After being considerably ahead of the benchmark for most of July, the sell-off in Facebook and four other holdings only in the last three days of the month saw our Global Capital Aware Fund ending the month slightly down -0.78%, having been up close to 4% prior to these three days. This was an example of the broader market temporary swing from growth to value stocks.
A concentrated, high conviction portfolio like ours can suffer short term periods of under-performance which often presents opportunities. Positive contributions from our holdings in Alphabet, Microsoft, Amadeus IT and Visa helped offset our losses, underlining our strong approach to portfolio construction.
Our core holdings remain including Facebook. This stock exemplifies our disciplined process and unique methodology of assessing ROIC and utilising Megatrends®. Evaluating the financials, not the headlines, it remains an excellent quality growth investment.
Growth to Value temporary swing?
Global broking house Nomura Securities stated recently "the three-day move in U.S. ‘Growth/ Value’ has been the largest since October 2008, a 4.3 standard deviation event relative to the returns of the past 10-year period."
Our strong belief is that quality growth stocks outperform over the full cycle, but there will inevitably be times during all cycles where growth stocks underperform. It will be interesting to watch what occurs in August and September.
In the fund's 106 months of being, just six other periods like July has occurred relative to the broader market result. Our investors enjoyed participating in around 75% of the upside moves in markets and have avoided around half of the downside moments, all the while with downside ‘catastrophe’ protection against sharp deep losses.
Year ending July after fees and the cost of protection the numbers remain sound; 4.98% - 3 months, 7.67% - 6 months, 18.11% - 1 year and 13.35% p.a. over 7 years. July has been the latest installment of an otherwise stellar month to month outperformance for the year, something we stress investors should never become accustomed to (but indeed it is nice when it happens).
Volatility has again come down towards historically low levels. This contrasts with factors that would usually increase it. Markets seem unperturbed at this point despite trade tensions escalating between the United States and the rest of the world.Should tariffs, WTO and Trade agreement threats not lead to benign negotiations, companies that find themselves caught in the crossfire may experience cost or revenue headwinds.
Along with the Brexit mess any reader of financial news will see some multinationals moving production facilities and head offices to manage these risks. At this stage, we don’t see any major impact to our stocks held.
A key risk to monitor is the growing emerging market stresses due to short term portfolio outflows and a strengthening US$.
This is reflected in the Shanghai market falling in excess of 20% and a sharp drop in certain emerging market currencies such as the Turkish Lira and the Argentine Peso.
Additionally, headwinds from short-term interest rates continuing to rise in the United States and the yield curve flattening presents markets with further pressures on valuations in these markets.
Mid-term elections in the US can prove to be a volatile period for equity investors. In fact, in eight out of the last nine midterm election years, the S&P 500 lost between 7% and 20%.
Calling market tops are fraught with danger, especially when one considers the extended nature of the current bull market and broad market valuations. Prudent investors should seek some active downside management strategy in place. A severe market drop will undoubtedly cause anxiety at best and stop individuals from meeting their financial objectives at worst.
All in all we remain positive on our stock holdings of highly profitable companies that will continue benefiting from global Megatrends®. Our valuation approach, which seeks to capture the long-term growth of these companies, continues to show a valuation discount.
We continue to focus on investing in quality growth companies with a long run way of growth that are less sensitive to the fluctuations of the global economy.
Should the markets continue to perform, the portfolio of stocks will participate in the rally. Importantly, if the market suffers a significant correction then we have our downside strategy in place.