October, 2023
• The Fund returned -0.54%, net of fees, in October 2023, compared with a return for the Benchmark of -0.98%.
• Nearly all sectors, with the exceptions of IT, Utilities and Consumer Staples, moved lower in October; Consumer Discretionary being the largest detractor to index returns. For the Fund, the largest relative sector contributors included holdings in Consumer Discretionary, such as Nike and Compass Group, and in Materials, including Linde and Shin-Etsu Chemical. Relative detractors included holdings in Health Care, such as West Pharmaceutical and Waters Corporation, and a lack of exposure to Utilities.
• There are few other products that symbolise the human character more than luxury goods. More than just a display of wealth, there is a universal, emotionally driven desire to own an item that conveys a certain image and style. Yet at the same time the history of luxury is one of innovation, where successful companies can develop new products that capture the imagination and set trends, and are able to respond deftly to market, demographic, and technological shifts. LVMH continues to display these attributes. The company’s recent revenue statement highlighted the return to a more normal growth trajectory; organic revenue growth was 9% in its third quarter, which is a marked reduction from two consecutive quarters of 17% growth. A reduction from such elevated levels was to be expected however, and 9% is consistent with historical trends. The luxury market typically grows at 6% per annum over time. Given that LVMH retains the ability to grow faster than that, and with its strong pricing, the long-term return outlook remains highly attractive.
• With an investment gaze always focused on the long-term, the luxury companies in the portfolio ‘tick the box’ in terms of what Walter Scott require in an investment. They are businesses with strong brands highly defensible market leadership, robust balance sheets, excellent profitability and cash generation, and are able to adapt well to changing market conditions. While investors ponder the ebbs and flows of cycles, the history of consumer behaviour suggests that luxury spending trends will remain intact over the long run, and these companies are in pole position to benefit
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-3.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/2020/12/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-2.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/2020/12/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ-1.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/2020/12/Walter-Scott-Global-Equity-Fund-Performance-Report-PRRP-WSGEF-ANZ.pdfFebruary, 2023
• The Fund returned 1.72%, net of fees, in February 2023, compared with a return for the Benchmark of 2.09%, with ongoing uncertainty over the future path of inflation and interest rates challenging investor sentiment.
• The largest sector drivers of the market’s positive result in February included IT, Industrials, Financials and Consumer Discretionary. For the Fund, holdings in IT, including Adobe and Cognex, and holdings in Financials, including AIA Group and Prudential, were the largest relative sector detractors; these were partially offset by holdings in Health Care, led by West Pharmaceutical Services and Novo Nordisk, and holdings in Materials, namely Linde.
• During the month, Walter Scott completed the initial purchases of Lonza Group and O’Reilly Automotive, and the final sale of Johnson & Johnson. Lonza is the global leader in the contract development and manufacturing organisation (CDMO) industry, which provides outsourcing services to the global pharmaceutical industry, most importantly manufacturing services for therapeutic drugs. Market growth and increased outsourcing should support double-digit industry growth for years to come. O’Reilly Automotive was purchased due to its resilient qualities, evidenced by 30 years of consecutive comparable sales growth. O’Reilly demonstrated strong share gains throughout the pandemic and momentum continued into 2022. The business is well-placed to continue consolidating a highly fragmented market whilst returning significant cash to shareholders. Johnson & Johnson is facing multiple headwinds, including a significant ongoing litigation challenge relating to its talcum powder-based products. There is also a more uncertain outlook for the company's pharmaceutical division, where several products are past, or nearing, key patent expiry.
