September, 2023
• Global equity markets continued to weaken in September as higher interest rates threatened to further slow consumer spending and rising bond yields impact company valuation levels.
• Smaller companies underperformed large cap stocks during the month.
• The Fund returned -4.2% in September, which was in line with the benchmark.
Global equity markets continued to decline in September as smaller companies again underperformed large-cap stocks. This trend was accelerated by rising longer-term bond yields which reflect growing concerns that inflation has not yet been brought under control.
Despite core US inflation moderating to 4.3% in August, rising oil prices pushed headline inflation back up to 3.7%, well ahead of the 2.0% targeted by the Federal Reserve (Fed). The Fed reiterated its “higher for longer” stance on interest rates, making the timing of lower rates very hard to predict, but likely lying further into the future.
Consumer spending was strong in the third quarter, yet there are now growing fears of a slowdown in consumption, as savings accumulated during the pandemic have now largely been spent. In August, the New York Fed highlighted that credit card balances have risen for five consecutive quarters, and rose at the fastest rate in more than 20 years during the June quarter.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-30-09-2023-pengsc.pdfAugust, 2023
• Equity markets weakened in August upon rising recession fears, with smaller companies underperforming larger cap stocks
• Australian dollar weakness offset the impact of lower share market returns when stated in AUD terms
• The Fund returned -0.8% in August and trailed the index return of 0.3% as smaller companies underperformed larger cap stocks
Global share markets were generally weaker during August, with smaller companies underperforming larger cap stocks. This was offset by the depreciation of the Australian dollar when expressed in AUD terms.
US economic news was mixed. Credit rating agency Fitch downgraded the US long-term credit rating, citing weakening fiscal conditions, the growing debt burden, and the repeated debt limit standoffs. Bloomberg’s median probability of a recession over the next 12 months remains at 60%.
On a more positive note, both core retail sales and industrial production showed month-on-month growth. The median estimate for third quarter US economic growth is 1.4% quarter-on-quarter, which may be somewhat conservative given the particularly strong 2.4% recorded in the second quarter.
In Europe, share markets broadly declined in August. The only sectors that performed well were energy and real estate, which traditionally do not fall within the Fund’s investment universe. Both the UK and Eurozone composite purchasing managers’ data indicated economic contraction, with the Eurozone’s reading reaching a 33-month low.
In China, share prices declined steeply in local currency terms during August. The economic slowdown continued in July, with unexpected slowdowns in both retail sales and industrial production. Furthermore, China’s property crisis intensified, raising concerns about contagion effects impacting the wider consumer economy. The near-term outlook appears bleak.
In Japan, the economy grew during the second quarter, driven by strong exports and tourism. However, signs of wage inflation are starting to emerge which is slowing momentum in corporate earnings growth.
Smaller company stocks underperformed larger cap stocks in August, negatively impacting the returns of the Fund relative to its benchmark. Continued weakness in companies at the smaller cap end of the small companies’ investment universe is weighing on the Fund. However, it also creates a highly attractive investment opportunity, when the discounts at which smaller companies are valued in the market become historically wide when compared to larger businesses.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-31-08-2023-pengsc.pdfJuly, 2023
• Global share markets continued to strengthen in July, with smaller-cap stocks performing well as cooling inflation appears to be bringing interest rates close to their peak
• Market returns were especially strong in banks, mining companies, and North America, where attractively priced quality companies are more difficult to find
• The Fund returned 0.5% in July, while the index returned 3.5% Global share markets performed well in July, with smaller companies making good gains, although a stronger
Australian dollar detracted from returns in AUD terms.
The Fund returned 0.5% net of fees in Australian dollar terms during July, trailing the MSCI All Country World SMID Cap Index, which gained 3.5% in the period.
The US share market performed strongly despite the Federal Reserve raising interest rates by a further 0.25% in July. The market now expects that interest rates are either at or close to their peak of the current cycle. While June headline inflation cooled for the 12th successive month, falling to just 3.1%, core inflation proved to be stickier at 4.8%. The US economic outlook improved further, with GDP growing by 2.4%, well above earlier market expectations.
European stocks also performed well as Eurozone inflation fell to 5.3% and its GDP expanded by 0.3%, which was faster than expected. Although corporate earnings have been resilient, July economic data was weaker. UK equities performed better than those in Continental Europe as headline inflation fell sharply to 7.9% in June from 8.7% in May.
