooth, CEO of elevator and escalator manufacturer KONE, reiterated the company’s strong growth opportunities in equipment servicing given its leading position in China and its digitalisation initiatives. KONE expects future ‘fundamental’ revenue growth to be led by services, expecting that new equipment sales will be flat to slightly up, while maintenance will see mid-to-high single-digit growth, with modernisation services posting high single-digit gains.
This mix change will be positive for margins. Walter Scott also met with Udit Batra, the impressive CEO of Waters Corporation, in the US this month. A lab technician by training, Batra has a clear plan of where he wants to take the company and has been turning Waters’ capabilities towards new opportunities, as evidenced by the development of mass spectrometry instruments in bioprocessing to assist in new drug modality development. So far, Waters has executed on its strategy well, with a clear acceleration in sales over the last two years.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/188913232.pdfMay, 2022
The Fund returned -1.92% in May 2022, compared with a return for the Benchmark of -0.83%, as equity markets regained a degree of composure, although not without a bout or two of turbulence given mounting macroeconomic headwinds.
• IT and Consumer Discretionary drove the index lower in May, while Energy and Financials were notable positive sector contributors. For the Fund, holdings in Health Care, such as Roche and Illumina, and an underweight to Energy were the largest relative sector detractors. These results were partially offset by holdings in Consumer Discretionary, including Inditex and Compass Group. There were no initial purchases or final sales within the portfolio during the month.
• The perennial question of the cost of healthcare has likely been amplified in many countries by rising budget deficits, but it highlights the importance of innovation and a strong drug pipeline. Walter Scott had two meetings during the month with the management of global pharmaceutical company Roche, one with the group CFO and the other with the CEO of the diagnostics business. These meetings reaffirmed Walter Scott’s view that Roche has a strong culture of innovation and is aligned to key areas in healthcare. Management is confident about its pharmaceutical pipeline and while the boost that the diagnostics division received from Covid is expected to ease, the core diagnostics business is growing well. Since 2018, Roche has lost CHF10bn of sales due to biosimilar erosion but still grew its top line, increased R&D investment and maintained profitability. Although drug patents will continue to expire across the business, the company has passed a recent patent cliff that was causing disruption. The company will continue to invest in innovation and work to lower the cost per molecule of discovery. Increased R&D spend will be facilitated by growing the top line and taking costs from other parts of the business
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/187689773.pdfApril, 2022
• The Fund returned -2.56% in April 2022, compared with a return for the Benchmark of -3.17%, as equity markets resumed a downward path due to the ongoing conflict in Ukraine, the escalation of Covid-related lockdowns in China and associated concerns over rising inflation and supply chain blockages.
• IT and Consumer Discretionary were amongst the largest detractors from index performance in April. For the Fund, holdings in these sectors, specifically Mastercard and TJX Companies respectively, outperformed their index counterparts and contributed most to positive relative return. The largest relative detractors were holdings in Health Care, namely Intuitive Surgical, and an underweight to Energy. There were no initial purchases or final sales within the portfolio during the month.
• Looking through the Fund’s technology holdings, the common denominator is Walter Scott’s belief in their ability to leverage and drive trends that will endure beyond the looming economic downdraught. Amidst ongoing chip shortages, Taiwan Semiconductor recently reported an excellent start to 2022 accompanied by an upgrade in full-year guidance, expecting at least 30% revenue growth. Management struck a confident tone, with an expectation that the impact of a cyclical downturn in consumer electronic gadgets or smartphones will be offset by structural growth in high-performance computing, driven by cloud service provider demand, and automotive applications.
• Although near-term equity market conditions are likely to remain turbulent, Walter Scott remains confident in the Fund’s holdings, and see opportunity amidst the turmoil. In the face of slowing growth or stagflation, demand contraction or a moderation of the growth trajectory can be expected. However, Walter Scott’s long-term focus spans the ebbs and flows of cycles and crises, and conviction in the Fund’s holdings rests in the rigorous application of the investment approach which examines, tests, and debates the investment rationale of each stock irrespective of prevailing market or economic conditions.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/186801716.pdfMarch, 2022
The Fund returned -1.20% in March 2022, compared with a return for the Benchmark of -0.89%, as the conflict in Ukraine and its concomitant escalation of inflation continued to shift the market narrative away from a rosy scenario of steady economic progression to a much more uncertain and volatile outlook.
