September, 2023
The portfolio delivered a return of -3.72% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of -3.69%. The portfolio has delivered returns in excess of the Benchmark over five years and since inception.
Following strong gains in the first half of the year, global equity markets posted a negative return for both the month and September quarter. A sell-off in global bonds (the 10-year US Treasury yield reached its highest level since 2007) was one of the primary factors contributing to the weakness in equity markets. The increase in bond yields put downward pressure on equity market valuations while the inversion of the curve renewed fears of a significant economic slowdown and subsequent impact on corporate earnings. The weakness in equity markets over the month was widespread with Japan and the UK the only major markets finishing in positive territory. It was a similar story of broad-based weakness at the sector level, the notable exception being Energy stocks which gained following production cuts from Saudi Arabia and Russia. Factor performance reflected the risk off sentiment with low volatility, quality and value stocks outperforming growth. The Australian dollar traded in a narrow range in September leading to little difference between the returns of hedged and unhedged portfolios.
Stock selection made a positive contribution to portfolio relative performance in September. This was most evident in the Health Care, Industrials and Consumer Staples sectors of the portfolio. On the flipside, selection in the Consumer Discretionary and Financials sectors detracted from relative performance. From a sector allocation perspective, the largest positive contributors were the overweight exposure to Health Care and below benchmark allocations to Real Estate and Consumer Staples. The zero positions in both Energy and Communication Services and overweight position in Technology weighed on performance relative to the benchmark.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WQG-1-1.pdfAugust, 2023
The portfolio delivered a return of 0.16% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 1.11%. The portfolio has delivered returns in excess of the Benchmark over five years and since inception.
Global equities declined in August in local currency terms, amid renewed fears concerning the Chinese property market and disappointment that the expected post COVID lockdown economic rebound in China has failed to materialise. An increase in global sovereign bond yields, following a Fitch ratings downgrade of US treasuries, also weighed on markets. At a regional level, the decline in Chinese equities was a major contributor to the underperformance of emerging markets relative to developed markets. In terms of sectors, Energy was the standout being the only one to record a positive return, and at a factor level, value was favoured over growth. The weaker Australian dollar in August enhanced the returns of unhedged portfolios, offsetting the decline in equity markets.
The portfolio underperformance in August was largely attributable to stock selection in the Financials, Consumer Discretionary and Industrials sectors.
From a sector allocation perspective, the overweight position in Health Care was the largest positive contributor to relative performance followed by the underweight exposure to both Utilities and Consumer Staples. In contrast, the zero weighting to Energy and Communication services and above index exposure to Industrials detracted from performance versus the Benchmark.
The calendar year has been a relatively quiet one thus far in terms of portfolio trading activity. One of the new names added to the portfolio was Arista Networks (Arista), a California based network equipment company founded by a trio of ex-Cisco executives. Arista disrupted its market during the platform shift to cloud, offering a networking product that was ideally suited for the needs of the emerging hyperscalers i.e., large cloud service providers. The firm is deeply embedded and aligned with the customers that are driving the lion’s share of industry growth and artificial intelligence will accelerate this trend. The WCM investment team believes Arista’s ‘scrappy’ engineering driven culture and highly technical salesforce are huge assets that will allow it to continue outperforming its peers.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WQG-1.pdfJuly, 2023
The portfolio delivered a return of 1.08% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 2.82%. The portfolio has delivered returns in excess of the Benchmark over five years and since inception.
Global equity markets posted their third straight positive month in July. The combination of better-than-expected inflation and economic growth numbers in the US brought optimism that the US Federal Reserve may be on track to engineer a ‘soft landing’.
While Federal Reserve chairman Jerome Powell did not give any firm guidance on whether July’s rate rise would be the last of this tightening cycle, he did indicate that a recession in 2023 was now less likely. Economic news in the rest of world was in general supportive of markets too. UK June inflation was lower than expected and the European Central Bank hinted that interest rate rises may be close to pausing. While economic growth in China slowed in the June quarter, policy easing plus expectations of further stimulus to come were additional positive signs for investors. July’s global equity market gains were broad based with all the major country indices posting positive returns. Investors’ increased risk appetite was reflected in the outperformance of emerging markets relative to developed markets and smaller capitalisation stocks versus large. Basic Resources, Banks and Energy were among the best performing sectors with Health Care and Utilities lagging. There was minimal dispersion at a factor level.