Japanese equities made more modest gains in July after strong quarterly earnings results were offset by earnings forecasts which reflected the impact of continuing increases in wage costs. Elsewhere in Asia, China’s GDP growth slowed and the post-Covid rebound appears to be running out of steam. Despite this, China’s stock market performed strongly upon hopes of further government stimulus. The Fund underperformed the benchmark during July, due largely to the Fund’s long-term underweight positioning towards banks and mining companies. The Fund’s underweight position in North America, where companies are relatively more expensive, further detracted from relative returns.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-31-07-2023-pengsc.pdfJune, 2023
• Shares in global smaller companies strengthened in June upon signs that inflation is now cooling and fears of a recession are easing
• Larger companies continued to outperform smaller ones, especially in technology-orientated sectors
• The Fund returned 0.7% in June, while the benchmark returned 3.0%
Global smaller companies strengthened during June, although a stronger Australian dollar detracted from returns in AUD terms. Larger companies continued to outperform smaller ones, especially in technology-orientated sectors.
The broader global share market performed well as US inflation moderated, raising hopes that interest rates may start to fall in 2024. The continued strength of economic activity and the labour market eased fears that the global economy would enter recession later this year. The US Federal Reserve stress test showed all 23 major banks had sufficient capital to survive under a severe recession scenario.
European shares made positive – but more limited – gains, reflecting receding fears of a potential energy crisis.
However, there were cautionary signs as both the service and production indices contracted in June. UK equities also made gains, with positive GDP growth despite inflation remaining well above target. The Bank of England raised the interest rate by 0.50% to 5.00% in June, the 13th successive increase. The market expects more interest rate hikes before the year-end.
Japanese stocks continued to perform well, benefiting from a weak yen and a strong industrial base. Chinese equities were also positive, driven by the real estate and communication services sectors, despite weak industrial production data.
The Fund underperformed the benchmark in June due to its focus on smaller stocks within the investment universe. Larger stocks outperformed, especially in the US, during the month. These stocks are now valued at highly attractive discounts to larger companies, which gives confidence that they will deliver strong performance as the global economy recovers.
SoftwareOne is a Swiss software reseller and cloud service provider to small and medium-sized businesses in more than 70 countries. The position was established in the third quarter of last year when the weak share price reflected investor concerns about the company’s margin profile. A new CFO has joined the business and helped establish credibility amongst investors. The business is now growing again, and margins are improving. Bain Capital noticed this and has made an indicative offer to buy the business. The founding families, who own 29.1% of the business, rejected the offer, believing that it undervalues the company. The Fund supports this position and continues to maintain its holding, believing it likely that Bain will make a higher offer. If this does not materialise, the stock remains attractive on a free cash flow basis, and the fundamentals continue to improve.
Dino Polska is a Polish retail chain of mid-size discount grocery stores and distribution centres. The stock contributed to relative returns when it outperformed the market in June, extending a long period of strong performance. The company has exploited what had been an immature retail market in Poland. It has rolled out modern western-European style stores with effective supply chains that delivered discounts to shoppers in excess of 20% compared to traditional grocery stores. This has enabled it to grow revenues by 20%-30%, delivering strong returns on equity for more than a decade.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-30-06-2023-pengsc.pdfMay, 2023
• The Fund was down 2.0% in May 2023, trailing the MSCI All Country World SMID Cap Index, which declined 0.7%.
• The AI surge drove interest in a narrow subset of primarily larger US companies.
• Economic momentum slowed in Europe, China, and the UK.
• New investment in Moringa, one of the largest confectionary companies in Japan.
U.S. Equities performed well in June. The S&P 500 rose 2.61% buoyed by large-cap tech stocks as well as the debt ceiling agreement. Economic data was healthy: retail sales were robust, core inflation cooled to 5.5%, and the labor market remained tight. The (Small Cap) Russell 2000 also fared well with a 1.23% gain. Europe’s economic momentum in April decelerated in May. All sectors fell aside from information technology which was boosted by optimism surrounding Artificial Intelligence. Germany entered a technical recession after showing a negative growth in the first quarter of 2023 and U.K. equities fell as core inflation accelerated to 6.8%, the highest level since 1992. Nevertheless, on many 1Q earnings calls, many of the European managers still signaled a rebound in 2H 2023.
