Global Equity Fund Commentary
January 2010
Global equity markets continued to advance in the fourth quarter, albeit at a slower pace than the spring and summer. The MSCI World Index gained 1.8% in Canadian dollars. Over the calendar year, the index advanced 10.4%. Price movements were strongest among technology, financial and resource stocks. The emerging markets also fared particularly well following large setbacks in 2008.
The Global Fund fell 0.9% in the quarter, but over the past year it has gained 14.3%.
The portfolio experienced greater turnover than normal over the year, as the manager, Edinburgh Partners Limited (EPL), took advantage of some large dislocations in stock prices. As noted in previous reports, the most notable shift came from a transition out of some defensive holdings (health care and telecoms) into stocks with higher growth profiles (technology, emerging markets).
EPL started accumulating beaten up, oversold stocks in late 2008 and early in 2009 in anticipation of an eventual economic and market recovery. Some of these stocks, such as Baidu.com and Abercrombie & Fitch, bounced back sharply and reached the manager’s upper valuation target in a matter of months (and were sold as a result). Others, such as Samsung, UBS and China Mobile, have rebounded nicely off their lows but are still attactively valued and remain core holdings.
The portoflio was well structured for the snap back in the markets, and has gained more than 45% from its early-March low.
Whereas technology and cyclical stocks drove the fund’s returns earlier in the year, there has been no clear theme to performance of late. As we noted last quarter, the easy gains are likely behind us and the manager’s focus is on stock-picking with an emphasis on companies that can deliver earnings growth. This is opposed to just targeting sectors of deep undervaluation, a strategy that doesn’t exist anymore.
In the quarter, Yara, Petrobras, Abercrombie & Fitch, and Novartis were among the top performers. The latter two stocks were sold on the basis of valuation. Conversely, UBS, Aviva, Nokia and Sony weighed on performance.
EPL is currently finding value in different areas of the market. They purchased four new stocks in the quarter: DR Horton (a U.S. homebuilder), Carlsberg (a Danish brewer) Fujitsu (a Japanese technology company) and Mitsubishi Corp. (a Japanese conglomerate). As well, they added to positions in China Mobile, Sanofi-Aventis, General Electric and Yamaha, among others.
With the purchases of Fujitsu and Mitsubishi, Japanese stocks now comprise 13% of the fund (up from 5% earlier in the year). These stocks have been depressed because of internal structural changes and concerns overhanging the Japanse economy. Yet, the manager likes the restructuring that is occurring at companies such as Sony and Fujitsu, and feels that the stocks have promising turnaround potential and represent good value.
While confidence has returned to the markets, negative short-term economic news could lead to further volatility. Stocks that have risen more than their underlying prospects would justify are at the greatest risk. The manager has the portfolio concentrated in businesses that they believe have the necessary fundamentals to deliver solid earnings over the next five years. Always a hawk on valuations, EPL is cautious of the market’s rapid rise but are still finding attractive investment opportunities.