Security selection was the primary contributor to the portfolio’s underperformance in the month. The strong relative returns from Technology, Consumer Staples and Industrials holdings were more than offset by stocks in the Health Care, Financials and Consumer Discretionary sectors of the portfolio. From a sector allocation perspective, the underweight exposure to Consumer Staples, zero position in Utilities and above benchmark weight in Consumer Discretionary added to relative performance. On the other hand, the above benchmark weight in Health Care and zero position in both Communication Services and Energy detracted from performance. The strong returns from global equity markets year-to-date have been achieved against a backdrop of many market commentators warning of the need for caution in the face of an expected economic downturn. As markets have risen these same commentators are now highlighting ‘stretched valuations’ as another reason for caution. For the Quality Global Growth strategy (the Strategy), it is encouraging that its year-to-date returns have been primarily driven by earnings growth as opposed to price-to-earnings multiple expansion. A market environment like this (i.e., one which is rewarding company fundamentals) typically bodes well for the Strategy. Regardless of the market outlook, the investment team at WCM Investment Management remains confident its focus on positive moat trajectory businesses with well-aligned adaptable cultures will deliver positive long-term outcomes for investors.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WQG.pdfJune, 2023
The portfolio delivered a return of 2.99% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 2.63%. The portfolio has delivered returns in excess of the Benchmark over one month and one year. The strong finish to the financial year brings the total return for the portfolio in FY2023 to 22.65%, outperforming the Benchmark of 21.51%.
Global equity markets rallied in June completing a strong first half rebound from the steep falls of 2022. The economic news in June was consistent with that of most of the year to date, namely, that growth continues to slow, but the global recession many had forecast has yet to materialise. Headline inflation has declined but absolute levels are still higher than those targeted by central banks. The better-than-expected growth outcomes have supported equities, while the disappointing core inflation numbers have prevented similar strong returns from bonds. The strong performance of equity markets in June was broad based with all sectors posting positive returns. At a regional level the US was the best of the major markets. Poor June economic data in the UK and China contributed to their equity markets being the laggards of the major markets for the month. Value as a factor had a positive month but growth was more mixed, stronger in developed markets but weaker in emerging markets. The Australian dollar was stronger in June, reducing the returns for unhedged portfolios.
Positive stock selection in the Financials, Materials and Industrials sleeves of the portfolio were more than offset by underperformance in the Information Technology, Consumer Discretionary and Health Care sectors. From a sector allocation perspective, Communication Services (zero weight) was the largest positive contributor to relative performance, followed by Industrials (overweight) and Consumer Staples (underweight). On the other hand, Health Care (overweight) detracted from relative performance, as did Information Technology (overweight) and zero allocation to Energy.
The marked reversal in market sentiment year to date once again highlighted the importance of consistency of process and long-term perspective. The worst performing asset classes of 2022, including growth equities, have led the way in 2023. Equally the best performing assets of 2022 such as commodities have been amongst the worst this year. The Quality Global Growth Strategy has benefited from the team at WCM Investment Management remaining committed to the investment process which has delivered consistent long-term outperformance of market benchmarks. This process is based on identifying companies with corporate cultures that help drive the expansion of their competitive advantages.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-5-1.pdfMay, 2023
The portfolio delivered a return of 1.54% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 1.40%. The portfolio has delivered returns in excess of the Benchmark over one month and one year.
Global equity markets declined marginally (in local currency terms) in May conceding some of the solid gains made year to date. The dominant headline making news for financial markets for most of the month was the US debt ceiling impasse between the Republicans and the Democrats. However, by month end, a compromise was reached which required Congress approval. Economic data in the US and Europe remained mixed with the manufacturing (weak) and services (strong) sector surveys giving conflicting signals in terms of the outlook for growth. The pace of China’s post lockdown recovery showed signs of slowing while in contrast, Japan posted a positive quarter 1, with GDP growth driven by strong domestic demand. Monetary tightening from central banks continued with the US Federal Reserve, the Bank of England and the European Central Bank each raising interest rates by 0.25%. At a regional level, developed market equities outperformed emerging markets. However, the main divergence within markets was at the sector level. Technology stocks, in particular those considered beneficiaries of the surge in artificial intelligence (AI), made strong gains while Energy and Materials were among the weaker performers.
Factor performance during the month reflected this strength in Technology stocks with growth outperforming value. The Australian dollar was weaker in May, enhancing the returns of unhedged global portfolios.