China’s economic data were much weaker than anticipated with the manufacturing PMI falling below the neutral 50-mark. China’s downturn may create a knock-on problem for the global luxury sector later this year. On the other hand, Japanese stocks did well. While core inflation continues to be strong at 4.1%, full-year earnings results were strong. Furthermore, the Tokyo Stock Exchange urged listed companies to put a stronger emphasis on increasing shareholder returns and many companies have responded.
The top five performers contributed evenly. The two most notable names were Flextronics and Melrose. FLEX performed strongly on the back of strong demand and a growing order backlog for its specialist manufacturing capabilities. Our thesis on Melrose continued to play out nicely. The spin-off of the automotive business (Dowlias) revealed to investors a strong Melrose’s Aerospace business with improving fundamentals. On the other hand, PRA Group was by far the biggest laggard, with a drag of -1.49% on total performance. We were negatively surprised by the weak first quarter results and decided to exit the position.
The Fund added a new position, Morinaga. Morinaga is one of the largest confectionary companies in Japan. It possesses the best-selling ice cream in Japan. The Company has announced its intention to improve its capital allocation policies. We expect this catalyst to drive a higher return on capital and accelerate earnings growth during the investment horizon.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-31-05-2023-pengsc.pdfApril, 2023
Global smaller companies were moderately stronger in April upon signs of solid economic activity, moderating inflation, stable earnings results and corporate activity.
Strong stock performance and an overweight position in Europe along with an underweight position in North America contributed to relative returns during April.
The Fund returned 1.6% in April, in line with the benchmark
File:February, 2023
Global smaller companies were moderately weaker in March as cautious investors tilted their asset allocation towards more liquid larger company stocks.
Strong stock performance in Asia and an underweight position in Financials contributed to relative returns during March.
The Fund returned -0.1% in March, while the benchmark returned -0.
File:February, 2023
Global smaller companies strengthened in February upon signs that the global economy remains resilient and that earnings are holding up reasonably well.
Strong stock performance and an overweight position in Europe contributed to relative returns during February.
The Fund returned 3.7% in February, while the benchmark returned 1.9%.
File:January, 2023
Global share markets strengthened in January upon expectations that interest rates will soon peak before starting to fall later in 2023.
The Fund is attractively valued relative to its companies’ earnings.
The Fund returned 4.6% in January, while the MSCI All Country World SMID Index returned 4.3% in Australian dollars.
File:December, 2022
The Fund returned -0.3% in December, while the MSCI All Country World SMID Index returned -4.2% in Australian dollars.
Global share markets moved lower in December upon fears that interest rates will continue to increase and will remain elevated throughout 2023.
The Fund is attractively valued relative to its companies’ earnings.
File:November, 2022
Global equity markets continued to strengthen in November upon further signs that inflationary pressure is starting to slow, which should allow the pace of interest rate increases to soon ease. The Fund’s more recently established positions in the technology sector continue to contribute to performance. The Fund returned 4.7% in November, while the MSCI All Country World SMID Index returned 2.5% in Australian dollars
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Screen-Shot-2023-01-09-at-13.08.21.pngOctober, 2022
Global equity markets bounced back in October, after weakening since the start of the year. The Fund returned 5.2% during the month, while the MSCI All Country World SMID Index returned 7.2% in Australian dollars.
Signs that inflation may be starting to slow brought expectations that the pace of interest rate rises would ease, before peaking at a lower level than had been forecast earlier. US economic data continues to weaken, although it appears more robust than the other major economies. Consumer sentiment is still weak despite a tight labour market. The US dollar appears to have stabilised following an extended period of strong appreciation against other major currencies.
The European Central Bank (ECB) raised its benchmark interest rate by 0.75% to 2.00% at its second consecutive meeting in order to control inflation which has reached a 40-year high. The UK equity, bond and currency markets all responded positively to the new Prime Minister Rishi Sunak’s more restrained fiscal policy. In China, President Xi Jinping consolidated political and economic power after securing a third term in office, but offered little sign of an early easing of the zero-Covid policy.
