September, 2023
• Global share markets continued to weaken during September as long-term bond yields increased and the economy slowed.
• Growth stocks underperformed the broader market and interest rate sensitive stocks, such as information technology and real estate, were particularly weak.
• The Fund returned -4.6% in September, while the benchmark returned -3.8%.
Market Review
The global equity market sell-off which began in August continued through September. The US share market performed particularly poorly after continued strong economic data led the Federal Reserve to declare that it may need to keep interest rates higher for longer.
This pushed up ten-year US Treasury yields to levels not seen since 2007, denting the appeal of equities. The sectors most sensitive to rising interest rates, such as information technology and real estate, underperformed the most.
Japan’s stock market declined nearly 2% but was still the strongest-performing region. The Tokyo Stock Exchange’s January drive to reform capital allocation at companies with lowly valued shares continued to capture investor and management attention.
Meanwhile, hints from the new Bank of Japan Governor Kazuo Ueda that the country’s two-decade-long zero interest rate policy may soon be at an end further fuelled market sentiment.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-30-09-2023-pengsh.pdfAugust, 2023
• Global share markets were weaker in August across most sectors and regions as the global economy continued to slow and inflationary pressures persisted
• US dollar strength and China’s sluggish economy brought a weaker Australian dollar, boosting returns in AUD terms
• The Fund returned 0.6% in August, while the benchmark returned 1.1%
Market Review
Global equity markets suffered a broad sell-off in August, as some of the gains of recent months were unwound.
Signs of stubbornly high inflation brought concerns that global interest rates would be kept elevated for an extended period. This particularly impacted sentiment in the North American and European share markets.
Almost every region and sector made negative returns in local currency terms. The only exception was the energy sector, which outperformed after oil prices rebounded following production cuts by Saudi Arabia and Russia.
A faltering economy and continued weakness in its highly leveraged property sector pushed Chinese stocks lower.
This weakened demand for materials and manufactured goods across global markets.
Technology and consumer stocks were generally weaker during August. However, the Fund’s holdings in businesses that are exposed to innovation in artificial intelligence (AI), such as Nvidia, Alphabet, and Amazon, continued to perform relatively well.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-31-08-2023-pengsh.pdfJuly, 2023
• Global share markets strengthened in July as inflationary pressures eased across developed economies and China indicated it would stimulate its sluggish economy
• Big tech companies performed well upon ongoing AI-related excitement, while lower quality stocks outperformed upon optimism that the US will avoid recession
• The Fund returned 1.5% in July.
Market Review
Global equity markets performed strongly in local currency terms during July. The US Federal Reserve increased interest rates by 0.25% to 5.25% – 5.50% in a move which was seen by some investors as the final interest rates hike in this cycle as inflationary pressures ease.
In Emerging Markets, China’s share market surged nearly 11% as the government unveiled a series of measures which are intended to boost domestic consumption. International stocks in the materials sector rallied on the prospect of a recovery in China that will boost activity in its construction industry. Meanwhile, enthusiasm for the prospects of companies with business models aligned to innovation in artificial intelligence (AI) brought strong outperformances by some stocks in the communication services sector.
Having contributed to relative performance during the first half of the year, the Fund’s quality style detracted from returns in July. The lowest quality quintile of companies in the MSCI ACWI Index (i.e. the bottom 20% of stocks, which the investment manager ranks on quality characteristics such as profitability, balance sheet strength and earnings growth) is a segment in which the Fund is underinvested. However, it outperformed the highest quality quintile by over 4.0% during July. This reflected optimism that the US will avoid a recession following publication of more resilient economic data.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-31-07-2023-pengsh.pdfJune, 2023
Global share markets rose this month, with all sectors and major regions recording positive performance. In the US, the Federal Reserve paused its rate-hiking campaign, while simultaneously suggesting that two more hikes of 0.25% later in the year may still be necessary. Monetary conditions in other parts of the world continued to tighten, however, with the European Central Bank increasing its main interest rate to address persistent regional inflation.