The portfolio’s outperformance during May was largely attributed to stock selection. The sectors most contributing to this were Information Technology, Financials and Consumer Staples. On the flipside, security selection in the Consumer Discretionary, Health Care and Materials sectors detracted from relative performance. In terms of sector allocations, the largest positive contributors included the zero exposure to both Energy and Utilities. The overweight exposure to Health Care and below benchmark position in Information Technology and Communication Services were the primary detractors.
The hype around AI has many investors scrambling over how best to gain exposure to it. Having conducted a detailed research project on AI, the investment team at WCM concluded that adopting a ‘picks and shovel’ approach is the best way to invest in this theme. This approach involves investing in companies that will be providing key inputs into AI as opposed to making binary bets on individual winners. Examples of holdings in the portfolio that stand to benefit from the growth in AI include Microsoft, Entegris, Snowflake and Lam Research.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-4-1.pdfApril, 2023
The portfolio delivered a return of 2.14% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 2.77%. The portfolio has delivered returns in excess of the Benchmark over three months.
Global equity markets made a positive start to the second quarter of 2023. Although reported economic data was mixed, on balance it surprised on the upside. The pace and scale of central bank tightening had spiked fears of a deep global recession but to date, economic activity has remained relatively resilient. This coupled with the continued downtrend in headline inflation has been supportive of risk assets, including equities. While markets are still discounting another 0.25% increase in interest rates in May by the US Federal Reserve (the Fed), the expectation is the Fed will then pause and be cutting rates towards the end of the year. Chinese economic data released during the month was also positive, with first quarter GDP growth of 4.5%, ahead of market expectations. However, continued geopolitical tensions dragged the Chinese equity market lower, in turn, contributing to the underperformance of emerging market equities relative to developed markets.
At a sector level, Energy and Consumer Staples were among the better performers with Information Technology and Consumer Discretionary lagging. In terms of factors, the trends continued from March with large capitalisation stocks and value outperforming small capitalisation stocks and growth respectively.
The Australian dollar was weaker in April, adding to the returns of unhedged portfolios. The portfolio’s small underperformance in April was primarily due to stock selection. While stock selection was positive in the Consumer Discretionary, Industrials and Materials sectors, it was outweighed by the underperformance of the Information Technology, Financials and Health Care holdings.
Portfolio activity has been relatively quiet year-to-date with Cambridge, England based pharmaceutical company, AstraZeneca the only new position added. AstraZeneca meets the criteria the investment team at WCM Investment Management seeks in all portfolio holdings, i.e., a positive moat trajectory supported by a strong, well aligned corporate culture. AstraZeneca’s current leadership has led a dramatic cultural shift which has included reorienting the company to be more focused on earlystage science, thereby improving its success rate in drug development. That effort has helped turn what was once an unproductive research and development organisation into one of the most prolific in the industry. AstraZeneca is now positioned to reap the attendant benefits of this transformation with multiple mega blockbusters, particularly in oncology.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-3-1.pdfMarch, 2023
The portfolio delivered a return of 4.36% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 4.05%. The portfolio has delivered returns in excess of the Benchmark over one and three months.
Global equity markets moved higher in March despite the month being marred by both a major bank failure and state-backed banking merger. The collapse of Silicon Valley Bank, closely followed by the merger of Credit Suisse and UBS caused temporary short-term panic in markets. However, by month end, this fear was replaced by optimism that these events may act as a catalyst for central banks potentially to halt the pace and scale of future interest rate increases. US inflation data again pointed to a declining trend with the consumer price index gaining 6.0% in February, compared with the peak level of 9.1% in June 2022. The absolute level, however, remains considerably above the US Federal Reserve’s target rate of 2.0%. Inflation numbers in Europe also showed a declining trend, although this positive news was partially tempered by concerns over potential contagion effects from the Credit Suisse crisis and the impact of civil disturbance from strikes in France and the UK. At a sector level, Information Technology and Communication Services led markets higher during the month. The US market’s relatively high allocation to these sectors contributed to it being amongst the best performers at an individual country level. The Financial sector, for the reasons described earlier, and Energy were two of the larger sectors posting declines for the month. Factor performance was mixed, with one noticeable feature being the outperformance of large versus small capitalisation stocks. The Australian dollar declined marginally in March, enhancing returns for unhedged portfolios.
Stock selection was the primary driver of portfolio outperformance during the month. This was most evident in the Financials, Health Care and Consumer Discretionary sleeves of the portfolio. Sectors where stock selection detracted from relative performance included Information Technology and Materials. From a sector selection perspective, the zero exposure to Energy and Real Estate and overweight exposure to Health Care were the largest positive contributors. On the flipside, the above benchmark positions in Financials and Industrials and the absence of any exposure to Communication stocks detracted from relative returns.