Equity returns varied significantly by region, US smaller companies strongly outperformed non-US shares, while emerging market stocks continued to fall in value. The Fund’s underweighting of the highly valued US market detracted from the Fund’s relative performance in October.
The Fund established a position in Melrose, a UK-based investment holding company, during October. It has a unique strategy of acquiring, improving and then divesting high quality but underperforming industrial businesses. The Melrose management team was established in 2003; it currently owns and focusses its efforts on the GKN group of businesses.
The company has delivered an impressive 21% average annual compound return to shareholders. However, plans announced in September to demerge and list the automotive division led to share price underperformance. The Fund took the opportunity to invest in a market-leading industrial auto and aerospace business, with a world-class management team at a deep discount to the underlying value of the business.
The Fund also invested in Nexi, a leading European payments business, which has a strong position in Italy, the Nordic region and other parts of Europe. The shares significantly underperformed the market, having completed acquisitions just before the global share market began to weaken.
The business is expected to deliver strong secular growth from growing electronic payments in its core geographical areas. The Fund invested in the company, paying a multiple of 15 times its earnings, gaining an interest in a sustainably growing business with significant room to also expand margins.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Screen-Shot-2022-11-26-at-12.10.33.pngSeptember, 2022
Global equity markets fell in September as central banks continued to increase interest rates to bring rising inflation back under control. The Fund continues to invest in innovative companies that demonstrate the ability to deliver sustainable earnings growth. The Fund returned -6.9% in September, while the MSCI All Country World SMID Index returned -4.4% in Australian dollars.
Global equity markets are now clearly experiencing a bear market, despite a brief rally early in September. US August consumer price inflation increased faster than expected to 8.3%, while September Eurozone inflation rose by 10.0%. Global central banks will need to continue raising interest rates to bring inflation back under their targets. Currency markets remained volatile, with the US dollar reaching multi-decade highs.
The US Federal Reserve increased interest rates by a further 0.75% in September and published a more pessimistic market outlook for 2023. It now expects slower economic growth and higher unemployment, but lower core inflation. Consumer spending remains reasonably stable, but construction and housing data weakened.
Eurozone retail sales, industrial new orders and purchasing managers’ data all indicated a deteriorating economic outlook. In contrast, most management teams with whom the Fund met have not yet seen any significant fall in demand.
The Fund expects earnings in Europe, as well as globally, to be impacted by the economic slowdown, which is expected during the northern hemisphere winter. While an early end to the Ukraine conflict would be positive for market sentiment in Europe, this is not expected in the near term.
The announcement of unfunded tax cuts and increased spending by new UK Prime Minister Liz Truss led to a steep rise in UK Government bond yields and a large fall in the value of sterling. The Bank of Japan kept interest rates low, despite inflation exceeding 3%. This may potentially support a Japanese export boom, but could eventually bring even higher inflation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Screen-Shot-2022-10-24-at-17.29.03.pngAugust, 2022
Equity markets in developed countries were generally weaker in August. The Fund returned -3.1% net of fees for the month, while the MSCI All Country World SMID Cap Index unhedged in Australian dollars returned -1.1%.
While Global and US shares fell, Emerging Markets made a positive gain during the month. Oil prices posted a third successive monthly drop, falling by more than 12%, whilst remaining much higher than a year ago. The US dollar strengthened further as investors reduced their exposure to the yen and euro. Overall, the economic outlook remains bleak, but many markets appear to have been oversold.
US: The share market made positive gains over most of the month, benefitting from a growing market belief that the peak in US interest rates was already reflected in market valuation levels.
However, hawkish commentary from US Federal Reserve (Fed) Chair Jay Powell at its Jackson Hole gathering caused the equity market to sell off aggressively. The Fed appears to be committed to its prior strategy of sustained increases in interest rates, acknowledging that it would create some “unfortunate costs of reducing inflation.”
Subsequent economic data suggested that the US economy hasn’t yet slowed sufficiently for the Fed to consider easing the pace of interest rate increases. The Fed’s next meeting on 20-21 September is expected to give more indication of the likely path of interest rates.
Europe: August consumer price inflation (CPI) increased to 9.1% from 8.9% in July, compared to the market expectation of 9.0%.
