September, 2023
The Barrow Hanley Global Value strategy outperformed the MSCI World Index in September. The portfolios’ underweight to the Information Technology sector and overweight to the Energy and Financials sectors combined with effective selection in the Financials, Consumer Discretionary, Industrials, and Utilities sectors were the primary contributors to relative returns. Regionally, the portfolios’ overweight to the UK and effective selection in the U.S. and continental Europe were primary drivers to the strong relative returns.
After underperforming in the month of August, HSBC Holdings Plc was among the top contributors in September. At several industry conferences, HSBC’s management reiterated that credit costs related to the company’s Chinese real estate loan portfolio should remain manageable. In addition, one-month HIBOR rebounded meaningfully, which should support loan yields and net interest margin going forward. Management continues to execute on simplifying the business and exiting non-core/lower-returning businesses while controlling expenses and returning excess capital to shareholders.
Cigna Group benefited from the strength in Health Care stocks in September, up strongly in a down market. Cigna noted in the month that health care utilization trends are tracking in line with expectations of its current guidance, likely helping to provide some positive sentiment around the stock. We continue to see Cigna trading at a meaningful valuation discount to its peers.
Southwest Airlines Co. underperformed in September as the company guided lower on higher fuel costs and lower revenue per available seat mile (RASM). During the month we reduced our position in the security as we look to monitor whether the headwinds Southwest is currently facing are temporary and adjustments being made by company management will be able to overcome these headwinds. Oracle Corporation underperformed in September in sympathy with the Information Technology sector combined with its having reported a mixed quarter in the month. As the stock had been a very strong performer in the portfolio, we sold our position in the month.
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Challenging stock selection in the Financials, Consumer Discretionary, and Health Care sectors offset effective selection in the Industrials and Consumer Staples sectors. The portfolios' overweight to the Materials and Utilities sectors detracted further from relative returns while an overweight to Energy benefitted relative returns. Regionally, challenging selection in the portfolios' emerging markets and U.S. holdings detracted from relative returns, offsetting effective selection in continental Europe and Japan.
Vertiv Holdings Co. Class A continued its strong performance in the month of August. Vertiv has benefitted from the excitement around Artificial Intelligence (AI) and, after reporting strong results earlier in the month, received an additional boost with NVIDIA posting strong results and comments about strong demand and positive comments around data center operators.
BAE Systems plc performed strongly in August, reporting very strong first half year results with EPS beating by 13%. Both near- and medium-term guidance have been upgraded and the company's buyback program has been extended/increased. BAE also announced the acquisition of Ball Aerospace in the month. This potential deal has been rumored for some time and appears strategically sound, though there is some risk with the integration of the new asset which we will watch closely.
Banco Bradesco SA Pfd underperformed in August as the company posted disappointing results early in the month. Net income was in line with expectations, though was boosted by a low effective tax rate as pretax income was -8% below consensus. Further, operating results for both loan growth and net interest income (NII) were softer than expected. Despite disappointing results, we remain comfortable with our position as we expect better results in the second half of the year.
Ralph Lauren Corporation Class A detracted from performance last month despite posting better-than-consensus results with EPS up 24% year-over-year. The company largely maintained full year guidance, though the market perceived September quarter guidance as soft which pressured the stock lower. We recognize that the softer guidance for the quarter is due to the company tilting more marketing spend this quarter relative to a year ago, which does not raise concerns about our investment thesis.
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Portfolio changes in July were modest, with reductions to the weightings in the Consumer Staples sector and redeployment of those proceeds to the Financials sector.
U.S. Bancorp was a top contributor in the month, as the U.S. bank reported better than expected core results driven largely by lower expenses.
While core deposits were down, we still see U.S. Bancorp as one of the strong capital generating banks in the US that will accelerate in 2024 as synergies from its purchase of MUFG Union Bank. Overall, the company continues to grow its loan book and has relatively little exposure to Office Commercial Real Estate.
Baidu, Inc. Class A – performed strongly in the month of July with improved sentiment around Chinese equities. Further, Baidu was aided by softening government rhetoric around technology and technology related stocks along with positive sentiment around improving ad recovery.
Aker BP ASA – performed strongly in the month of July benefitting from a strong recovery in oil prices but far outpaced the overall energy sector as it reported positive earnings in the quarter and raised production guidance for the year. Over the prior year, Aker appears to have been unduly impacted by the decline in European gas prices even though it only represents only a small portion of their production. Aker continues to trade at a compelling valuation with the ability to grow the dividend.
Merck & Co. Inc. underperformed in the month of July. Performance was not driven by any particular news in the market but likely impacted by its recent acquisition of Prometheus which will have a negative impact on non-GAAP EPS. It is worth noting that post month end, Merck announced a second quarter top line beat and raised their full year top line guidance. Southwest Airlines Co. detracted from performance this quarter as the airline posted in-line Q2 results as other airlines beat estimates. The main driver of underperformance was that Southwest lowered its guidance for the third quarter as the domestic travel market is weakening, and margins are compressing as revenue per available seat mile is not keeping up with expenses. The key for Southwest going forward will be keeping capacity growth in-line with demand, successfully completing labor negotiations, and the overall macro picture for domestic airline travel.