Meanwhile, China’s central bank—facing a stalled economic rebound—chose to loosen its key lending rates, and the Bank of Japan maintained its ultra-accommodative policy despite signs of nascent inflation. Commodities rebounded substantially in mid-June; however, this resurgence lost steam, primarily due to increasing apprehensions about the health of the Chinese economy.
Following a very strong run this year, and boosted by investor optimism surrounding artificial intelligence (AI) in May, some of our Information Technology (IT) holdings including US chip design software company Synopsys and US tech giant Alphabet gave back some gains in June.
Our Health Care holdings continued to outperform, with UK-based biotechnology company Abcam up over 50% on the month as the company announced that it had received acquisition inquiries from multiple parties.
We recently initiated a new position in US-based cosmetics company Estée Lauder. The company has been struggling post-pandemic, with a severe inventory glut in products sold at travel hubs in China and South Korea.
The company’s US-centric R&D and manufacturing capacity have led to a long and inflexible supply chain for Asia that complicates its ability to address its excess inventory problems. However, the company has recently taken steps to remedy this, opening a state-of-the-art R&D centre in Shanghai and announcing plans to open its first Asian manufacturing plant in Japan in 2023. These actions, coupled with Estée Lauder’s continued strength in product innovation and consumer brand appeal, should help it overcome its current challenges and sustain long-term growth.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-30-06-2023-pengsh.pdfMay, 2023
The Fund benefitted in May from its overweight exposure to information technology and communication services. These sectors outperformed the broader market as investors focussed on opportunities which AI is expected to deliver.
However, the Fund’s largest active weight is in health care, where as in the tech sectors, secular growth trends and innovation create opportunities but also attract competition. The Fund holds several biotech companies, a segment traditionally characterised by weak profitability. However, strong research and development by companies in the Fund has helped generate strong cash flows. This has been achieved by developing next-generation treatments that meaningfully improve the standard of patient care ahead of competitors. High levels of trust in established brands enables these first movers to capture new markets, delivering early commercial success. These factors contributed to the Fund’s health care positions outperforming during May.
US-based biopharmaceutical group Vertex Pharmaceutical’s new triple-combination therapy is extending its dominance in the treatment of cystic fibrosis. US pharmaceutical company AbbVie, a leader in arthritis treatment, known for its blockbuster Humira antibody, has also developed next-generation products Rinvoq and Skyrizi (which are also used to treat psoriasis).
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/monthly-31-05-2023-pengsh.pdfApril, 2023
Global share markets strengthened in April as economic data remained resilient and company earnings exceeded investor expectations.
Australian dollar weakness supported share market returns in AUD terms.
The Fund returned 2.2% in April, while the benchmark returned 2.8%
File:March, 2023
Global share markets strengthened in March, led by large US tech stocks, but offset by weakness in the banking sector.
Australian dollar weakness supported share market returns in AUD terms.
The Fund returned 1.8% in March, while the benchmark returned 3.8%.
File:February, 2023
Global share markets weakened in February as signs of growing inflationary pressures led to expectations that interest rates have further to rise than previously expected.
Lower global share markets were offset by a weaker Australian dollar.
The Fund returned 0.5% in February, while the benchmark returned 1.5%
File:January, 2023
Global share markets strengthened in January as falling inflation led to expectations that interest rates are now nearing the peak of the current cycle.
China stocks continued to rebound as its economy re-opened following the ending of Covid lockdowns, which supported emerging market shares more broadly.
The Fund returned 4.8% in January, while the benchmark returned 3.1%
December, 2022
Global share markets fell in December upon central bank comments which suggested global interest rates have further to rise and will remain elevated throughout 2023. Chinese stocks continued to rebound as the zero-Covid policy was abruptly unwound, raising hopes this will support the global economic recovery. The Fund returned -5.5% in December, while the benchmark returned -5.1%
File:November, 2022
During November, the Fund outperformed the benchmark by 1.1% as global value stocks outperformed growth.