• March saw declines for most benchmark sectors, with positive contributions from Health Care and Energy key exceptions. For the Fund, the largest relative detractors were holdings in Consumer Discretionary, including Inditex and TJX Companies, and an underweight to Energy. These were partially offset by holdings in Consumer Staples, namely Alimentation Couche-Tard, and the Fund's long-term underweight to Financials. There were no initial purchases or final sales within the portfolio during the month.
• Walter Scott's recent discussions with companies have reflected some of the challenges presented by the current environment. The investment team had an upbeat conference call with the CEO of L'Oréal. As yet, management has not seen a change in consumer behaviour in the face of rising inflation; 'luxury' remains buoyant, and China and the US have continued the strength of 2021 into the new year. The long-term opportunity for new customer acquisition in China remains a highly attractive proposition and there are new fragrance product categories that are showing promise. Overall, Professional, Active and Luxury (together around 65% of sales) are firing on all cylinders and the good growth of these businesses should offer a positive mix effect that more than offsets any margin headwinds that the Consumer division, the lowest-margin business, is likely to see from cost inflation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/185954751.pdfJanuary, 2022
The Fund returned -5.27% in January 2022, compared with a return for the Benchmark of -2.20%, with the prospect of higher interest rates against a backdrop of stubborn inflation and rising global political tensions blighting the start to the year in equity markets, and driving a market rotation from growth to value.
• As a consequence of the wider market rotation, the Energy and Financials sectors were the largest contributors to index returns, while IT and Health Care lagged. For the Fund, the largest relative contributors were holdings in Consumer Discretionary, such as Booking Holdings and Compass Group, but these were offset by holdings in Health Care, including Intuitive Surgical and Edwards Lifesciences, and the Fund’s underweights to Financials and Energy. Walter Scott also completed the final sale of enterprise software company Oracle, owing to a deterioration in the company’s balance sheet and increasing financial gearing.
• Rather than trying to weigh up macroeconomic variables, Walter Scott have been analysing and assessing how companies in the portfolio are navigating the current environment and how they are positioning themselves for the future. Health care stocks in particular have endured a difficult start to the year, in many cases reflective of the strong share price performance they have enjoyed in recent years rather than of any fundamental issues. The fourth-quarter 2021 results finished off what was a strong year for one such example, robotic surgery company Intuitive Surgical. Revenue increased 31% to US$5.7 billion over the full year. Procedures were inevitably disrupted by the pandemic, but systems and accessories subsequently rebounded, as evidenced by a 74% leap in operating profits for the full year. This figure also reflects an increase in operating margins from 24% to 32% in 2021, which compares favourably with the equivalent 31% level in 2019. Gross margin will see a deterioration in 2022, reflecting the company’s investments in infrastructure and automation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/184271813.pdfDecember, 2021
The Fund returned 3.24% in December 2021, compared with a return for the Benchmark of 1.68%, with the bullish tone of equity markets belying a considerable degree of volatility, as investors remained concerned about the continued spread of the Omicron COVID variant, and its effect on economic growth and supply chains.
• Health Care and Consumer Staples made the largest contributions to index performance in December, while the Consumer Discretionary sector lagged. The largest relative contributors to the Fund’s performance were holdings in Consumer Discretionary, such as Compass Group and Booking Holdings, and in Health Care, led by Edwards Lifesciences and Waters Corporation. Relative detractors included holdings in Financials, namely AIA Group. There were no initial purchases or final sales within the portfolio during the month.