Europe’s energy crisis intensified in August when Russia announced it would halt the flow of natural gas through the Nord Stream 1 pipeline for three days from 31 August. However, the pipeline remains shut “indefinitely” due to political tensions with Western European countries following Russia’s invasion of Ukraine.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Screen-Shot-2022-09-17-at-10.42.08.pngJuly, 2022
The major equity market indices saw upward rebounds in July, with US stocks seeing a sharper bounce back than their global counterparts. The US S&P500 rose 9.1% in July, bringing its year-to-date return to -13.3% while the MSCI Europe gained only +5.0% and the MSCI Emerging Markets grew by a modest 2.4%.
Overall, corporate earnings have been surprisingly positive despite gloomy economic forecasts. Furthermore, facing record high inflation, central banks all over the world are expected to raise interest rates further. The Bank of Japan remains the exception due to the country’s very low level of inflation.
The US: While the US Federal Reserve (the Fed) raised interest by 0.75% for the second consecutive month, this was below the market’s expectation of a 1.00% hike. Inflation is showing signs of coming under control; US CPI came down to 8.5% in July from 9.1% in June, while core inflation remained steady at 5.9%, having peaked at 6.5% in March. The US entered a technical recession, with a second consecutive quarter of falling GDP and manufacturing data that continues to be weak.
A less-hawkish Fed interest rate policy is now expected by investors, which has been positive for the equity market, and offers some explanation for the strong equity market performance in July. However, should the Fed feel that it is forced to raise rates further and hold them higher for longer, another challenging period for the equity markets is to be expected.
Europe: In June, Eurozone unemployment increased for the first time in 14 months. Furthermore, S&P Global survey data indicates that the manufacturing sector contracted in July, and new orders fell the most since the Eurozone sovereign debt crisis in 2012. This limited the rebound in share prices during July.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Screen-Shot-2022-09-17-at-10.40.58.pngJune, 2022
The Fund was down -6.9% in June, slightly underperforming the Index which was down -6.0%.
As of June 30th, the top ten holdings accounted for 41% of the Fund’s assets with the largest position at 5.3% of the portfolio.
The Fund continued with limited trading activity this month. We believe the Fund’s value is at a meaningful discount to the long-term fair value. The Fund is currently trading at just over 13x earnings on a weighted average basis. The constituents are expected to grow their earnings nicely over the coming years and carry over 20% ROE. We are also continuing to examine many interesting new investment opportunities given the sell-off in the equity markets.
File:May, 2022
The ACWI SMID cap index was down -1.1% in May, as ongoing concerns over inflation, rising interest rates, and the war in Ukraine weighed on investors. In the US, policymakers continue to stand by their hawkish stance and foresee further rate increases to tame inflation. Inevitably, we are starting to see early signs of the U.S. economy slowing down: the PMI index fell again in May and GDP was confirmed to have contracted in the first quarter. In Europe, inflation continues its rapid rise putting more pressure on the ECB to raise rates. The UK’s inflation rate was confirmed to have reached a 40-year high in April, yet May’s expected inflation is higher still. The largest jump was from a higher level of the energy price cap. In Japan, the equity market welcomed Prime Minister Kishida’s “New Capitalism” policy (emphasizing economic growth). The likelihood of recession is rising as central banks may struggle to tame inflation and pull off a “soft landing.”
Energy, Utilities, and Financials performed well in May while Consumer Staples and Consumer Discretionary lagged behind the overall market. While the S&P had dropped 20% for the year on May 20th, it bounced back and ended May in the green. The US Dollar DXY index briefly gave back some strength only to climb back as of this writing. One trend that we are happy to see continuing is the MSCI Value index outperforming its Growth counterpart. While the macro environment remains challenging, we continue to see opportunities in our space: the MSCI All Country World Index ex-US is trading at an attractive 12.2x forward earnings, unchanged from April.
Stock selection drove the Fund’s overperformance against the index in May. As of May 31st, the top ten holdings accounted for 41% of the Fund’s assets with the largest position approximately 5.9% of the portfolio.
File:April, 2022
April was marked by a significant increase in global uncertainty. Among the biggest questions was how aggressively the U.S. Fed would deal with four-decade high inflation through inevitable interest-rate rises? The knock-on effect is to potentially force the global economy into recession, dashing investors’ dreams of a “soft-landing”. Adding to the global wall of worry was China’s Zero-Covid policy and lockdown of key geographic areas. This served to kick the feet from under global supply chains just as they were attempting to stand up again. The Russia – Ukraine conflict seems to have moved off the front page given the deluge of economic issues, however, the energy and food supply issues created by the conflict are very real.