All market sectors posted positive returns. The Fund benefitted from the underweight position in energy, but the overweight positions in cash and materials and the underweighting to healthcare detracted from relative returns.
The Fund’s outperformance was driven by strong stock selection across most sectors, but especially in information technology and consumer discretionary.
The Fund continues to find high quality, durable growth companies in the healthcare sector. The eye care industry is characterized by high barriers to entry, fewer participants and good long-term growth prospects driven by an aging population. Yet stocks in this segment remain generally underappreciated by investors.
File:October, 2022
Equity markets rebounded strongly in October as company earnings showed resilience. Investors are turning their attention to an eventual easing of the speed of interest rate increases as the global economy shows signs of slowing. The Fund returned 4.1% in October, while the benchmark returned 6.6%
File:September, 2022
Global equity markets fell in September upon expectations of higher for longer interest rates after the US Federal Reserve increased rates by 0.75% The more defensive Health Care, Consumer Staples, and Materials sectors outperformed the market, while interest rate-sensitive sectors such as Real Estate and Communication Services underperformed In September the Portfolio returned -3.6%, in line with the MSCI All Country World Total Return Index.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/Screen-Shot-2022-10-24-at-18.12.08.pngAugust, 2022
Global equity markets fell in August upon expectations of higher for longer interest rates and rising geo-political uncertainty Energy was the only sector to deliver positive returns during August, reflecting Europe’s strong demand for non-Russian natural gas, while Health Care, and Information Technology underperformed; Emerging Markets were the strongest region, while Europe was the weakest In August the Fund returned -3.2%, while the MSCI All Country World Total Return Index returned -2.0%.
File:July, 2022
Global stocks delivered their strongest monthly gains in July for almost two years, partially reversing the market falls seen during the first half of 2022. Information Technology was the best-performing sector, and the US was the best-performing region. This reflected strong investor interest in fast-growing businesses and the potential slowdown in the pace of US Federal Reserve interest rate increases. In July, the Fund returned 7.5%, outperforming the MSCI All Country World Total Return Index by 2.1%.
File:June, 2022
Global markets fell in June as inflation reached a 40-year high in both the US and Europe.
Amid strong style headwinds and economic uncertainty, we continue to find opportunities to purchase high-quality, growing businesses. The Portfolio’s overweight in Health Care was a contributor to relative returns as Health Care stocks significantly outperformed the broad index.The Fund fell -4.0% in June, outperforming the Index (MSCI All Country World Total Return Index (net) in $A) which fell -4.5% for the same period.
File:May, 2022
Relatively flat returns in May belied the volatility during the month The style-headwinds experienced by high-quality, fast-growing companies continued unabated through May Amid strong style-headwinds and economic uncertainty, we continue to find opportunities to add to our ownership of high-quality, growing businesses whose current share prices fail to reflect their underlying value.
Amid strong style headwinds and economic uncertainty, we continue to find opportunities to add to our ownership of high-quality, growing businesses whose share prices fail to reflect their underlying value. One is Schneider Electric, a French electrical component specialist. Schneider helps its industrial and other commercial customers capture real-time data, with a focus on measuring and evaluating electricity consumption to identify and implement energy efficiencies to save money and lower carbon emissions. While Schneider is not immune to economic cycles, we expect rising energy prices and demand for energy efficiency projects will lead to sustained growth over the long run. We’ve added to our holding in the company several times this year, most recently in May.
File:April, 2022
Continued geopolitical and economic headwinds, particularly for the quality growth holdings targeted by the strategy. New positions added to benefit from de-globalisation and industrial onshoring. Notwithstanding compelling company fundamentals, Chinese exposure was reduced due to increased country risk concerns.
Markets have been buffeted by stubbornly high inflation, aggressive interest rate hikes, the ongoing war between Russia and Ukraine, and COVID-19 lockdowns in China. The MSCI ACWI Index declined by 8%, the worst monthly performance since the onset of the COVID-19 pandemic in March 2020. Growth stocks led the way down, continuing their year-to-date underperformance — the MSCI ACWI Growth Index has declined nearly 20% in 2022. Declines were broad across sectors and regions. The US performed the worst due to the sharp decline in technology stocks; the NASDAQ Index had its worst month since October 2008.The Portfolio fell -6.5% in April, compared to the Index (MSCI All Country World Total Return Index (net) in $A) which fell -2.8% for the same period.