The March quarter was a positive one for the Quality Global Growth Strategy in terms of both absolute and relative returns, delivering a strong return of 10.92% compared with the Benchmark return of 8.79%. Lower trending inflation and the decline in long-term interest rates provided a positive tailwind for growth-style investing. As evidence of investing often being as much about what you don’t own as you what you do, the Strategy also benefited from the zero exposure to Energy stocks, the worst performing sector over the quarter. This contrasts to the experience of 2022 when Energy topped the sector performance tables. There was one new position added to the portfolio during the quarter, UK pharmaceutical group Astra Zeneca.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-2-1.pdfFebruary, 2023
The portfolio delivered a return of 3.04% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 1.53%. The portfolio has delivered returns in excess of the Benchmark over one and three months.
While global equity markets actually retreated over the month, the Australian dollar was significantly weaker against the US Dollar in February, which resulted in enhanced returns for unhedged global equity portfolios. In general, signs of more resilient economic growth promoted a shift in market sentiment regarding the likely peak and then reversal of global interest rates. These signs included stronger than expected US labour market data, European business surveys showing heightened confidence and evidence of a sharp post COVID-19 lockdown rebound in China. The US Federal Reserve, Bank of England and European Central Bank all increased interest rates in February. The commentary from each suggested that while inflation has declined from the peak, central banks believe their job is not done yet. In terms of individual markets, Europe fared best with each of the major continental bourses posting flat-to-positive returns. Emerging markets were the major laggard with narrow performance dispersion at a sector level. Information Technology and Industrials were among the better performing sectors. Quality and growth factors marginally outperformed value.
The portfolio’s outperformance in February can be largely attributed to stock selection. This was particularly evident in the strategy’s holdings in the Consumer Discretionary, Materials and Financial sectors. Security selection in the Information Technology sector was the largest drag on relative performance. From a sector allocation perspective, the zero exposure to Communication Services was the largest positive contributor followed by the overweight positions in Information Technology and Industrials. On the flipside, the above benchmark allocations to Health Care and Consumer Discretionary and underweight position in Consumer Staples detracted from performance.
February was another month in which the market seemed to flip from the hope of a potential ‘pivot’ in the direction of global interest rates to one of fear over ‘higher for longer’. With central banks showing a preference to err on the side of potentially over-tightening monetary policy to ensure inflation is beaten, rather than move too slowly and risk it becoming entrenched, an economic slowdown and/ or a recession seems likely. This would inevitably put pressure on global corporate earnings. The WCM Quality Global strategy is not constructed based on any macroeconomic forecasts or expectations. However, its exposure to a diversified range of expanding moat companies with aligned corporate cultures should prove relatively robust in a market where investors are putting a premium on earnings certainty.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-10.pdfJanuary, 2023
The portfolio delivered a return of 3.20% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 3.63%. Global equities made a positive start to 2023 with strong gains for both developed and emerging markets. Investor risk appetite rose in January following the sixth successive month of easing in US inflation and a relatively healthy annualised fourth quarter GDP growth rate of 2.9%. Positive developments in China boosted the local equity market and in turn emerging markets more broadly. Economic growth for the fourth quarter was higher than expected, with leading indicators such as subway passenger traffic turning upwards and regulatory pressure on the internet sector easing.
Economic data from Europe provided further encouragement for markets. Reported GDP growth and leading indicators exceeded expectations and December’s Eurozone inflation print confirmed a further easing from 10.2 to 9.2%. Market leadership at a sector level during January came from those considered more economically sensitive such as Technology, Consumer Discretionary and Communication Services. At a regional level, emerging markets led by Chinese equities outperformed developed markets. The Australian dollar was stronger during the month, dampening returns for unhedged portfolios. Stock selection contributed positively to relative performance of the portfolio in January with the largest contribution coming from holdings in the Consumer Discretionary, Health Care and Consumer Staples sleeves of the portfolio. Conversely, the largest detractors from a stock selection perspective came from the Industrials and Financials sectors. In terms of sector allocation, the portfolio’s underweight positions in Energy (zero exposure) and Consumer Staples added to relative performance.