• As always, Walter Scott are focused on analysing and assessing how portfolio companies are navigating the various hurdles or indeed seizing the opportunities presented by these volatile times. Although in some cases they have not been immune from demand contraction or cost pressures, looking through the recent slew of earnings results, many have continued to show resilience and indeed growth. Thanks to their market-leadership, financial strength, pricing power and an ability to adapt to the vagaries of economic cycles, the companies the Fund holds remain well positioned to deliver strong earnings growth over the long term.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/198014022.pdfDecember, 2022
The Fund returned -3.55%, net of fees, in December 2022, compared with a return for the Benchmark of -5.19%, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/195839264.pdfNovember, 2022
The Fund returned 7.46%, net of fees, in November 2022, compared with a return for the Benchmark of 5.43%, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/193698008.pdfOctober, 2022
The Fund returned 6.18%, net of fees, in October 2022, compared with a return for the Benchmark of 7.22%, 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.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/192536068.pdfSeptember, 2022
• The Fund returned -8.10% in September 2022, compared with a return for the Benchmark of -8.91%, 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/2020/12/191770714.pdfAugust, 2022
The Fund returned -5.44% in August 2022, compared with a return for the Benchmark of -3.57%, with equity markets starting the month on an upbeat note, lifted by hopes that the US Federal Reserve might eventually moderate its monetary aggression, before succumbing to inflation and growth concerns.
The IT and Health Care sectors led the benchmark lower in August, with Energy the sole positive index contributor. For the Fund, holdings in Health Care, including Waters Corporation, Edwards Lifesciences, and Novo Nordisk, and in Financials, such as Prudential and AIA Group, were the largest relative sector detractors. Relative contributors of note included holdings in Communication Services, namely The Walt Disney Company. There were no initial purchases or final sales within the portfolio during the month.
Macroeconomic pressures were evident in the second-quarter results of leading off-price clothing and home furnishing retailer TJX Companies, with the company reporting a 1.9% year-on-year drop in sales. However, margins were promisingly resilient despite significant cost pressures. A tough environment can play into TJX’s hands with more off-price product on the market leading to favourable buying conditions, therefore creating a better customer proposition in-store and attracting a value-conscious consumer who is more likely to trade down to TJX. The historic precedent is for the business to outperform in such environments, as evidenced by resilient performance in the GFC (the company posting sales growth right through that downturn). Walter Scott expects a similar outcome this time around.
Guessing market direction is not part of Walter Scott’s investment process, but in terms of market tenor, it is likely that investors will increasingly focus on corporate financial strength and profitability. Against a backdrop of monetary tightening, the pullback in equities has taken a lot of heat out of valuations, and market ‘delta’ will consequently be a function of earnings rather than valuation shifts, in Walter Scott’s view. This is a recipe for volatility as investors mull over economic data and its impact on near-term earnings. Nonetheless, Walter Scott’s focus remains on sticking to the analysis of held or portfolio candidate companies, gauging their ability to weather economic tempests and deliver excellent earnings growth over the long-term.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/190840759.pdfJuly, 2022
The Fund returned 8.92% in July 2022, compared with a return for the Benchmark of 7.96%, 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/2020/12/189766742.pdfMay, 2022
The Fund returned -1.50% in May 2022, compared with a return for the Benchmark of -0.20%, 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/2020/12/187688871.pdfApril, 2022
The Fund returned -6.17% in April 2022, compared with a return for the Benchmark of -7.44%, 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/2020/12/186802213.pdfFebruary, 2022
The Fund returned -3.27% in February 2022, compared with a return for the Benchmark of -2.75%, with equity markets impacted by the heightened geopolitical and economic uncertainty surrounding the conflict between Russia and Ukraine.
• Elevated uncertainty resulted in most market sectors declining in February, with the notable exception of Energy. For the Fund, the largest relative detractors were holdings in Consumer Discretionary, led by LVMH and Booking Holdings, and in Materials, such as Linde and Shin-Etsu Chemical; these were partially offset by holdings in Communication Services, such as The Walt Disney Company, and in Health Care, including Stryker and Novo Nordisk. There were no initial purchases or final sales within the portfolio during the month.
• The Fund has no holdings in either Russia or Ukraine, and while there are several companies that will lose Russian and Ukrainian sales, Walter Scott does not expect the impact of this exposure to be material at the portfolio level. Nonetheless, there are clearly broad consequences of the conflict which will affect the equity landscape, although the extent of the impact will depend on the scale and duration of the war and its outcome. While markets have been caught up in the macro turmoil, at the fundamental stock level, companies have been enjoying the fruits of recovery. Cybersecurity provider Fortinet is sitting at the apex of long-term trends that are propelling the business. The war in Ukraine is also being fought in cyberspace. As the digital revolution exposes more and more companies to the threat of external attack, Fortinet is leading the fight against cybercrime with its innovative security solutions. Walter Scott spoke with the company’s IR team shortly after the recent annual results announcement. 2021 was an excellent year, as evidenced by a 29% year-onyear increase in revenues and a 22% increase in operating profit, and guidance looks equally bright.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/185019007.pdfJanuary, 2022
The Fund returned -7.98% in January 2022, compared with a return for the Benchmark of -5.07%, 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/2020/12/184270498-1.pdfDecember, 2021
The Fund returned 5.52% in December 2021, compared with a return for the Benchmark of 3.97%, 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.