File:March, 2022
The Pengana Harding Loevner International Fund fell -by 1.9% in March, compared to the MSCI ACWI (Total Return in AUD) which fell -by 1.3% for the same period.
The Fund seeks to invest in a global portfolio of high-quality and rapidly growing companies at reasonable prices. In a quarter during which investors fled from growth companies, our portfolio experienced significant underperformance. Unfortunately, our focus on quality businesses further detracted from returns as the highest quality companies also underperformed the lowest quality companies through the quarter. The worst performing holdings in our portfolio this quarter were concentrated in the healthcare and technology sectors, which have historically provided rich investment opportunities. Notwithstanding the current headwinds, we expect them to continue to do so for the foreseeable future.
File:February, 2022
The Pengana Harding Loevner International Fund fell -7.3% in February compared to the MSCI ACWI (Total Return in AUD) which fell 5.4% for the month.
Already coping with rising inflation and the prospect of further interest rate increases, investors were stunned by Russia’s invasion of Ukraine at month-end. Strong punitive sanctions from Western nations against Russia lead to the closures of the Russian domestic stock markets, and deep declines in shares of Russian companies traded elsewhere. Oil and commodity prices soared, benefiting Energy and Materials, the two strongest-performing sectors over the month which was a headwind relative to the benchmark as we have no exposure to materials and very little exposure to energy in our portfolio. Information Technology lagged as software companies reported slowing growth due to subsiding COVID-induced demand. By region, countries rich with natural resources performed relatively well, including Australia and South Africa.
The Global Equity strategy was largely shielded from the direct impacts resulting from the Russian invasion of Ukraine, as it had no holdings based in either country. However, we did have indirect exposure to the region through EPAM, a US-headquartered IT services company that has over half its engineers based in Ukraine, Russia, and Belarus. We sold our shares of the company in late February; as tensions rose as we grew concerned that EPAM’s customers, including many US-based corporations, would become increasingly reluctant to entrust their digital transformation programs to EPAM. Our Financials holdings were a bright spot; in late January, US commercial bank SVB Financial raised its already strong guidance for 2022, boosting share prices.
In Communication Services, shares of Meta Platforms declined sharply after the company announced a rare decline in profits. The company also warned of slowing growth due to rising competition from Tik Tok and changes to Apple’s privacy features. Our analyst met with Meta following the announcement to better understand the company’s plan to navigate potential headwinds and to confirm that the company continues to meet our quality-growth criteria. We believe that Meta should be able to adapt to Apple’s privacy settings and continue to generate revenues from ad sales, albeit perhaps at a lower level. Our analyst remains impressed by Meta’s effective development and use of AI, which will help Facebook continue to innovate, diversify, and grow. In Information Technology, PayPal shares fell after the company delivered surprisingly weak guidance on future new user growth. PayPal management withdrew its medium-term user growth targets as it shifts its focus to deriving more revenue from its existing user base. We are actively evaluating the investment implications of the revised guidance. We currently believe our investment thesis for PayPal remains intact and that the company should continue to meet our growth criteria. However, we have lowered our long-term revenue and earnings growth forecasts, and continue to debate PayPal’s expected post-pandemic growth rate.
File:January, 2022
It was a rocky start to 2022, with the Fund declining -6.9% in January, underperforming the benchmark (MSCI All Country World Total Return Index) which declined by -1.9% (AUD$). While a short-term market correction is not particularly noteworthy, the performance differential between stocks with different growth and value characteristics was significant and explains our underperformance relative to the benchmark. In January, the performance differential between the “fastest growing” and the “cheapest valuations” diverged by a margin rarely seen in such a short time period, with value outperforming growth by nearly 7.5%. This is the largest margin in more than 20 years. All major regions posted negative returns during the month, while Energy and Financials, aided by expectations of rising rates and higher oil prices, were the lone sectors to rise.