Seven & I Holdings Co., Ltd. underperformed in the month as the company reported a slight miss versus consensus and guidance as the street’s expectations for higher fuel margins needed to be adjusted lower though the company had signaled this well in advance. The company maintained its full year guidance.
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The Fund's largest overweight positions include Air Products and Chemicals Inc, Oracle Corporation and Seven & I Holdings Co Ltd. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.
Vertiv Holdings Co. Class A contributed positively to relative performance during the quarter due to the bullish sentiment surrounding AI stocks. As a leading supplier of equipment and technology to data centres, the company stands to benefit from increased spending on digital infrastructure for expansion and upgrades. Company management continues to execute its strategy to improve margins, reversing the cost headwinds from the prior year, and delivering on operational improvements and greater free cash flow conversion. Backed by sustainable growth in their end markets, Vertiv continues to trade at an attractive valuation as they build a profitable backlog and remain well positioned for future earnings growth.
Lithia Motors, Inc. outperformed in the second quarter. It is becoming increasingly clear to investors that our view that the company’s current earnings are durable, rather than substantially inflated, as many have argued. That growing recognition, alongside increased optimism about the economy in general, is driving the beginnings of a re-rating in Lithia’s stock. We continue to see the shares as deeply undervalued and earnings should grow materially in 2024. Lithia currently trades at a forward P/E of 9x.
Northern Trust Corporation underperformed in sympathy with banks facing expectations of deposit outflows. While the top-line results matched expectations, EPS guidance was a little lower for the full year on continued deposit pressure. Pressure on custody revenue continued driven by market trends, but servicing and wealth management showed solid organic growth in the most recent quarter. Capital remains robust and the diversified businesses mix coupled with low credit exposure relative to other financials suggests the bank trades at too large a discount (12x forward price to earnings).
Aptiv PLC detracted from performance after margins fell short of estimates in their most recent quarterly release. However, full year guidance was reiterated, and the stock stands to benefit as auto manufacturers’ production normalizes and increasingly demand their solutions for electrical systems and autonomous vehicles. Aptiv provides integrated power management solutions, which as a whole use less power, adding to electric vehicle efficiency, and improving their range, a key selling point to the end consumer. Valuation remains attractive as cyclical headwinds abate and electric vehicle production increases.
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During the month, we reduced our overweight to the Industrials sector by selling two stocks in the aerospace/defence industry. We also reduced our weighting to the Communication Services sector while increasing our weighting to the Utilities, Financials, and Consumer Discretionary sectors. We modestly increased our weighting to the Information Technology sector, though we altered our weighting within as we added to an existing holding and added a new name within the sector while modestly trimming two stocks that had performed well.
Among the top contributors in the month were Oracle Corporation and Vertiv Holdings Co. Class, both associated with the strong performance within the technology space. Vertiv is worth noting as the company clearly benefitted from the melt up in stocks associated with AI. Vertiv is a leader in cooling systems for data centres, particularly in liquid cooling systems, which will be in higher demand because of AI’s higher energy demands for computing. Aramark was a top contributor in May as the company announced strong operating results and raised full year guidance. The company continues to show acceleration in the business as EBIT grew faster than revenue and earnings per share grew faster than EBIT.
Allianz SE detracted from performance in May despite reporting solid results for 1Q2023 and announcing a new €1.5 billion share repurchase program. Allianz was likely impacted not only by the negative sentiment about the Financials sector in the month but also by investors digesting the new insurance accounting change to IFRS 17. Aptiv PLC reported slightly disappointing results in the month, with revenue and earnings per share slightly ahead of expectation while margins were slightly behind consensus. Full year guidance was reiterated, though the market was likely expecting an upgrade as there has been some strength seen in auto production. We continue to have confidence in the long-term tailwinds associated with the company. Air Products and Chemicals, Inc. posted good results in the month, with organic sales growth, total sales, EBITDA, and earnings per share all higher. The company reported in line with consensus but raised the low end of the guidance range. Air Products did report a decline in the backlog, which likely pressured the stock in the month. We continue to see strong upside to free cash flow, and Air Products continues to be a positive contributor to decarbonization and should be a beneficiary of this movement across the industries it serves.
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The Fund's largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.
Defence company Rheinmetall AG was top contributor in the month. Rheinmetall is benefitting from continued higher demand with the ongoing war in Ukraine. The stock has performed strongly since the time of purchase, but we believe further upside remains. As such, we continue to hold the security but took the opportunity in the month to take some profits in the stock along with our other defence holding, as noted below. Vertiv Holdings Co. Class A was a top contributor in February as Vertiv posted a record quarter in operating profits. Investor concerns about the impact of slowing cloud growth on data centre demand seem to have abated. Further, Vertiv has been able to improve its margins to historical averages, though we recognize that it may take several quarters of stable margins before investors feel comfortable that Vertiv can deliver.
Despite the strong performance, we continue to see a good risk/reward profile. Fidelity National Information Services, Inc./STRONG> was a top detractor in the month. The stock sold off after the company guided lower-than-expected earnings growth. We recognize that with a new management team the company wants to reset expectations, and we believe guidance is conservative. Further, the company announced it is planning to spin off the underperforming merchant segment. Finally, the company has announced additional cost savings over the next two years. As such, despite the stock’s challenging performance since our initial purchase, our bottom-up analysis and calls with management have given us confidence that the company offers not only a compelling valuation but a pathway for a re-rating in that value.