• At the start of 2022, concerns linger over the impact of the latest COVID variant on economic growth and supply chains. So far, it appears to be a weaker strain, and may allow governments to shy away from draconian containment measures. The persistence of inflation will continue to be a test for economies and corporate profitability, although it is likely that cost pressures will ease as supply and demand mismatches are resolved. Nonetheless, a more aggressive US Federal Reserve may test global sentiment as well as equity valuations. For Walter Scott, macroeconomic or market guesswork play no part in the creation of portfolios. They are instead the result of the investment team’s research efforts to find market-leading, financially strong, well-managed businesses that are resilient, and well placed to benefit from long-term growth trends. Walter Scott remains confident in the ability of the companies the Fund holds to deliver excellent returns in the years ahead.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/182466821.pdfNovember, 2021
The Fund returned -2.48% in November 2021, compared with a return for the Benchmark of -1.57%, 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/2020/12/181810925.pdfSeptember, 2021
The Fund returned -4.48% in September 2021, compared with a return for the Benchmark of -3.76%, 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/2020/12/180213219.pdfAugust, 2021
The Fund returned 2.45% in August 2021, compared with a return for the Benchmark of 2.69%, 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/2020/12/178792974.pdfJuly, 2021
The Fund returned 3.76% in July 2021, compared with a return for the Benchmark of 1.77%, 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/2020/12/175738509.pdfJune, 2021
The Fund returned 2.73% in June 2021, compared with a return for the Benchmark of 2.40%, 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/2020/12/174342111.pdfMay, 2021
The Fund returned 1.16% in May 2021, compared with a return for the Benchmark of 0.99%, 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 stro
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/173009913.pdfApril, 2021
The Fund returned 3.66% in April 2021, compared with a return for the Benchmark of 4.01%, as equity markets posted another strong result driven by investor optimism around a stimulus-driven economic recovery.
• With the exception of Energy, all GICS sectors climbed higher in April. For the Fund, the largest relative detractors were holdings in Information Technology, including Texas Instruments and Taiwan Semiconductor. These were partially offset by holdings in Health Care, including Edwards Lifesciences and Intuitive Surgical, and in the Consumer Discretionary sector, namely LVMH. • Two members of the Walter Scott Research team recently conducted a ‘virtual’ visit to Japan, largely dedicating a week to ‘e-meeting’ companies across a spectrum of industries. A key message that is perennially reinforced by such visits is that enterprise and innovation can be found in any country, irrespective of economic travails. Honed by tough domestic markets and intense international competition, Japan remains home to a variety of world-class businesses.
• One such company is Keyence, the world's leading supplier of sensors and measuring instruments, predominantly for factory automation. The company is effectively ‘fabless’, focusing on design and sales, with manufacturing almost entirely sub-contracted, selling directly to users with solutions often customised to specific requirements. In bypassing several layers of distribution, it has captured the most profitable element of the industry, thereby retaining a healthy profit margin. Keyence’s fourth-quarter results for the year ending March 2021 saw revenues and earnings before interest and tax rise 15% and 24% respectively year-on-year, representing a strong acceleration from what was an already improving previous quarter. In Walter Scott’s ‘e-meeting’, management noted that the backdrop for capex investment had improved markedly, in line with the encouraging outlook given by several other factory automation related companies. This exceedingly cash-rich company retains a very significant opportunity to grow its business, both in Japan and in overseas markets.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/171427522.pdfMarch, 2021
The Fund returned 3.27% in March 2021, compared with a return for the Benchmark of 4.26%, as investor optimism around the level of fiscal and monetary stimulus drove global equities higher across the month. • As the world gradually emerges from the clutches of the COVID-19 pandemic, the prospect of a return to economic normality against a backdrop of massive monetary and fiscal stimuli has been a potent mix in terms of elevating investor sentiment. All market sectors moved higher across the month. For the Fund, the largest relative detractors were holdings in Health Care, such as Illumina, and holdings in Consumer Discretionary, which made smaller gains than the broader sector. These were partially offset by holdings in Information Technology, including Cisco Systems and Automatic Data Processing, and in Materials, namely Linde.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/170122505.pdfFebruary, 2021
The Fund returned 1.32% in February 2021, compared with a return for the Benchmark of 2.65%, with a strong cyclical sector rebound driving global equities higher across the month.