File:December, 2021
The Global Equity strategy underperformed its benchmark in December. By style, our focus on growth detracted, as shares of the fastest-growing companies significantly underperformed both the broad market and their slowest-growing peers. Additionally, shares of the least-expensive companies significantly outperformed the broad index and their most-expensive peers, a headwind for the strategy during the month.
By sector, weak stocks in Information Technology, Financials, and Health Care detracted from relative returns. US software developer Adobe declined despite reporting strong earnings, as management issued disappointing guidance for next year in anticipation of slowing growth. In Financials, our significant overweight in US-banks SVB Financial and First Republic Bank detracted as shares of both companies declined slightly during the period. In Health Care, two Chinese companies—pharmaceutical R&D services platform WuXi AppTec and biologics service provider WuXi Biologics—detracted as new Chinese regulatory standards for approving oncology drugs continued to weight on investor sentiment toward the stocks of drug developers. Our overweight in Health Care and underweight in the lagging Consumer Discretionary sector were helpful.
File:November, 2021
In November 2021, the Fund returned 3.3% compared to the MSCI ACWI (Total Return in AUD) which rose 3.4% for the same period. Financials stock selection helped due to the strong performance of Tradeweb, an electronic fixed income marketplace, which reported strong trading volume growth.
Health Care performance was relatively weak. Despite reporting strong earnings, shares of genetic sequencing company Illumina fell as the EU ordered Illumina to not consolidate its recent acquisition of GRAIL, a provider of cancer-tracing blood tests. European stock-picking helped as Schneider Electric shares gained after management unveiled higher organic growth targets. Emerging markets stock selection detracted as Chinese property manager Country Garden Services fell on news it will raise capital for acquisitions.
File:October, 2021
In October 2021, the portfolio returned 1.4% compared to a market return of 1.1% for the same period.
October Attribution:
1) Our US banks, First Republic Bank and SVB Financial Group, both reported robust growth while maintaining strong credit quality. 2) Alphabet shares gained after the company reported strong advertising revenue growth, overcoming fears it would be adversely impacted by Apple’s data privacy changes. 3) In China, a shift in sentiment back toward many companies whose shares had dropped following sweeping government regulatory changes earlier this year boosted NetEase. Conversely, our Health Care holdings WuXi Biologics, a contract biologics manufacturer, and WuXi AppTec, a pharmaceutical R&D services platform, declined.
File:September, 2021
In September 2021, the portfolio retracted -4.1% compared to a market decline of -3.0% for the same period.
The Global Equity Fund lagged the benchmark, the MSCI All Country World Index, primarily due to weak holdings in Information Technology (IT) and Consumer Discretionary. Strong stock selection in Health Care proved helpful during the month.
In IT, Dutch payment-processing business Adyen declined to absent any specific news, apparently caught in a shift from more expensive, long-duration growth companies in response to expectations of higher interest rates. Another case was US software developer Adobe, whose shares declined after recently reporting another quarter of strong earnings growth that nevertheless did not satisfy investors’ elevated expectations. In Discretionary, US sportswear manufacturer Nike cut its sales guidance due to supply-chain challenges, specifically the closure of factories in Vietnam due to COVID-19 outbreaks.
In Health Care, Chinese pharmaceutical contract development and manufacturing company Wuxi Biologics reported strong results for the first half of the year, with revenues up 127% and net profits up 163%, both year-over-year. The company is running at full capacity with a strong backlog of projects. Japan’s Sysmex, a manufacturer of blood-testing instruments has also recently reported good results, with rising revenues and margins.
By region, stock selection in the US weighed on relative returns. Key detractors included Adobe and Nike, as well as life science products and services company Illumina. The company’s shares continued to decline after it announced last month it had completed its acquisition of GRAIL (leader in the new field of liquid biopsies) without EU regulatory approval. This action may subject Illumina to future regulatory action. The portfolio’s underweight in Japan also hurt performance versus the benchmark.