Air Products and Chemicals, Inc. underperformed in the month after announcing earnings below consensus. Earnings were at the bottom end of guidance as a result of macro weakness in Europe and COVID impacts in Asia. The company did maintain guidance for the year while also reporting merchant pricing up 19%, which highlights the company is overcoming inflationary pressure and getting additional pricing over higher inflationary costs.
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The Fund's largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Lithia Motors Inc. and Aptiv PLC, both in the auto space, were the top contributors in January after being the leading detractors in December.
The Automobile and Parts industry was the strongest performing in January, up nearly 31% in the month, with both stocks benefitting from this strong performance. With lower interest rates beginning to be expected for later in the year, lessening fear of a recession and lessening supply chain constraints were likely drivers to the more robust performance within this space. Both stocks continue to present a compelling risk/reward profile. After being among the top contributors in December, Merck & Co., Inc. underperformed in January along with another Health Care holding, Elevance Health Inc. Both stocks were challenged by the market rotation out of the Health Care sector after its stellar 2022 performance. Both companies continue to deliver excellent financial results, and we believe each still presents a strong risk/reward opportunity.
Allstate Corporation detracted from performance in the month as markets expected a challenging period for Allstate given December's winter storm Elliot and continued challenges in its auto book. Allstate has continued to face challenges that we are monitoring, but we currently feel our investment thesis, though delayed, remains intact.
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The Fund's largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Air Products and Chemicals, Inc. added to performance as the company posted another strong quarter of double-digit revenue and earnings growth. A new plant coming online in Asia helped volumes while pricing was strong globally, offsetting some of the recent cost inflation. Their backlog continues to grow and remains meaningfully higher than history, over US$21B now versus their entire company’s gross plant, property, and equipment of US$29B today. As the company executes on this backlog, distributable cash flow could more than double, and this embedded future growth remains underappreciated in shares today. Merck & Co., Inc. benefitted from the market’s tendency to favor more defensive sectors, as Health Care was one of the better-performing sectors in the quarter, with Merck doing better than peers. Strength in the quarter was not driven by any dramatic change in fundamentals, but rather by a steady progress on pipeline drugs and the earnings coming slightly ahead of expectations. The market also sensed a meaningful change in Merck’s commentary on M&A, now indicated as focused on collaborations and small tuck-in acquisitions rather than larger deals. We like this capital discipline. Despite the recent strong outperformance, we see the risk/reward profile sufficiently reasonable to continue owning the shares. Fidelity National Information Services, Inc. detracted from performance in the quarter as the company reported disappointing earnings in November driven by higher-than-expected costs, slowing revenue growth, and foreign exchange/interest expense headwinds from the stronger dollar and higher interest rates. Despite challenges for the stock price in the quarter, we remain positive on what we believe is a solid business following management change, board turnover, and an activist investor now helping drive shareholder value creation. The stock is compelling at approximately 10x forward price-to-earnings, a meaningful discount to where this business has historically traded. Medtronic Plc had two disappointments in the quarter, causing the stock to detract from performance. First, its 2nd renal denervation trial failed to hit the primary endpoint in the most recently conducted studies, thus creating a market controversy on the future revenues that can be expected from this blood pressure-reducing procedure. Additionally, the company announced results that missed on organic growth and guided lower top-line growth. Although disappointing, we believe the full renal denervation data combining all the trials is still compelling for a very prevalent condition in a difficult-to-treat population. We believe the company offers good long-term value within the Medical Devices group.
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The Fund's largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Air Products and Chemicals Inc.
contributed positively to relative returns in November after the company posted strong results early in the month that were ahead of consensus. Additionally, the stock has benefitted from positive sentiment about its hydrogen projects which are being seen as strong contributors to the reduction of greenhouse gas emissions. With Air Products’ leading edge in hydrogen, we believe the stock remains attractively valued. Ping An Insurance (Group) Company of China, Ltd. Class H and Baidu, Inc. Class A contributed to relative returns in the month after being among the top detractors in October. Both benefitted from the strong rally in Chinese equities in November, as noted earlier.
Ping An also benefitted in the month as it is more geared to the China re-opening trade and what appears to be policy support for the Chinese Real Estate sector. Advance Auto Parts, Inc. detracted from performance in the month as the company missed earnings estimates on the back of higher SG&A expenses. The increase in SG&A expenses are being driven by inflation in wages and fuel. Additionally, the company reported an FX hit of $.20 per share and expects a further headwind in 4Q of $.10. Accordingly, the EPS range was lowered. Given the more challenging environment for Advanced Auto Parts, we chose to exit the position in the month.
Fidelity National Information Services, Inc. underperformed in the month, largely due to an earnings miss reported in the first week of November. The miss was quite significant but the initial reaction from the market was very harsh, as the stock performed strongly off the lows of the month but remained down for the entire month. The stock has a number of cost and macro headwinds, but with the introduction of a new CEO/CFO team, we believe the steps planned are constructive. Though the stock may remain under pressure in the short-term as they work through several headwinds, we believe the long-term value remains compelling, but we are continuing to monitor it closely.
