Our fund range with a developed market bias includes Global Equity Select and two multi-asset funds – the long-term, growth-oriented Global Managed Fund and the more conservative Global Capital Plus Fund. As you would expect during a period when markets recovered strongly, the funds performed in line with their risk budgets over the quarter in review, with Global Equity Select, Global Managed and Global Capital Plus producing US dollar returns of 5.7%, 4.6% and 1.7% respectively.
In Global Managed and Global Capital Plus, return contributions were broad-based:
- Equity holdings returned 7.9% in the case of Global Managed and 6.2% in the case of Global Capital Plus, compared to the benchmark’s 8.1%.
- Property holdings had strong returns of 10.0% and 11.0% respectively.
- Fixed interest continued a solid rebound, returning 3.7% and 3.1% respectively, compared to the bond benchmark of 2.7%.
- Gold holdings returned 6.4%.
- Other commodity holdings returned 6.9% and 7.2% respectively.
Portfolio hedges were the most significant detractor from performance, which is not surprising, as these positions will clearly be a headwind in strong markets. However, it is not unusual for some form of protection to be in place in our multi-asset funds. If purchased when the cost is low, and scaled appropriately, we feel this is an important tool to manage risk and volatility.
Multinational pharmaceutical Bayer detracted over the quarter. We think the stock is materially undervalued at a seven times price-to-earnings ratio. This is due to continued uncertainty regarding the resolution of the Roundup litigation and regulatory uncertainty around its Xtend platform at a time when end-markets (principally corn due to lower bioethanol demand) are temporarily depressed. Longer term, Bayer remains the leading crop science franchise, with significant opportunity to improve profitability from merger synergies, new products in the pipeline (e.g. short-stature corn) and scaling its digital agriculture initiative. While recent results have been disappointing, the range of potential outcomes remain tilted to the upside.
COVID-19 UNDERSCORES NEED FOR SERVICE EXCELLENCE
US cloud-based company Salesforce was a strong contributor to performance, with the share price climbing 26% in one day following the release of better-than-expected results. Organic revenue growth of 19% on a year-over-year basis in a quarter heavily impacted by Covid-19 is an excellent result and highlights the strong positioning of the company and demand for its software solutions. Salesforce is the global leader in customer relationship management software and has moved into adjacent areas, including the broader digitisation of customer-facing activities, such as marketing, e-commerce, data management and business intelligence. While these trends were strong before Covid-19, social distancing has reinforced the need for businesses to invest in revenue-generating activities, to better know their customers and to be able to reach them online. Salesforce offers the tools to do this. The company sees a large opportunity ahead and continues to invest aggressively in adding staff during a time where many companies are laying people off. Salesforce is a well-managed, high-quality and fast-growing compounder with strong environmental, social and governance credentials, and we remain bullish on its outlook.
At quarter-end, Global Managed was positioned in 68% growth assets and 32% more stable, diversifying assets with limited correlation to equities. The growth-asset allocation consists of 54% effective equity exposure and smaller positions in listed property, infrastructure, convertible bonds and high-yield corporate bonds. The more stable part of the portfolio consists of Treasury bills, hedged equity, inflation-protected securities, commodities and investment-grade corporate bonds.
The more conservative Global Capital Plus owned 43% in growth assets, including 25% effective equity exposure and 57% more stable and diversifying assets, including 19% in investment-grade corporate bonds, 12% in Treasury bills, 8% each in commodities and hedged equity, and 6% in inflation-protected securities.
Earlier this year, we felt that there were attractive opportunities for those investors with a long time horizon and the ability to filter companies whose prices had been dislocated with little impact to their sustainable earnings power. After a sharp rally over the past six months, these opportunities are now harder to find. In addition, the need to reassess the prospects of many businesses continues as investors parse fundamental virus-induced behavioural changes from short-term noise. Fundamental changes, however, play to the strengths of fundamental investors, and we continue to find a select number of stocks with solid, long-term prospects that are reasonably priced.