• Edwards Lifesciences was the Fund’s top performer in December, and its recent annual investor day provided more colour on the company’s exciting long-term growth opportunities. End markets are expected to double from US$10 billion today to nearly US$20 billion by 2028, which represents an 11-12% annual compound growth rate. A key driver of this is the doubling of the transcatheter aortic valve replacement (TAVR) business to US$10 billion by 2028. The majority of this growth will come from further expansion amongst severe aortic stenosis (AS) patients that display symptoms and are treated. Penetration is around 10% today and Edwards expects it can reach low-to-mid 20% levels. Severe AS asymptomatic approval by 2026 should also provide incremental growth.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/182477167.pdfNovember, 2021
The Fund returned 2.51% in November 2021, compared with a return for the Benchmark of 3.70%, with global equity markets impacted by the identification of the new Omicron COVID variant in the last days of the month.
• Most market sectors gained in November, with Information Technology the largest contributor to index performance. The largest relative detractors from the Fund’s performance were holdings in Health Care, such as Edwards Lifesciences and Waters Corporation, and in Consumer Discretionary, namely Inditex and Booking Holdings. Positive relative contributors included holdings in Industrials, including Fastenal and SMC, and the Fund’s long-term underweight to Financials. During the month, Walter Scott completed the final sale of CLP Holdings, to raise funds for reinvestment into other positions.
• The recent performance of Compass Group, which provides contract catering and other business support services, reflects an impressive combination of dynamism and resilience, characteristics Walter Scott continues to see on display across the portfolio. Compass is capitalising on an already market-leading business model to chart a successful course through a still uncertain environment, while working diligently to future proof its business through investment and innovation. Investments by Compass in its digital capabilities are starting to bear fruit. After years of development, digital pick-up and delivery, vending solutions, unattended service, and mobile ordering have proliferated rapidly during the pandemic, and the company is now able to provide bespoke offers for its customers as they adapt to new working practices. This more agile operating model, alongside greater labour flexibility and reduced overheads, will be powerful long-term tailwinds for Compass, helping it to build market share in what remains a highly fragmented industry.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/181812149.pdfSeptember, 2021
The Fund returned -3.87% in September 2021, compared with a return for the Benchmark of -3.05%, with investor sentiment challenged by higher inflation and continued supply chain disruption.
• A number of factors suppressed sentiment in September, most notably ongoing supply chain disruption and material, labour, and component shortages, which have fostered concerns about growth, inflation and corporate margins. Against this backdrop, all market sectors with the exception of Energy moved lower. The largest relative detractors from the Fund’s performance were holdings in Health Care, including Roche and Waters Corporation, and an underweight to Energy, to which the Fund holds no exposure. These were partially offset by holdings in Materials, namely Shin-Etsu Chemical, and in IT, including MasterCard and Texas Instruments. • There was an uptick in portfolio activity during the month, with Walter Scott completing the initial purchase of Prudential and the final sale of Novartis. Prudential is a pan-Asian life insurance business. Powerful, long-term, structural trends support the growth of the Asian life insurance industry. The continent's large middle-class population is expanding, becoming wealthier and growing older. When coupled with relatively low levels of government spending on public health and welfare services, the result is growing demand for insurance protection. Novartis was sold over concerns about growth in the coming years when compared to the global opportunity set. Despite having many new product launches in recent years in its pharmaceutical division, growth has been pulled down at group level by Sandoz, the generics business.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/180186238.pdfAugust, 2021
The Fund returned 2.68% in August 2021, compared with a return for the Benchmark of 3.10%, with renewed challenges to the market’s long-dominant recovery narrative unable to prevent global equity markets making further gains.
• With the exception of the Energy sector, all market sectors again moved higher in August. The largest relative contributors to the Fund’s performance were holdings in Health Care, including Novo Nordisk and Waters Corporation, and an underweight to Energy. These were partially offset by an underweight to Financials. There were no initial purchases or final sales within the portfolio during the month.