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The Fund's largest overweight positions include Merck & Co., Inc., Hess Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Hess Corporation was a strong contributor to performance in the month on the back of rising oil prices. Further, Hess reported stronger than expected earnings for the quarter, driven by higher realised prices and greater production volumes.
The stock has been a very strong performer over the last two years and although it has further upside, we did trim some of our position after these strong results as the stock had become a very large position in the portfolio. Oracle Corporation added to the strong relative returns in the month after underperforming in the prior month and handily outpaced its Information Technology peers. Veering from its usual routine, the company announced mid-term financial targets (targets out more than three years), which were well received by the market and did result in a sell-side rating upgrade. With high single-digit to low double-digit revenue growth, operating leverage (from Cerner synergies + scaling investments in the cloud) pushing margins back to the mid-40s, and a business that is more macro resilient than most, we believe the Oracle’s risk/reward profile remains very attractive. Our Chinese holdings Baidu, Inc. Class A and Alibaba Group Holding Ltd. detracted from performance, and not unexpectedly, given the challenges Chinese equities faced in the month.
However, Baidu did come under additional pressure with the announcement of the U.S. rules about selling high-end chips to Chinese companies. Further, Alibaba has been challenged with concerns regarding its revenue growth that we believe are temporary.
Despite the recent pressure, we continue to see a positive risk/reward profile for both these holdings. Seven & i Holdings Co., Ltd. detracted from performance in the month after posting in line results for the quarter. The move towards more cyclical stocks in the month was a headwind to performance and, with the strong performance in the prior months, the give back is not too surprising. Further, Seven & i raised its full year operating profit guidance which was not fully unexpected given the progress it is making in its North American operations, improvement in profits on gasoline sales and yen depreciation. We continue to see a compelling risk/reward profile and have maintained our holding accordingly.
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The Fund's largest overweight positions include Merck & Co., Inc., Hess Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.
Air Products and Chemicals, Inc. reported EPS +13% and $.01 ahead of consensus while reiterating guidance. This is the second quarter of steady results without the Europe gas cost or project timing noise seen earlier, which is leading to renewed interest in the company given its defensive secular growth profile. Further, with the passing of the Inflation Reduction Act, the climate provisions within the bill are expected to be a net benefit to Air Products. Despite falling oil prices in August, Hess Corporation contributed positively to performance in the month as the company reported better-than-consensus results. Further, Hess continues to be a solid story in the Energy sector as the Guyana asset growth will drive cash flow and earnings higher. The company has one of the best compounding stories in the Energy sector, with at least +20% CAGR for the next 4-5 years.
Aptiv PLC was challenged in the month given the negative market sentiment on cyclical stocks. In August, the company noted it expects second-half margins of 10%-10.5%, which is below expectations of 12% but well ahead of the previously realized margins of 5%-7%. Further, given the strong bounce from its lows in July, a pullback from the strong performance in this environment was not unreasonable. We continue to see the stock trading at very attractive valuations with high upside potential. Rheinmetall AG detracted from performance in the month despite reporting numbers in line with expectations. The primary cause of the shortfall appears to be that the company is expected to push its defence order intake further out. Consequently, Rheinmetall now expects 2023 defence revenue to grow -21%, which is at the lower end of its prior guidance. The stock continues to trade at an attractive valuation, and we remain positive on the name.
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The Fund's largest overweight positions include Merck & Co., Inc., National Grid plc, and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.
J.B. Hunt Transport Services, Inc. contributed positively to relative returns despite what appears to be a tougher economic environment. Driven by strong pricing in intermodal, the company reported strong results in the month, handily beating consensus earnings expectations. Company management continues to execute well on its long-term plan. Vertiv Holdings Co. Class A was a positive contributor in the month as it reported operating income of positive $13m, well ahead of guidance for a loss of $2orn and well ahead of consensus. Most of the beat was driven by better price/cost than previously expected, by more aggressive pricing in the distributor channel (where lead times are shorter), and lower material inflation than planned. With the stock previously challenged by mispricing due to higher inflation, we believe we are at an inflection point whereby the company is getting better control of its pricing, which should benefit margins and earnings going forward.
In a reversal from last month's strong performance, Rheinmetall AG and BAE Systems plc detracted from performance. We view this as a pause due to the very strong performance over the last several months, as BAE reported strong results in the month with record order intake, better margin expansion, and an announced buyback. Rheinmetall published a brief guidance update, noting organic sales growth at the lower end of its previous guidance and expected operating margins >11%. There may be some weakness in its automotive division, which would not be surprising in this market environment, but the defence business remains strong. Rheinmetall rallied post guidance, potentially signalling investor relief. We continue to be constructive on both holdings. Allstate Corporation detracted from relative returns in the month, posting negative underwriting results for the quarter. Cost inflation in automobiles is challenging for Allstate, as higher costs to repair vehicles are outpacing the company's ability to price policies higher in the near-term. Allstate began pushing prices higher at the end of last year, and we believe positive pricing will begin to accrue for Allstate in the next 12 months. Despite the pullback in performance, we remain positive on the stock.