The main detractors were the above Benchmark positions in Health Care and Industrials and zero weighting in Communication Services. The 2022 bear market in both bonds and equities has put significant pressure on the money management industry. Many industry participants have already announced reductions in head count and product closures. Investors familiar with WCM will be aware of the importance its investment team places on identifying companies demonstrating culture and economic moat alignment. Maybe less well known is how equally important this is for fund managers running their own firms. WCM’s response to the industry downturn reveals a lot about its focus on culture and moat expansion. Unlike most of its peers, WCM has continued to invest in people across all parts of the firm to grow its moat.
This included adding to its team of culture analysts as referenced in WCM’s recent client letter: ‘Most importantly of all, we are doubling down on our culture focus. In 2022 we significantly expanded our team of culture-focused specialists with three new Business Culture Analysts, compounding our already strong lead in analysing companies’ culture from the key perspective of culture-moat alignment, culture strength and culture adaptability.’
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-9.pdfDecember, 2022
The portfolio delivered a return of -530% during the month, outperforming the MSCI All Country World Index (ex-Australia) (the Benchmark) return of -5.45%.
Global equity markets declined sharply in December 2022, bringing to a close the worst calendar year of returns for the MSCI All Country World Index benchmark since 2008. Once again it was the familiar themes of inflation, interest rates, recession fears and the war in Ukraine which weighed on markets. While inflation is showing tentative signs of having peaked, it remains significantly above global central banks' tolerance levels. Market expectations therefore are for further interest rate rises into the first quarter of 2023. The most significant 'new' news in December was the decision of the Bank of Japan to ease yield curve controls and the additional relaxation of China's zero COVID-19 policies. In terms of regions, Asia recorded a positive return and was the best performer for the month, with the US being one of the weakest. Performance dispersion at a sector level was relatively narrow. Utilities and Financials were two of the better performers and Technology lagged. At a factor level, it was another strong month for value relative to growth.
Portfolio underperformance in December was largely attributed to stock selection. While stock selection was a positive contributor in the Health Care and Information Technology sectors, it was offset by holdings in the Financials, Industrials and Consumer Staples sleeves of the portfolio. In terms of sector selection, the largest positive contributions came from the overweight exposures to Health Care and Industrials and zero exposure to Communication Services. Sector exposures detracting from performance included the underweight position in Consumer Staples and Utilities and above benchmark exposure to Information Technology.
The 2022 bear market for equities was driven by the compression of valuation multiples due to sharply rising bond yields_ This environment has been particularly challenging for WCM's Quality Global Growth Equity Strategy given its bias to companies with investment theses based on longer duration investment timeframes. One of the core values of WCM's investment team is 'continuous learning'. This means that while it would be easy to blame recent portfolio underperformance solely on these 'style' headwinds, the investment team also recognises mistakes they have made and the lessons to be learned from them. In terms of outlook, the consensus view from market commentators is for a slowdown in economic growth as central banks remain firmly focused on bringing down inflation. Trying to forecast the timing and scale of this slowdown is a near impossible task. However, when it does occur the markers attention will likely move more towards the sustainability of corporate earnings. This will provide a more positive backdrop for the portfolio given its exposure to high quality (i.e., expanding economic moat) companies now trading at relatively low valuations.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-8.pdfOctober, 2022
The portfolio delivered a return of 6.07% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 6.64%. The portfolio delivered returns in excess of the Benchmark over three years. After a somewhat shaky start, global equity markets subsequently recovered to post a very positive return for the month. The US and European markets fared best, while emerging markets, weighed down by Chinese equities, fell by close to 3%. The closely watched inflation and labour market data released during the month continued to put pressure on central banks to increase interest rates. The European Central Bank was the latest to react to this data, increasing its benchmark rate by 75 basis points. It was also another big month in global politics. In China, the Chinese Communist Party confirmed the election of President Xi Jingping for an unprecedented third term. The UK completed its market calming change of Prime Minister and reversal of its September mini budget. At the corporate level, October saw the start of the quarterly earnings reporting season. At the midpoint, aggregate reported quarterly earnings have been in line with expectations. For individual sector performance, Energy was again the standout over the month, followed by Industrials and Health Care. Factor performance varied across regions. Value performed strongly in the US and Europe but was more mixed in Japan and emerging markets. Quality performed strongly in Europe but less well in other regions. Portfolio attribution analysis for the month showed a positive contribution from sector selection with the primary drivers being the zero allocation to Communication Services and overweight exposures to Health Care and Industrials. Sector allocations detracting from relative portfolio performance included the underweight positions in Energy (no exposure) and Financials and the overweighting to Consumer Discretionary. Stock selection in October was strongest in the Consumer Discretionary and Financials sleeves of the portfolio. Conversely, selection in the Health Care, Information Technology and Industrial sectors was a drag on performance. Market participants continue to wrestle with the question of whether central banks can get the balance right in terms of reining in inflation without triggering a deep economic downturn. Notwithstanding the much better performance of markets in October, the more pessimistic narrative has certainly been the more dominant one in the year to date. With market sentiment indicators remaining ‘bearish’, this is unlikely to change materially in the short term. However, as WCM has recently been reminding clients, now is the time to pay attention to the Warren Buffet adage, ‘when investing, pessimism is your friend, euphoria the enemy’. In line with this, the investment team remains focused on finding companies continuing to play ‘offence’ in this difficult environment by reinvesting in their businesses to strengthen and expand their moats.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-7.pdfSeptember, 2022
The portfolio delivered a return of -2.10% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of -3.49%. The portfolio has delivered returns in excess of the Benchmark over one month, three months, three years and since inception. Following a brief respite in July, the declines in the following two months meant the September 2022 quarter was the third consecutive negative quarter of the calendar year for global equity markets. Stubbornly high inflation and central banks’ commitment to fighting it through higher interest rates remain the primary short-term headwinds for both equity and bond markets.