• The unfortunate emergence of diabetes and obesity as global epidemics makes Novo Nordisk’s pioneering work with insulin and related treatments ever more valuable to healthcare systems around the world. The big story of an excellent set of H1 results was the spectacular rollout of the company’s new obesity drug, Wegovy. Approved by the US Food & Drug Administration in early June, Wegovy was launched into the US market the following week. Just five weeks later, it had generated as many prescriptions as Saxenda, Novo’s previous obesity drug, had managed in four years. Perhaps this shouldn’t have been a surprise; clinical trials that showed high levels of sustained weight loss in people with Type 2 diabetes had created considerable excitement among patients and doctors alike. While this initial surge in demand for Wegovy will inevitably moderate, over the long term the market opportunity is huge. In the US, some 70% of the population is overweight or obese, although only a fraction receive treatment. However, awareness of the condition and its human and economic consequences is growing, and with it demand for effective therapies. Keen to encourage healthier lifestyles, many employers have been quick to add Wegovy to employee insurance plans. Outside the US, approval is expected in the EU later this year and given the region’s high engagement with Saxenda expectations are high
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/178792976.pdfJuly, 2021
The Fund returned 6.17% in July 2021, compared with a return for the Benchmark of 4.03%, as investors continued to celebrate the gradual, if uneven, recovery from the COVID-19 pandemic.
• With the exception of the Energy sector, all market sectors moved higher in July. For the Fund, the largest relative contributors to performance were holdings in IT, including Keyence and Oracle, and in Health Care, including Waters Corporation and Edwards Lifesciences. These were partially offset by an underweight to the Real Estate sector. There were no initial purchases or final sales within the portfolio during the month.
• The Chinese government’s continued crackdown on the technology sector has increasingly unnerved investors. Last November saw Chinese regulators force the cancellation of fintech champion Ant Group’s IPO, 33% held by Alibaba, which was itself hit by a US$2.8 billion antitrust fine in April this year. Fast forward to this month’s news regarding Didi Chuxing, the ride-hailing app, which a few days after its public listing in the US was made the subject of an investigation into the security of private data. The latest targets have been the online education companies whose curriculum-based tutoring services will now have to be conducted on a not-for-profit basis.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/175738523.pdfJune, 2021
The Fund returned 4.86% in June 2021, compared with a return for the Benchmark of 4.71%, with global equities eking out further gains against a backdrop of accelerating vaccination rollouts and a still-extravagant monetary and fiscal environment.
• The ‘reflation trade’, which has been a feature of equity markets since the tail end of last year, ran out of puff this month, with share prices across several cyclical sectors coming under pressure. Financials and Materials declined, while the IT sector rose strongly. For the Fund, the largest relative contributors to performance were holdings in Health Care, including Edwards Lifesciences and Intuitive Surgical, and the Fund’s long-term underweight to Financials. These were partially offset by holdings in Consumer Discretionary, such as Inditex.
• Some companies in the portfolio have endured a tough pandemic-induced downturn but are now recovering well. Inditex’s recent firstquarter fiscal year 2022 results showed good progress against the comparable pandemic-blighted period last year, although inevitably, the revenue and profit numbers fell shy of the equivalent pre-COVID period in 2019. However, business is rebounding, and gross margins were strong in the first quarter, at around 60%, and reflected robust full-price sales as the new (Northern) spring/summer collections were well received by customers. There has been a recovery in physical store sales, but it is noteworthy that the strength of online sales has continued nonetheless. Encouragingly, trading since the quarter end has been impressive, with sales actually up on 2019 levels, which bodes well for the remainder of the year.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/174342121.pdfMay, 2021
The Fund returned 1.39% in May 2021, compared with a return for the Benchmark of 1.19%, with investor enthusiasm around a strong global macroeconomic environment driving equity markets higher.
• Against a backdrop of vaccine rollouts and ongoing fiscal and monetary stimuli, cyclical GICS sectors, such as Energy and Financials, saw the largest gains. For the Fund, the largest relative contributors to performance were holdings in Consumer Discretionary, including Inditex and LVMH, and in Consumer Staples, such as L’Oréal. These were partially offset by the Fund’s long-term underweight to the Financials sector.