• Cyclical sectors, such as Energy and Financials, led the market higher in February, driven by improving investor confidence around fiscal stimulus measures and the vaccine rollout, while more defensive sectors weighed on returns. For the Fund, the largest relative detractors were its long-term underweight to Financials and holdings in Industrials, such as Experian and Fanuc. These were partially offset by holdings in the Consumer Discretionary sector, including Booking Holdings and Compass Group.
• Contract caterer Compass Group, one of the Fund’s top performers in February, has inevitably borne the full brunt of the pandemic, given extensive workplace, education, and leisure shutdowns. Despite a strong start to the financial year, revenues in 2020 were down 20% and profits collapsed. Mass vaccinations clearly represent a light at the end of the tunnel, but the company has not been standing still as it looks to the future. As a result of contract renegotiations, cost reduction initiatives and investments in technology, it has made excellent progress in rebuilding margins in a low-volume environment, and this is expected to continue in the coming months. The company’s asset-light and highly cash-generative business model should also allow it to finance organic growth and bolt-on acquisitions, with firepower augmented by prudent equity issuance last May.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/167980608.pdfDecember, 2020
The Fund returned 4.22% in December 2020, compared with a return for the Benchmark of 3.45%. • Sector returns were mixed this month, with the Information Technology, Consumer Discretionary, and Financials sectors moving higher, and Utilities, Industrials and Real Estate declining, amongst others. For the Fund, the largest relative contributors were holdings in Health Care, such as Intuitive Surgical and Edwards Lifesciences, and in Information Technology, including Taiwan Semiconductor and Keyence; these were partially offset by holdings in Industrials, including SMC Corporation, KONE and Fastenal.
• There were several changes to the portfolio in December, with the initial purchases of Canadian National Railway (CN) and Paychex, and the final sales of CNOOC and EOG Resources. Below, Walter Scott discusses the rationale behind each of these decisions. • CN is a Class I freight railway and the largest railway in Canada. Rail is the lowest cost, most energy-efficient mode of ground transportation, and economies of scale, productivity improvements and real pricing growth should result in an improving margin structure for CN. Paychex provides human capital management services to small and medium-sized businesses and is the dominant player in its market niche. The company is benefitting from the move to outsource the growing administrative burden of payroll processing, and increased penetration into the majority of the market who perform these functions in-house provides a large growth opportunity. • Chinese oil producer CNOOC was sold following reports that the Trump administration was poised to place CNOOC on a blacklist of Chinese firms in which Americans are unable to invest. Though unconfirmed at the time of sale, this directive would ban a meaningful group of shareholders from owning the stock and significantly impair CNOOC's ability to operate certain assets. Despite its technological leadership and best-in-class operational capabilities within the oil and gas industry, EOG Resources has been plagued by a weak and volatile oil price environment over the last five years, and was sold following a sharp rebound in its share price.
• Walter Scott remains focused on investing in financially strong companies that can weather near-term turbulence and take advantage of secular growth trends, to deliver strong, sustainable returns over the long-term.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/163537495.pdfNovember, 2020
The Fund returned 11.66% in November 2020, compared with a return for the Benchmark of 11.56%, with growing optimism over the deployment of a COVID-19 vaccine driving developed markets to their strongest monthly return in unhedged terms since July 2013.