On a more medium-term basis, investors are concerned these higher rates may lead to recessionary economic conditions and ultimately a negative impact on corporate earnings. The unfunded, expansionary mini budget announced by the new Truss government in the UK and the subsequent response from the Bank of England to limit the rise in Gilt yields added to the negative market sentiment. The September market sell off was wide ranging with all major markets and sectors recording monthly declines. At a factor level there was no clear pattern with the performance of value, quality and growth differing across regions. The one clear trend was the outperformance of lower volatility stocks. The strong performance of the US dollar was another feature of the month. This helped reduce the decline in unhedged global portfolios. Portfolio attribution analysis shows that most of the outperformance in September was due to sector selection. The positively contributing sector positions included the overweight allocation to Health Care and zero exposure to Communication Services and Real Estate. In contrast, the overweight allocation to Information Technology and Industrials detracted from returns as did the underweight to Consumer Staples. In terms of stock selection, the major positive was the consumer discretionary sleeve with holdings in the Health Care and Information Technology sectors a drag on relative performance.
The investment team at WCM always strives to learn from market experiences. One such learning from the recent market downturn and style shift from growth to value was the high correlation observed amongst the holdings in the defensive growth sleeve of the Quality Global Growth portfolio. From this, the team recognised the need to have greater diversification amongst the defensive growth holdings in terms of their key business drivers and industry tailwinds, while also meeting WCM’s core requirements of an expanding economic moat with aligned corporate culture. As such, several new and diverse defensive growth names have been added to the portfolio including North American waste services company, Waste Connections, and pharmaceutical distribution firm, McKesson Corporation.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-6.pdfAugust, 2022
The portfolio delivered a return of -3.18% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of -1.98%. The portfolio has delivered returns in excess of the Benchmark over three months. Having rallied strongly in July 2022, global equity markets gave up some of these gains in August. This followed comments from central banks reaffirming their commitment to bring inflation under control. These comments, particularly those from US Federal Reserve Chair, Jerome Powell, have dashed investors’ hopes that recent signs of economic slowdown may limit future interest rate increases. The central banks’ priority for fighting inflation over managing economic growth is seen as a clear negative for equity markets.
All major developed market indices were lower during the month, while emerging markets eked out a minor gain. European markets fared worst with the escalating energy crisis expected to push the region into recession in the coming months. In terms of sectors, Energy, Banks and Utilities fared best, with Technology and Healthcare amongst the major decliners. At the factor level, value once again outperformed growth. The Australian dollar was weaker in July, reducing the decline for unhedged portfolios. From a portfolio performance attribution perspective, most of the underperformance for the month can be attributed to sector allocation.
The major contributors to this were the overweight position in Healthcare and the zero exposure to Energy, Utilities and Real Estate. Rising inflation and interest rates have been a significant headwind for growth stocks in 2022. During this challenging period, the investment team continued its search for new additions to the portfolio that meet its criteria of an expanding economic moat with an aligned corporate culture. One such recent addition to the portfolio is Novo Nordisk (Novo), the global leader in diabetes medicines. Novo’s laser focus on metabolic diseases and its resulting GLP-1 dominance form the basis of its moat. This moat should continue to widen courtesy of Novo’s focused culture and superior innovation engine.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-5.pdfJuly, 2022
The portfolio delivered a return of 9.67% during the month, outperforming the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 6.02%. The portfolio has delivered returns in excess of the Benchmark over one and three months, and three years.