File:December, 2020
2020 was a good year for the Fund, which delivered 18.7% vs the Benchmark’s 5.9%. There was no one single bet that drove the performance, but rather the continued dogged application of our long-term strategy.
While we can’t know in advance how our strategy will perform in any single year, we have a high degree of confidence that it will perform well over the long term. Over the past five years, the Fund delivered a total return of 77.1% (12.1% p.a.) with a volatility of 8.8% p.a. These outcomes compare favourably with the Benchmark’s 68.1% total return (10.9% p.a.) with a volatility of 10.5%. We have not done everything perfectly, but we have always stuck to our process, learned from our mistakes and we are pleased with the outcome.
In simple terms, we seek to create a diversified portfolio of highly cash flow positive companies that are well-positioned to grow, reasonably valued, and unlikely to blow up. This involves bottom-up and top-down considerations and, as we have regularly commented on in these pages, the interest rate environment is one of the thorniest considerations.
Abnormally low-interest rates have been the most important factor governing financial markets for over ten years. Initially, these rates rescued debt markets. Subsequently, they fuelled a massive rise in traditional asset classes, which spilled over into non-traditional asset classes. This has been a once in a lifetime boom for asset owners, but has it been a massive boom for society and the economy at large?
We think the interest rate environment has been a bust for society and the economy and is fuelling material risks. Our primary concerns include: (i) the yawning gap between the haves and have nots; (ii) less productive economies; (iii) excessive risk-taking.
Our 2Q20 quarterly (available here) discussed the growing wealth divide caused by low-interest rates. In summary, low-interest rates have fuelled asset prices, increasing the wealth of asset owners. However, there are relatively few asset owners and most of society has not participated in this wealth impact. The rich got richer and the rest of society has been left behind, which has contributed to global social unrest.
Reinforcing the wealth gap is stagnant wages in developed countries. This is partly explained by weak corporate productivity, which we believe can also be partly traced to the low-interest rate environment. In an environment where capital is almost free, unprofitable companies can survive. Some of these businesses are exciting start-ups, which is a positive, but in many cases, they have established businesses that are manifestly uneconomic but survive on the graciousness of low-interest rates.
The uneconomic companies do not generate sufficient economic profit to warrant survival. However, with interest rates so low, they can fund their day-to-day operations and interest expenses but are unable to invest in growth or repay their debt. They are sometimes described as ‘Zombie’ companies and just like their horror story brethren, they suck the life out of an economy.
Before discussing the impact of Zombie companies, we should scale the issue. According to a Bloomberg analysis[1] as at Nov-20, roughly 25% (739 companies) of the US’s 3000 largest publicly listed companies were Zombie companies, and they were sitting on an unprecedented $2 trillion of debt (Figure 1). Many of these companies are the walking wounded, rather than the walking dead, but the figures are so staggering that the punchline remains unchanged. The conclusion is even starker when we consider that the analysis doesn’t include smaller companies, which are typically more thinly capitalized than their larger peers. There is clearly a proliferation of Zombie firms in the US, and (we can safely assume) in most other economies that have similarly low-interest rates.
File:asset_class: Foreign Equity
asset_category: Large Growth
peer_benchmark: Foreign Equity - Large Growth Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: PCL0026AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://pengana.com/our-funds/harding-loevner-international-fund/
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fund_features:
Pengana International aims to obtain returns greater than the MSCI All Country World Total Return Index (net, AUD) (‘Index’) and with lower volatility than the Index, over the medium to long term. The strategy focus is to consistently generate excess returns by investing in highly cash flow generative companies with favourable outlooks that are trading at attractive valuations. While these opportunities are scarce, they are available in a variety of businesses, which can be identified and acted upon with rigorous research in an environment of intellectual freedom and strong risk management. To encourage this environment we apply a portfolio segmentation strategy that divides opportunities into Core, Cyclical or Opportunistic investments.
structure: Managed Fund