All this negative news caused the market to sell off aggressively, adding to what has already been a very tough start to the year. The S&P 500 traded down nearly -9% in April closing the YTD run of more than -13%. From a historical perspective, this is the worst start to a year since 1939. The tech-heavy Nasdaq also hit a fresh low for 2022 having fallen -13% in April. The U.S. dollar as measured by the DXY index resumed its relentless rise, increasing by 5% in April alone as investors fled to the safe haven. We continue to see this as unsustainable and expect it to reverse when global growth resumes. While the sell-off has been challenging, signs of value are starting to emerge. Timing is always uncertain but equities outside the U.S. are looking cheap. The MSCI All Country World Index ex-US is trading at 12.2x forward earnings. That is currently in the 22nd percentile going back 20 years.
File:March, 2022
The Fund was slightly positive, +0.14%, against the index which declined -2.26% in March 2022.
File:February, 2022
The global equity market sell-off continued in February driven primarily by Russia’s invasion of Ukraine. Expectations for the number of interest rate hikes that would be delivered by the US Federal Reserve (Fed), the Bank of England (BoE) and the European Central Bank (ECB) ramped up quickly and pushed equity markets lower. Equity volatility spiked, with the Volatility Index (VIX) ending the month near 30. Oil prices surged with the potential withdrawal of Russian oil from world markets, and Brent crude closed above $100 per barrel at the end of the month, up from $73 at year end. Against this backdrop, the Fund returned -6.0% in February, underperforming the benchmark return of -3.4%.
File:January, 2022
Global equity markets started the year by registering their worst month of performance since March 2020. The prospect of US interest rate hikes, rising global inflation, and Russia-Ukraine tensions meant there were few places for equity investors to hide. US consumer inflation climbed to 7%, the highest level since 1982. The Fund returned -5.4% for the month, the benchmark returned -4.1%.
File:December, 2021
The Fund returned +2.9% in December, outperforming the benchmark return of +1.2%.
Global equity markets recovered in December from the previous month’s slump, ending the year on a strong note. Although the Omicron variant of COVID-19 that surfaced in November proved to be more infectious than the Delta strain, investor fears quickly dissipated as Omicron appears to be neither as severe, nor as vaccine-resistant, as initially anticipated. As a result, most countries have not imposed major restrictions. Equity investors continued to focus on the strong corporate earnings outlook for the year ahead now that the economic recovery is less likely to be disrupted by COVID-19.
The equity markets that suffered most in November, such as the UK and Europe, outperformed the U.S. during the month. The Federal Reserve announced a doubling in the pace of its tapering from January 2022, while the Bank of England and a few other central banks in continental Europe increased short-dated rates. These actions helped to alleviate concerns over inflation and an overheating of the global economy. The Bank of Japan remained an outlier, adhering to its stimulus policies, which sent the yen to multi-year lows. Developed equity markets finished 2021 with a 4% gain in December, measured by the MSCI ACWI index, capping off a strong year. Emerging markets were also up in December, posting a gain of 1.9% as measured by the MSCI Emerging Markets index. Despite the positive performance in December, Emerging Markets ended the year in negative territory, falling -2.5%.
File:November, 2021
The Fund returned -3.0% in November, underperforming the benchmark return of +1.7%.
Global equity markets retreated in November as investor concerns centered around the spread of the new COVID-19 variant, Omicron. Markets continued to sell off during the month due to U.S. Fed tapering concerns, mounting inflationary pressure, continued labour shortages, and further supply chain disruptions due to news of restrictive measures in Europe to contain the spread of Omicron. Volatility surged with the uncertainty over the severity and transmissibility of Omicron and the effectiveness of existing vaccines against the variant. Markets remained highly volatile towards month-end and moved in line with news flow on the variant, with the VIX volatility index rising significantly.
U.S. equities provided the strongest monthly performance of the major developed equity markets, declining 1% as measured by the MSCI USA index. President Biden signed a long-awaited $550 billion infrastructure bill to upgrade America’s roads, bridges, and railways and deploy electric vehicle charging stations across the country. Defensive sectors outperformed cyclical sectors and growth outperformed value by a large margin. This rotation led to U.S. equities outperforming non-U.S. indices. The U.S. dollar also rallied on higher interest rates.