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The Fund's largest overweight positions include BAE Systems Plc, Merck & Co., Inc., and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.
Merck & Co., Inc., a multinational pharmaceutical company, was a top contributor to relative performance driven by strong performance across its segments. Its animal health and vaccine franchises continued to deliver strong growth and look to continue to compound those results in the future. Given the sharp decline seen in smaller pharmaceutical firms’ valuations, management commented on remaining disciplined in terms of capital deployment. Within Merck’s pharmaceutical franchise, its key immuno-oncology drug Keytruda posted another solid quarter of growth. Dollar General Corporation, a leading discount retailer, was a top relative contributor in the quarter, benefitting from better-than-expected earnings results against its most challenging year-over-year comparison of the year. Margin headwinds from elevated transportation costs are easing as ocean shipping rates have fallen by more than a third since the beginning of the year. As well, Dollar General remains well positioned given its mix of sales is shifting back towards consumables versus non-consumables.
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The Fund's largest overweight positions include Seven & I Holdings Co., Ltd., Merck & Co., Inc., and Air Products and Chemicals, Inc. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.
Hess Corporation performed strongly in the month as the company reported 1Q2022 earnings at the end of April, which handily beat consensus estimates, $1.30 versus $1.13 per share. Further, Hess benefited from higher oil prices in May, with Brent crude up more than 13%. Electronic Arts Inc. is a recent addition to the portfolio and was a top contributor in May, largely on the back of posting solid fourth-quarter and full-year results during the month. Prior to our purchase, the stock was trading at eight-year lows with a strong library of franchise games and notable opportunities to further monetise them in the future.
SeaWorld Entertainment, Inc. detracted from performance in the month despite reporting very solid operating results. As a result, the stock suffered alongside the broader Consumer Discretionary sector and appeared to us to be more indiscriminate selling, as we believe the underlying fundamentals continue to be strong for SeaWorld.
Howard Hughes Corporation sold off alongside the sell-off in the Real Estate sector, despite reporting fourth-quarter earnings which showed improving trends. Notably, residential land acres sold were up meaningfully at higher prices, and retail collections improved 700bps sequentially while multi-family and office collections remained strong.
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The Fund's largest overweight positions include Seven & I Holdings Co., Ltd., Merck & Co., Inc., and Allstate Corporation. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Merck & Co., Inc. was a top contributor in the month after posting quarterly EPS and sales results that were ahead of consensus expectations. Merck’s Keytruda drug continues to perform well, and we expect that Keytruda, used in conjunction with other cancer-fighting drugs, will ultimately extend the life of Keytruda.
The stock continues to trade below our estimate of fair value with a compelling risk/reward profile. Atlantia S.p.A performed strongly in the quarter on the back of an announcement that the Benetton family and Blackstone were buying the company. Given that the Benetton family has a controlling position, we do not believe higher offers will be made, and we thus sold our position. Altice USA, Inc. Class A continued to be volatile despite our underlying assessment of good assets that are currently undervalued. Altice reported results for the quarter that was largely in line with expectations but noted slightly weaker customer data, with broadband net ads declining 13k versus an expectation of roughly flat net ads. Although the company remains compellingly cheap, we are continuing to monitor
The challenges we have noted in our prior commentaries regarding supply chains, labour shortages, higher inflation, higher interest rates, etc., remain, as seen with a market that was down in April. We believe the path to recovery will continue to be challenging as China’s zero COVID policy will continue to pressure supply chains. Further, central banks are beginning their tightening policies, including the US Fed announcing a 50bps rise in its Federal-funds target rate this week. Although we do not make top-down calls, we believe market fears about a potential recession due to central banks overshooting on their tightening policies is not unwarranted.
Given the strong sell-off in Technology-related names and the strength in defensive areas of the market, we are beginning to see opportunities in Technology and the more cyclical areas of the market, which we are pursuing as part of our bottom-up, fundamental process. We believe our portfolio positioning that is tilted towards defensive stocks remains appropriate in this market environment, though we recognise the positioning may shift if we continue to see pressure on more cyclically oriented stocks. Regardless, we will continue to follow our time-tested, bottom-up, fundamental strategy of looking for those dislocations in the market where we see good companies that are trading below our estimate of intrinsic value and where we see opportunities for those companies to unlock that value.
overall industry dynamics regarding cable broadband and assessing whether this is a cyclical slowdown post COVID strength or due to secular challenges
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The Fund's largest overweight positions include Seven & I Holdings Co., Ltd., Merck & Co., Inc., and Allstate Corporation. Conversely, the Fund's largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. With the outbreak of war in Ukraine, the portfolio's holdings in defence stocks Rheinmetall AG and BAE Systems plc were up firmly in the quarter as European governments recognised the need to spend more on their national defence given years of underinvestment. Rheinmetall is one of the leading defence contractors in Europe, with market-leading positions in land vehicles, large calibre weapons, and ammunitions and electronic solutions. The company is a key supplier to the German army as well as a range of both NATO and non-NATO countries around the world. Similarly, BAE Systems plc is the largest non-U.S. defence contractor in the world and has a diversified portfolio with a strong technology focus covering air, land, and sea. BAE Systems plc performed strongly on the back of potentially higher defence spending, but also reported full-year 2021 numbers in the quarter with EPS and free cash flow ahead of consensus and guided free cash flow meaningfully over the next few years. We continue to hold both names as we see a compelling risk/reward profile.