Following a very tough first half of 2022, developed market equities rebounded strongly in July. This followed the release of weaker economic data, giving hope that inflation may be close to peaking. The weaker data included the Purchasing Managers Index (PMI) in the United States and retail sales in Germany. Optimism over inflation in turn gave rise to markets winding back expectations of the scale of interest rate increases by global central banks. Global growth stocks were a major beneficiary of this decline in long-term interest rates. The US S&P 500’s heavy weighting in growth stocks contributed to it being the best performing index during the month. Ongoing problems in the Real Estate sector and COVID-19 lockdowns to combat the Omicron outbreak weighed on the Chinese equity market, which declined by over 9%.
At a sector level, Information Technology and Consumer Discretionary led the markets higher, with the laggards including Consumer Staples and Health Care. The Australian dollar strengthened in July, reducing the returns for unhedged portfolios.
From a performance attribution perspective, the majority of the excess returns for the month can be attributed to stock selection. Strong stock selection was most prevalent in the Health Care and Industrial sleeves of the portfolio. In terms of sector allocation, the overweight to Information Technology and zero exposure to Communication Services were the largest positive contributors.
While the decline in equity markets has brought a significant decrease in valuations, there remains no shortage of ‘frightening developments’ for the pessimists to focus on. In a recent client update, WCM noted how a market pundit it follows was recently quoted as saying, ‘there is so much uncertainty, we can’t even be certain what to be uncertain about’. This highlights why the investment team continues to believe that economic analysis is a low return-on-time exercise. Instead, it’s focus remains on investing in companies with expanding economic moats, aligned cultures and strong free cash flow generation. Such companies are rarely out of favour for long.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-4.pdfApril, 2022
The portfolio delivered a return of -4.94% during the month, compared with the MSC' All Country World Index (ex-Australia) (the Benchmark) return of -2.66%.
The selloff in global equity markets gathered pace in April with many major indices entering correction territory i.e., a decline of more than 10% from the most recent peak levels. Inflation continues to be the primary concern for investors with the March US Consumer Price Index at 8.5%, its highest level since December 1981. The absence of any signs of resolution to the Ukraine invasion or ending of the COVID-19 lockdowns in China added to the bleak picture for equity market investors. In response to the deteriorating inflation outlook, markets are now pricing in 50 basis point increases at the next three Federal Reserve meetings. This combination of tightening monetary policy and rising inflation made it a challenging month for bond markets too, with US 10-year treasury yields ended the month close to 3%.
Within markets, there were very few places to hide with all major developed markets declining during the month. Emerging markets also suffered with only those heavily exposed to Energy and Commodity sectors posting a positive return. In overall terms for sectors, Consumer Staples and Energy stocks led the market, with Communication Services and Information Technology at the other end of the performance ladder. The portfolio's performance was hampered by its overweight exposure to Information Technology and underweight position in Energy and Utilities. However, the zero allocation to Communication Services and overweight exposure to Health Care benefited the portfolio. At a factor level, it was another month during which value outperformed growth. The Australian dollar was weaker in April, providing a partial offset for unhedged global equity portfolios.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-3.pdfSeptember, 2021
The portfolio delivered a return of -3.77% during the month, compared with the MSCI All Country World ex-Australia Index (the Benchmark) return of -2.80%. The portfolio has delivered returns in excess of the Benchmark over three months, six months, two years and since inception. The September decline in global equity markets largely erased the gains achieved in the preceding two months of the quarter. Global equities, however, remain firmly in positive territory year to date.
While a market pause was inevitable at some stage post the strong rally from the lows of March 2020, there was no shortage of negative news for those investors seeking reasons to lock in part of their recent gains. These negative news stories included the US Federal Reserve flagging the potential for an earlier than expected tapering in bond purchases and an increase in interest rates in late 2022. Fears of a possible debt default by Chinese property developer Evergrande Group, ongoing concerns of the effect of supply chain disruptions on inflation and fears of a US government shutdown added to the overall negative market sentiment. At a regional level, emerging markets outperformed developed. Energy, the only sector posting a positive return, and Financials were among the top performing sectors. These two sectors contributed to the outperformance of value factors relative to growth and quality. The portfolio's underweight exposure to energy and interest rate sensitive financial stocks and the overweight position to the two worst performing sectors, Technology and Healthcare, contributed to the underperformance in September. Stock selection during the month was a marginal drag on performance too. September brought renewed focus on the question of whether the recent increase in inflation will turn out to be more permanent than transitory.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-2.pdfAugust, 2021
The portfolio delivered a return of 2.62% during the month compared with the MSCI all-country World ex-Australia index (the vbenchmarj) return of 3.02%. The portfolio has delivered returns in excess of the Benchmark over three months, two years and since inception.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-1-1.pdfMay, 2021
The portfolio delivered a return of 0.28% during the month. The portfolio has delivered returns in excess of the benchmark MSCI All Country World Index (ex-Australia) since inception.