File:October, 2021
Following September’s sell-off and a slow start to the month, equities regained momentum throughout October with many indices around the world hitting new highs. Inflation, monetary tightening, and supply chain woes continue to be a drag on global growth in the short term, but a strong start to the Q3 earnings season made investors look beyond all that. The U.S. outperformed global markets by a significant margin. At the end of October, just over 50% of the listed companies in the U.S had reported their earnings and of these 80% had exceeded market expectations, capping off one of the best starts to a U.S. earnings season on record. Some of the strongest returns in the month came from the consumer discretionary and energy sectors.
In Europe, global supply constraints, rising inflation pressures, and concerns of natural gas shortages weighed on investors at the beginning of the month. These concerns faded however as the European Central Bank (ECB) reiterated that it expected the current rise in inflation to be transitory and fuel prices declined after Russian President Putin called for Gazprom to start filling European storage facilities.
File:September, 2021
The global equity markets’ streak of seven straight months of positive performance ended abruptly in September. The Fund’s benchmark returned -2.3% for the month while the Fund returned -3.7% , the underperformance being mainly due to the Fund’s overweight in Europe.
Emerging markets outperformed developed markets as the MSCI Emerging Markets Index was -4.0% vs. the MSCI World Index that ended the month -4.2%.
Individual stock selection and currency were the main drivers of negative performance versus the benchmark in September. Approximately 78 bps separated the top contributor and largest detractor. As of 30th September, the top 10 holdings accounted for approximately 29% of the Fund’s assets, with the largest position approximately 4.3% of the portfolio. Regional and sector exposure remained relatively unchanged month over month. Underperformance relative to the benchmark was due to the Fund’s overweight in Europe.
File:August, 2021
The Fund returned +1.8% in August, underperforming the benchmark return of +3.1%.
Global equity markets ended August with another positive month of performance, pushing their streak to seven straight months in the black. Global markets were driven by strong performance in US equities as investors reacted positively to the speech from Federal Reserve Chairman Jerome Powell at the Jackson Hole symposium. Powell was cautious in his commentary, stating that while the US economy had made progress on some important targets, specifically on inflation, tapering too aggressively could derail progress. Powell’s ‘dovish’ statements overshadowed growing cases of COVID-19 due to the Delta variant and the worries surrounding Hurricane Ida.
In Europe, investor optimism continued as corporate earnings in the region recovered further as vaccinations increased and the economy continued to reopen. The Delta variant continued to spread, but most large Eurozone countries have now vaccinated around 70% of their populations against the virus. Given this backdrop, European sell-side analysts raised their earnings estimates at a historically high rate.
File:July, 2021
The global equity market had its sixth consecutive month of positive performance in July as the year-long rally continued. Investors continued to shake off inflationary concerns and remained optimistic due to strong corporate earnings, positive economic indicators, and unwavering support from central banks. Despite an uptick in COVID-19 cases linked to the Delta variant, the continued reopening of economies in developed markets led to positive market returns. Developed markets led by the United Kingdom, United States, and continental Europe, finished in positive territory.
In the US, investors weathered a choppy month due to inflationary fears and the continued spread of the Delta variant. Broad-based indices were positive on the month, bolstered by positive corporate earnings. As July closed, 221 Standard & Poor’s 500 companies had reported, with 91 percent of those beating Wall Street’s estimates. In Europe, concerns over the resilience of the economic recovery tested support for the major indices, resulting in mixed results across the region. Overall, the Eurozone ended the month up 1.79% as measured by the MSCI Europe Index. Despite a continued rise in new COVID-19 cases, vaccine rollouts accelerated with Spain, Italy and Germany all overtaking the US in terms of the share of people fully vaccinated, boosting hopes that rising cases of the Delta variant would not necessarily lead to further lockdowns and restrictions on economic activity.