As it now stands, central banks face a monumental challenge – raise rates fast enough to cool inflation but not so fast that economic growth is negatively impacted. Central banks appear woefully behind tackling inflation as they underestimated the effects of fiscal and monetary policies enacted over the past decade and, more recently, the massive stimulus provided during the COVID pandemic. Markets are rightly concerned over a misstep by central banks which could ultimately push economies into a recession.
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The Fund’s largest overweight positions include Seven & I Holdings Co., Ltd., Oracle Corporation, and Advance Auto Parts, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. As a result of Russia’s invasion of Ukraine, European governments reassessed their allotted spending on their own defense infrastructure after having underspent for many years. Germany and other European countries have committed to increase the percentage of their budgets allocated to defense. Accordingly, BAE Systems PLC and Rheinmetall AG, were up strongly on the news, as they will be direct beneficiaries of this increased spending. Despite the strong performance in the month, both stocks continue to trade at attractive valuations with a longer path to stronger growth.
Ralph Lauren Corporation Class A was a positive contributor in the month after posting another set of very strong quarterly results, with results better than both consensus and guidance. Further, the company raised guidance again for the third time this year. Revenues and EBIT were well ahead of December 2019 levels, with margins continuing to expand.
During the month. Vertiv Holdings Co. Class A reported lower than expected EBIT and EBITDA margins due to supply chain issues and mispricing of its products. Vertiv failed to sufficiently adjust its prices higher during the period, as reflected in orders and backlog, which were up 51% and 56%, respectively as customers took advantage of the lower pricing. As noted earlier, with increased costs, margins were pressured. However, Vertiv has begun to aggressively price its products higher to compensate for higher costs, but this will not meaningfully impact results until the second half of 2022. We believe that if company management can effectively deliver on its second half guidance, there is substantial upside in the stock.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-8.pdfJanuary, 2022
The Fund’s largest overweight positions include Seven & I Holdings Co., Ltd., Oracle Corporation, and Advance Auto Parts, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Seven & I Holdings Co., Ltd. contributed to relative performance reporting in January strong EBIT results and raised guidance. Speedway continues to run ahead of plan and drove the upgrade. Further, an activist investor reported an open letter sent to management recommending action to unlock value which is being impeded by the corporate structure and management structure/decision making. This remains a very cheap stock, and we believe the US business will drive faster growth and ultimately multiple rerating as covid headwinds eventually ease. Hess Corporation was a top contributor in January on the back of strong gains in oil prices. Further, during the month, Hess reported above-expectation earnings per share and cash flows from operations. A dividend increase is expected in the second quarter of 2022, to return the higher cash flows to shareholders. This, combined with its attractive oil reserve profile and valuations, leaves its risk/reward profile compelling. Unlike Merck, Humana Inc. failed to defend in the down market of January, largely driven by the company announcing lower expected membership due to retention challenges as competitors were very aggressive on pricing. Humana noted it was conservative in its pricing for 2022 to protect profits, though expects that it may need to be more aggressive in 2023 if the trend persists. We feel the pricing challenges will be temporary and not sustainable by competitors, and we continue to be positive on this name and believe the risk/reward profile remains attractive.
Quidel Corporation continued to challenge performance in January. This stock was a detractor in December on the back of an acquisition announcement. In January, the company announced above-expectation results on higher COVID testing. However, this failed to push the stock higher as investors are not willing to price in higher COVID testing revenue when the OMICRON variant is quickly receding. Further, the company will be in the penalty box as investors wait to see how effective management is at integrating the recently-announced acquisition with the rest of the company.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-7.pdfDecember, 2021
The Fund’s largest overweight positions include Seven & I Holdings Co., Ltd., Oracle Corporation, and Advance Auto Parts, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Lowe's Companies, Inc. outperformed in the quarter as the business delivered a 33% two-year stack sales comp and more than 200bps EBIT margin expansion against a difficult quarterly comparison. Pro same store sales rose 16% year-over-year and 43% on a two-year basis, highlighting major share gain with both existing and new professional customers. EBIT margin for the year will exceed 12%, up from 9% in 2019. In nearly every regard, Lowe’s has shown impressive traction in its efforts to close the performance gap that existed versus Home Depot when Marvin Ellison joined in 2018. We think that investors are beginning to appreciate this and believe that significant upside remains for the business and the shares as sales continue to grow and margins expand helping to shrink the gap with Home Depot.