Global equity markets in general continued to move higher in May, benefiting from the gradual reopening of economies, the ongoing vaccine rollout and supportive global monetary and fiscal policy. Corporate earnings in the US in its first quarter were another source of positive news with an estimated 86% of S&P 500 constituents surpassing consensus earnings estimates.
Inflation remains a key measure, being closely watched by equity market investors. Inflation fears were stoked by a higher than consensus April number in the US and some strong leading indicators of future economic activity including the Purchasing Managers Indices (in both the US and Europe). This strong growth and higher inflation picture provided a backdrop for economically sensitive companies in May. It also led to a relatively stronger month for value sectors such as Financials and Energy. At a regional level European and emerging markets, which have heavier weighting towards cyclical sectors, outperformed the US.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA-1.pdfJanuary, 2021
The portfolio delivered a return of -1.00% during the month, outperforming the benchmark MSCI All Country World (ex-Australia) Index return of 0.22%. The portfolio has delivered returns in excess of the benchmark over the previous one, three, six and 12 month periods, as well as since inception. Global equity markets began the year strongly, building on their solid finish to 2020. The Democrats’ victory in the Senate race in Georgia was taken as a positive sign in terms of the increased probability of further larger fiscal stimulus in the US.
By month end however these early gains were largely eroded as concerns about the supply of COVID-19 vaccines in Europe and fears over the emergence of new strains of the virus weighed on markets. The sharp rally in several heavily shorted US stocks added to market volatility in the latter part of the month. This short squeeze on several hedge funds was co-ordinated by a group of retail investors executing trades via low-cost trading platforms. As the price of these stocks soared, the exposed hedge funds were forced to close their short positions. The better performing pockets of the market in January included small companies and emerging markets.
At a sector level, energy and healthcare were among the better performers while consumer staples lagged. The Australian dollar was marginally lower by month end. Chinese internet services group Tencent reached a record high in January and was the largest contributor to the portfolio’s monthly return. The other leading contributors included Taiwan Semiconductor and US scientific instrument and software firm Thermo Fisher Scientific.
The three largest detractors from returns were: data analytics specialists Verisk; Visa Inc.; and Fair Isaac Corporation. The short selling controversy referenced above has captured a lot of media attention. Many commentators cried foul as they believed the aggressive buying of fundamentally challenged companies and forced selling of stronger ones to finance this activity threatened the concept of fair price discovery. While the media is likely to continue to focus on this ‘battle’ between retail investors and professionally managed hedge funds, it should not concern investors in long term focused portfolios such as the WCM Quality Global Growth Strategy. This portfolio is invested in companies the WCM investment team believes have growing competitive advantages (expanding economic moats) over the long term, i.e. 5 years and beyond. While the WCM Quality Global Growth Strategy will not be immune to short term retail investor and hedge-fund-induced market volatility, its longer-term performance will be driven by the strength of the underlying companies in the portfolio.
File: https://commentary.quantreports.net/wp-content/uploads/2021/02/NTA-Portfolio-Report-WCMA.pdfasset_class: Foreign Equity
asset_category: Large Growth
peer_benchmark: Foreign Equity - Large Growth Index
broad_market_index: Developed -World Index
manager_contact_details: Array
ticker: SWI1413AU
release_schedule: Monthly
commentary_block: Array
factsheet_url:
https://www.switzerassetmanagement.com.au/funds/wcmm/
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fund_features:
WCM Quality Global Growth (Managed) aims to achieve a long term total return that exceeds the MSCI All-Country World Index ex-Australia (with gross dividends reinvested reported in Australian dollars and unhedged) (Benchmark) before fees, taxes and expenses over rolling three-year time periods, but with lower volatility than the Benchmark. The Fund will invest in a high conviction, actively managed diversified portfolio of listed, quality, high growth companies sourced from developed (ex-Australia) and emerging markets, with the primary objective of providing long-term capital growth.
structure: Managed Fund