• What do a meat processing company, an oil pipeline and the Irish Department of Health have in common? ‘Hacking’ of course, and this is a problem that is intensifying. Leading internet security company Fortinet is firing on all cyber-cylinders, judging by its recent set of first-quarter 2021 results, which saw the highest quarterly revenue and billings growth in the last five years. Its FortiGate network security appliances recorded a 20% year-on-year increase in billings, as the company gained market share thanks to architectural advantages which allow the running of many simultaneous security applications without a degradation of performance. However, the company also continues to see significant momentum in its broader platform of security solutions and cloud offerings, as demonstrated by the 50% increase in billings in this area. The company’s strong rates of growth are not a function of pandemic-related pent-up demand, but more reflect the increasing priority companies are giving towards cyber security.
Fortinet is a highly cash-generative business with industry leading margins, negative net working capital and a strong balance sheet with an engineering-focused culture of continuous innovation, aimed at positioning the business for long-term growth.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/173009926.pdfJanuary, 2021
The Fund returned -2.43% in January 2021, compared with a return for the Benchmark of -0.45%, with global equities recording a subdued start to the year against a backdrop of economic uncertainty.
• Most sectors moved lower in January, with the notable exceptions of Energy, as oil prices climbed across the month, and Health Care. For the Fund, the largest relative detractors were holdings in Consumer Discretionary, such as Booking Holdings and NIKE, and in Health Care, including Edwards Lifesciences and Intuitive Surgical; these were partially offset by the Fund’s long-term underweight to Financials.
• 2020 was a banner year for Taiwan Semiconductor (TSMC), the Fund’s top performer in January. The company continues to benefit from strong demand tailwinds including data centre investment, thanks to booming cloud services; 5G telecommunication spending in China; and WFH-related hardware expenditure. TSMC remains very positive about future growth trends. Management has guided for mid-teens revenue growth in 2021 and raised its long-term 2020-2025 average revenue growth targets to 10-15%. This speaks of the company’s growing confidence in high performance computing, 5G, Internet of Things and auto demand.
• During the month, Walter Scott completed the initial purchases of Jardine Matheson and SGS. Jardine Matheson is a diversified business group focused principally on Greater China and South-East Asia. The group has interests in leading companies in a wide range of areas but primarily in motor vehicles, property, retail and restaurants. The company combines cash-generative businesses with an asset-intensive property business. Its diversification enables the group to focus its investments in high-growth markets while spreading the risk that might otherwise be associated with its geographic concentration. SGS is a world leader in the inspection and verification of products, goods and services. Operating in a fragmented industry, its global footprint of testing labs and diversification across industries, from hospitality to consumer products to oil and gas, sets SGS apart from the vast majority of the competition. Demand for the services of this profitable, cash-generative business are increasing alongside an ever-growing burden of regulation throughout the modern world.
• Looking ahead, Walter Scott is optimistic about the companies in the portfolio as they leverage on long-term growth opportunities and remains focused on investing in financially strong companies that can deliver strong, sustainable returns over the long-term.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/165060940.pdfasset_class: Foreign Equity
asset_category: Large Growth
peer_benchmark: Foreign Equity - Large Growth Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: MAQ0410AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.macquarieim.com/investments/global-equities/walter-scott-global-equity-fund#resources
fund_features:
Walter Scott Global Equity aims to achieve a long-term total return (before fees and expenses) that exceeds the MSCI World ex Australia Index, in $A unhedged with net dividends reinvested (Benchmark). Walter Scott & Partners Limited (Walter Scott) believes in active, bottom-up stock selection. Investment decisions are driven by in-depth financial analysis and qualitative research that aims to identify companies capable of generating high levels of internal earnings growth. Portfolio construction is notably benchmark unaware (relative to most global equity managers reviewed by Lonsec). Walter Scott targets absolute returns (in contrast to benchmark relative, most common in the Lonsec peer group) through a concentrated portfolio of 40-60 stocks. Lonsec notes that Walter Scott s approach typically leads to a portfolio with a mid to large-cap growth bias and low turnover.
structure: Managed Fund