Managed Care Organization (MCO) Anthem, Inc. outperformed in the period. We have long believed that MCOs represent one of the cheapest parts of the healthcare sector. With Medicare For All (M4A) not even getting sufficient support within the democratic party, we believe that a major overhang on the industry has been removed. During the period, despite COVID and utilization variabilities, MCOs delivered strong results, resulting in partial upward re-rating on the names. Over time, we expect other investors to start appreciating strong margin stability and growth opportunity names such as Anthem that are still not fully reflected in the stocks
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-6.pdfOctober, 2021
During the month, we reduced our exposure to the Utilities, Financials, and Communication Services sectors while increasing exposure to the Materials, Health Care, and Consumer Discretionary sectors. The more notable addition in the month was the purchase of Alibaba Group Holding Ltd. After a pull back of more than 50% from its all-time high, Alibaba now offers a compelling valuation entry point. At the current valuation level of less than 12x EV/EBIT for the core business, the market appears to not be giving Alibaba credit for strong growth opportunities within its other businesses such as Cloud.
As noted earlier, the portfolios did well in the Health Care sector as Anthem, Inc., Humana Inc., and Merck & Co., Inc. were the top contributors in October. Anthem and Humana performed well on the back of better-than-expected earnings despite extra costs associated with COVID. Further, the companies suggested that 2022 is expected to show strong EPS growth with general pricing discipline in the industry. Similarly, Merck’s 3Q21 results were better than expected, and the company raised guidance for 2021. Management continues to highlight that its top-line growth potential appears under-appreciated by the market
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-5.pdfSeptember, 2021
The portfolios benefitted from effective stock selection in the Health Care, Industrials, Consumer Discretionary, Information Technology, and Utilities sectors. The portfolios’ underweight exposure to the Information Technology sector and overweight exposure to the Energy sector added further to relative performance. Stock selection within the Communication Services, Financials, Energy, and Materials sectors detracted from relative performance. Portfolio changes were modest and did not impact the overall sector positioning of the portfolios.
Oracle Corporation performed strongly over the quarter after reporting very strong results and a solid outlook. Investors appear to be gaining confidence in the revenue acceleration driven by strength in the cloud business. In addition, the share repurchase program, which totalled $8b last quarter, was ahead of consensus estimates. Further, free cash flow continued to be strong at $1.4b, also ahead of consensus.
American International Group, Inc. (AIG) also outperformed as earnings came in well above consensus. Its core P&C Insurance operation continues to show substantial improvement and is the primary driver for the earnings beat. Premium growth was very strong during the June quarter in both commercial and personal insurance. Overall, pricing continues to be favorable and substantially exceeds loss cost trends. AIG authorized an incremental $5 billion share repurchase program, giving it a total capacity of $6 billion, a sizeable~14.5% of market value. Altice USA, Inc. Class A detracted from performance as the company announced net subscriber adds would be down for the third quarter, falling short of investors’ expectations. Additionally, regarding the 2021 outlook, management said positive revenue and EBITDA growth for the year is still very likely based on what it sees through the third quarter, but the fourth quarter still holds some uncertainty. At this point, we do not believe the sell-off over the quarter was warranted. The company trades at very compelling valuations with a path to realizing greater value, but we continue to closely monitor operating fundamentals to ensure there is no further deterioration
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-1-1.pdfAugust, 2021
The Fund’s largest overweight positions include convenience store operator Seven & I Holdings Co, video, internet, and phone service provider Comcast Corporation, and computer technology company Oracle Corporation. Conversely, the Fund’s largest underweight positions include Microsoft, Apple, and Amazon, all of which are not held by the Fund.
American International Group, Inc. (AIG) performed strongly in the month as earnings came in well above consensus. Its core P&C Insurance operation continues to show substantial improvement and is the primary driver for the earnings beat. Premium growth was very strong during the quarter in both commercial and personal insurance. Overall, pricing continues to be favorable and substantially exceeds loss cost trends. AIG authorized an incremental $5 billion share repurchase program, giving it a total capacity of $6 billion, a sizeable~14.5% of market value. Like AIG, KunLun Energy Co. Ltd. reported better-than-expected first half 2021 earnings in the month, which contributed to the strong relative performance. The results demonstrated the strong growth in the remaining business. The next leg up in the stock price will be from executing growth and improved profitability in the natural gas sales business that can reduce the stock’s valuation discount to peers. We continue to see positive indicators for further re-rating but are monitoring management actions to see continued progress towards their growth initiatives.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-4.pdfJuly, 2021
The Fund’s largest overweight positions include convenience store operator Seven & I Holdings Co, video, internet, and phone service provider Comcast Corporation, and computer technology company Oracle Corporation. Conversely, the Fund’s largest underweight positions include Microsoft, Apple, and Amazon, all of which are not held by the Fund.
Oracle Corporation performed strongly in the month of July after reporting very strong results and a solid outlook in the month of June. Investors appear to be gaining confidence in the revenue acceleration driven by strength in the cloud business. In addition, the share repurchase program, which totalled $8b last quarter, was ahead of consensus estimates. Further, free cash flow continued to be strong and was also $1.4b ahead of consensus.
BAE Systems plc is a recent addition to the portfolio and was a top contributor in the month. Sentiment toward European defence has been weak recently, and BAE was trading close to a multi-year low valuation relative to the market. A private equity bid for listed U.K. defence peer, Ultra Electronics, in July at a 63% premium highlighted the undemanding valuation of the sector and helped improve sentiment. BAE also reported strong 1H21 results at the end of July, with profits and cash flow coming in better than expected. Further, company management announced an expected share buyback; having this confirmed was a net positive.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-3.pdfJune, 2021
The Fund’s largest overweight positions include convenience store operator Seven & I Holdings Co, video, internet, and phone service provider Comcast Corporation, and computer technology company Oracle Corporation. Conversely, the Fund’s largest underweight positions include Microsoft, Amazon, and Apple, all of which are not held by the Fund.