• This month’s welcome news of vaccine breakthroughs has largely allayed fears that ongoing COVID-19 containment measures will propel many economies into a double-dip downturn and had an electrifying effect on markets. All market sectors moved higher, led by cyclical sectors such as Energy, Financials and Consumer Discretionary. The largest relative detractor for the Fund was underweight positioning in Financials; this was offset somewhat by strong relative contributions from holdings in Consumer Discretionary, including Inditex, TJX Companies and LVMH. There were no initial purchases or final sales within the Fund during the month.
• A measure of a business is its ability to negotiate hurdles as it positions itself for the future. The pharmaceutical industry may be less prone to cyclical vagaries, but it faces distinct challenges nonetheless. For example, companies can face patent ‘cliffs’, i.e. expiries, which allow the intrusion of generic competition. This is an issue that has inhibited growth at Novartis in the past; however, over the past five years the company has spent over US$45 billion on research and development. This has generated a more diverse portfolio of products, as well as a strong pipeline. During a call with the CEO this month, it was highlighted that over 90% of the Novartis pipeline is ‘‘first in class’’, with 80% of it targeting areas where there is no current treatment, and includes cutting-edge gene, cell and radioligand therapies. In Walter Scott’s view, given its financial strength, high levels of innovation, and a diverse portfolio of drugs that offer a good growth runway, Novartis looks set for a period of sustainable earnings progression over the long-term.
• While effective COVID-19 vaccinations offer concrete hope that 2021 will mark the end of the pandemic, significant risks still remain, including the sizeable logistical challenges involved in the roll-out of mass vaccination programs, and in the post-pandemic recovery itself. Such is the investor’s lot − risk is an ever-present feature of the investing landscape. Walter Scott will continue to weigh both risk and opportunity, and invest in a portfolio of high-quality, resilient companies that strikes an appropriate long-term balance between the two.
File: https://commentary.quantreports.net/wp-content/uploads/2020/12/162268121.pdfOctober, 2020
• The Fund returned -3.51% in October 2020, compared with a return for the Benchmark of -3.19%, with key European markets moving lower as COVID-19 cases in the region soared.
• The uptick in COVID-19 infection rates in the US and Europe heightened concerns that the nascent economic recovery will lose momentum as containment measures are reintroduced. Nearly all market sectors fell, with the Energy sector declining the most following a further fall in oil prices. For the Fund, the largest detractors from relative performance were holdings in the Consumer Discretionary sector, particularly in Europe and the US, such as Inditex, TJX Companies and Compass Group; more positive were strong relative contributions from holdings in IT, such as Automatic Data Processing and Amphenol, as well as the Fund’s sole Taiwanese holding Taiwan Semiconductor. There were no initial purchases or final sales within the portfolio during the month.
• Although the near-term environment may be challenging, Walter Scott remains encouraged by the various conversations the team has had with companies regarding their longer-term outlook. The investment team spoke with one such company, Novo Nordisk, in October following the release of a good set of results and an increase in the company’s sales and operating profit guidance for 2020. Insulin has been on the wane in the US as a driver of the business, but GLP-1, a range of hormonal-based treatments for diabetes, remains very much in a growth phase across the board. Novo’s ‘star’ molecule, Semaglutide, is driving growth across the business in the GLP-1 category, but it also has potential to enhance the company’s prospects in the field of obesity. It is estimated by the company that 650 million people are officially classed as living with obesity, but only 2% are medically treated. The economics of a drug solution for some patients could be compelling compared to the long-term costs involved in treating the associated ailments that obesity brings.
• While Walter Scott cannot predict what will happen next in terms of an economic recovery trajectory, ingenuity and enterprise can flourish whatever the economic backdrop, and new growth opportunities will evolve. Walter Scott’s focus remains on investing in financially strong companies that can weather near-term turbulence and take advantage of secular growth trends while delivering strong, sustainable returns over the long-term.
ticker: MAQ0557AU
commentary_block: Array
factsheet_url:
https://www.macquarieim.com/investments/global-equities/walter-scott-global-equity-fund
release_schedule: Monthly
fund_features:
The Fund provides exposure to a concentrated portfolio of global equities by investing in securities which, in Walter Scott’s opinion, offer strong and sustained earnings growth by investing in the Walter Scott Global Equity Fund (Underlying Fund).
- 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.
- The Fund 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).
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