File:June, 2021
The Fund returned +3.8% in June, outperforming the benchmark return of +3.6%. ndividual stock selection was the main driver of the Fund’s performance in June. Approximately 97 bps separated the top contributor and largest detractor. As of 30th June, the top 10 holdings accounted for approximately 29% of the Fund’s assets, with the largest position approximately 4.3% of the portfolio at the end of the month. Regional and sector exposure remained consistent month over month. The Fund continues to be overweight small to mid-cap names vs. the benchmark.
File:May, 2021
The Fund returned +1.67% in May, outperforming the benchmark return of +1.19%.
Positive economic data and continued assurances from the ECB of unwavering support also contributed to the upside in May. Asian markets were up slightly on the month with India leading the way. Despite the huge resurgence of COVID-19 in India, the Nifty 50 rose 6.5% with investors optimistically looking forward as infection rates slowly declined. Japanese equities were slightly up on the month, buoyed by a recent decline in COVID-19 cases.
Individual stock selection and currency were drivers of the Fund’s performance in May. Approximately 91 bps separated the top contributor and largest detractor. As of 31st May, the top 10 holdings accounted for approximately 29% of the Fund’s assets, with the largest position approximately 4.8% of the portfolio at the end of the month. Regional and sector exposure remained consistent month over month. The Fund continues to be overweight small to mid-cap names vs. the benchmark.
File:December, 2020
The Fund returned 3.3% in December, outperforming the benchmark return of 1.5%.
Global equity markets finished the year strong, capping off one of the most volatile years in recent memory. Despite the bleak backdrop of rising COVID-19 cases around the world, markets continued to surge on the hope that the end of the global pandemic was in sight. In the US, despite a record number of COVID-19 cases and political disarray, equity markets ended the year on a positive note. Stocks rose, spurred by the rollout of multiple vaccines and the signing of another stimulus package. The Federal Reserve’s commitment to low-interest rates continued to weigh on the US dollar as it continued to fall against the major currencies. In Europe, COVID-19 cases continued to rage and the discovery of a new more contagious strain of the virus in the UK moved the country back into full lockdown. However, the UK was the first country in Europe to distribute vaccinations which helped buoy investor sentiment. The UK and European Union arrived at a last-minute Brexit agreement, averting any major trade disruptions going into early 2021.
Asian equity markets were positive despite a similar social backdrop as the rest of the world. In China, the market rose but underperformed the region as sentiment was dampened somewhat by the continuity of US-China tensions. In December, the Trmp administration blacklisted China’s top chipmaker, Semiconductor Manufacturing International Corp. (SMIC), China’s largest offshore oil and gas producer, China National Offshore Oil Corporation (CNOOC), and 60 other Chinese companies, claiming that they exploit US technology for malign purposes. Emerging equity markets enjoyed a strong end to 2020 by extending their healthy year-to-date gains. A weakening dollar helped emerging markets during the month. Emerging markets outperformed developed markets in December as the MSCI EM was up over 7% while the MSCI World returned just over 4%. Small caps outpaced large caps globally as the MSCI ACWI Small Cap Index was up 7.5% while the MSCI ACWI was up 4.5%
Individual stock selection was the main driver of the Fund’s outperformance in December while currency was a positive driver. Approximately 103 bps separated the top contributor and largest detractor. As of 31st December, the top 10 holdings accounted for approximately 34% of the Fund’s assets, with the largest position of approximately 4.2% of the portfolio at the end of the month. Regional and sector exposure remained consistent month over month. The Fund has outpaced the benchmark 11 out of the past 15 months. Over the past year, the Fund’s upside capture has been 116% while the downside capture has been 99% vs. the benchmark generating approximately 4.1% of alpha.
File:asset_class: Foreign Equity
asset_category: Equity World Mid/Small
peer_benchmark: Foreign Equity - World Mid/Small Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: PCL0022AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
Monthly Report
Note: There is no PDF..
fund_features:
Pengana Global Small Companies aims to obtain returns greater than the MSCI All Country World Index SMID Cap unhedged in Australian dollars (‘Index’) over rolling 3 year periods after fees.
- The Fund invests principally in small and mid cap listed (or soon to be listed) global equities.
- The Fund’s investment manager uses a value-oriented investment approach to small and midcap global equities that seeks to identify and invest in quality businesses that create significant value but are mispriced, overlooked or out-of-favour. The investment manager believes that unique opportunities exist due to limited available research, corporate actions or unfavourable investor perception.
structure: Managed Fund