Seven & I Holdings Co., Ltd. (+19.9%) operates the largest convenience store network in Japan and the US, in addition to department stores, supermarkets, and hypermarkets in Japan. The shares outperformed during the quarter on the back of strong results relative to expectations, helped by the economic re-opening in the US along with solid execution. We also believe the market is starting to measure the impacts of its Speedway acquisition, which cements 7-Eleven as the leading convenience store operator in the US market, with large revenue and cost synergy opportunities in the coming years. We expect a significant earnings and dividend enhancement from this combination, in addition to accelerated market share gains going forward for scale convenience store players in the US market, of which 7-Eleven is the clear leader.
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-2.pdfMay, 2021
Grupo Financiero Banorte SAB de CV Class O (+20.6%) performed well in May on the back of strong results posted at the end of April. Further, the Mexican market was among the stronger performing emerging market countries in May, partially attributable to Andres Manuel Lopez Obrador’s declining popularity, which has resulted in a weakened majority in congress and helped to alleviate investors’ concerns over his less market-friendly policies being implemented. Hess Corporation (+12.3%) outperformed in May on the back of strong results reported at the end of April combined with the increasing price of oil. Further, with higher oil prices, Hess will be in a position to begin to retire its $1 billion term loan this year. The retirement of the term loan combined with the start-up of the second phase of its offshore project in Guyana will allow the company to improve its free cash flow generation in 2022. Finally, management has reiterated that a significant amount of the free cash flow will be shared with investors via major dividend increases.
Ralph Lauren Corporation Class A (-7.4%) underperformed in May despite posting strong revenue and earnings growth well in excess of consensus expectations, as well as reinstituting its annual dividend with an effective current yield of 2.3%. Similar to the situation several quarters ago when the stock underperformed after posting strong results, we believe the pullback was largely due to conservative full-year guidance. We continue to have confidence in our thesis and believe the stock is trading well below its estimate of fair value. Corteva Inc (-6.7%) detracted from performance in May on modestly disappointing results, primarily due to an increase in input costs. Additionally, the stock was weak on a sell-side note in which the analyst tried to draw a link between the risks of chlorpyrifos and Bayer’s glyphosate settlement.
We recognize that there is risk associated with chlorpyrifos lawsuits, but such risk is not on the same scale as glyphosate, as Monsanto/Bayer sold about $3-$5 billion annually in glyphosate products versus Dow/Corteva selling ~$200 million a year in chlorpyrifos products. Even with these challenges, we continue to believe the stock remains undervalued despite the strong price performance over the last year, but we also feel that the risk/reward has narrowed; accordingly, we trimmed our position in May
File: https://commentary.quantreports.net/wp-content/uploads/2021/04/129_pfp-1.pdfFebruary, 2021
The Fund’s largest overweight positions include convenience store operator Seven & I Holdings Co, theme park operator SeaWorld Entertainment, and video, internet, and phone service provider Comcast Corporation. The Fund’s largest underweight positions include Microsoft, Amazon, and Apple, all of which are not held by the fund. SeaWorld Entertainment, Inc., a theme park operator, was up nearly 80% (JPY) in February on the back of positive fundamental improvements in the business. The company’s cost-cutting measures during the pandemic provide for strong profit growth going forward. Additionally, as of February, season pass sales for 2021 are only down 6% year-over-year from February 2020, highlighting that 2021 may return to normal sales levels with reduced costs.
AMERCO, a moving and storage business, reported a blowout quarter in February. Revenue was up 28% (10% ahead of consensus) and EBITDAR was up 78%. Earnings per share were ahead of consensus by 32%. Further, moving and storage revenues were up strongly in the quarter. Exelon Corp. is a utility services company. Despite posting positive results in February, Utilities stocks lagged the broader market in the month given the risk-on environment. Further, with record-cold weather in the south, including Texas, concerns around cost increases to deal with the widespread power outages in Texas, pressured the stock. Altice USA, Inc. Class A is a cable/broadband operator. The company posted positive results in February with in-line guidance. There was some weakness reported within broadband revenue and, after a strong performance coming into February, the stock price failed to keep pace with the broader market in the month.
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ticker: PER0050AU
release_schedule: Monthly
structure: Managed Fund
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factsheet_url:
https://www.perpetual.com.au/funds/perpetual-wholesale-international-share-fund/?product=PWITF
FUND PROFILE
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fund_features:
Perpetual Wholesale International Share aims to provide investors with long-term capital growth through investment in quality global shares. Provides investors with the potential for capital growth and income through a portfolio of global companies using Barrow Hanley’s experienced investment team and disciplined investment process. The Fund primarily invests in publicly traded, or to be listed, global equity securities, including emerging markets. The focus is on investing in stocks of companies the investment manager believes are solid but temporarily out-of- favour and provide above-average total return potential. The country and sector allocations within the Fund are a result of the stock selection process.