Equity markets continued their recovery from the March lows and delivered a strong 14.7% return in the fourth quarter (Q4-20). There were some notable macro events, including the US Presidential election, and second and third waves of the Covid-19 pandemic, but the quarter was perhaps dominated by the news of successful vaccine developments by a host of pharmaceutical companies with seemingly high efficacy. This triggered a violent rotation in markets, out of the recent ‘Covid-19 winners’ into perceived ‘opening up’ beneficiaries.
The funds performed well in Q4-20 against this backdrop, with Global Equity Select returning 16.8% in Q4-20 (2.1% ahead of the benchmark), Global Managed returning 11.3% (1.3% ahead of the benchmark) and Global Capital Plus returning 5.6% in the quarter (well ahead of the benchmark, which was virtually flat). For the year, markets returned 16.3%, which many will think remarkable, considering the economic disruption wreaked by the pandemic.
The primary contributors to the return from Global Managed were:
- Equity holdings, which returned 17% for the year (ahead of the MSCI All Country World Index’s [ACWI] 16.3%). It is pleasing to note that, after passing the Fund’s 10-year mark, the core equity building block has added value over this meaningful time period, delivering 11.9% p.a. (1.8% p.a. ahead of the benchmark over this period).
- Gold, which increased 24.2% for the year.
- Fixed interest returned 6.2%, which is healthy in absolute terms, compared to inflation and considering the very low duration of the portfolio, although clearly lagging the Global Bond Index’s 9.2%.
The primary contributors to return for Global Capital Plus were:
- Equity holdings, which returned 11.4% for the year. Over 10 years, the Fund’s equity holdings have compounded at 10.7% p.a. (which is ahead of the ACWI).
- Gold, which increased 24.2% for the year.
- Fixed interest returned 5.2%, which is healthy in absolute terms, compared to inflation and considering the very low duration of the portfolio, although clearly lagging the Global Bond Index’s 9.2%.
Spotify was a top contributor for the year and a meaningful contributor for the quarter, with its shares up over 100% in 2020, as the market started to appreciate its multi-year growth potential (as outlined in previous commentaries). Spotify is the leading player (ex-China) in the fast-growing audio streaming market and will benefit from two powerful tailwinds, both of which are in the very early stages. First, music remains extremely under-monetised compared to other forms of media and in absolute terms, with US spending per capita halving in real terms since 1999. Secondly, traditional radio is a $30 billion-plus global revenue pool that is in the very early stages of the inevitable shift to online, and Spotify is aggressively trying to accelerate this move by investing in leading podcast content and creation tools.
Since 2015, Spotify has grown its revenue by 37% p.a. and we expect this strong growth to continue, forecasting growth of over 20% p.a. and steadily expanding margins going forward. With its excellent and innovative management team led by its visionary founder Daniel Ek, we believe that Spotify is well positioned for future growth. The stock has tripled from the lows, and with less upside to our estimated fair value, the Funds’ holdings have been reduced.
Airbus, reflecting the rotation within markets, was both a top-two contributor for the quarter and a top-two detractor for the year. After a precipitous decline in the first quarter of the year, Airbus’s share price basically flatlined until early November and the announcement of Pfizer/BioNTech’s strong Covid-19 vaccine results.
Despite returning 50% for the quarter (in US dollars), Airbus is still trading more than a third lower than pre-Covid-19 levels. This compares to the market which, as we know, is c.15% higher (at all-time highs). We recognise the high levels of uncertainty in the near-term, but believe that Airbus shares are offering a high margin of safety on a long-term horizon, as they are pricing in that air-travel growth will remain at levels c.20% below its 50-year growth trend, in perpetuity. Thanks to its robust initial balance sheet, and to moves that further increased the company’s liquidity during the year, we are comfortable that Airbus can withstand a challenging environment for several months or even years ahead.
In fact, we think it is possible that Airbus could end the year in a net cash position, which was unthinkable a few months ago. We are also encouraged by the potential for a much-improved competitive position against its US peer Boeing, which is hamstrung by an over-leveraged balance sheet and has suffered a meaningful hit to brand equity through the 737MAX crisis. Finally, several vaccines have been approved and immunisation programmes are being rapidly rolled out; it would seem that the path to some form of economic normalisation is growing clearer and closer. We remain cautiously optimistic.
POST-PANDEMIC REBOUND LIKELY TO BE STRONG
The departure point for markets at the start of 2021 is provocative: many indices start the year at record highs, driven by a few mega-caps, with speculative froth evident in some hyper-growth sectors, in capital markets activity (especially some initial public offerings and special purpose acquisition companies) and in the behaviour of frenetic retail traders. However, interest rates are low, savings rates have exploded, monetary stimulus is set to be followed by fiscal stimulus, and economies will grow well above trend once the world emerges from the Covid-19 pandemic.
We continue to hold a balanced portfolio of competitively advantaged businesses in our equity allocations. This includes some of the mega-caps that have performed for a long period of time – these still have strong growth prospects and are phenomenal businesses. Also, some of the stocks left behind in the 2020 rally that had unjustifiably low starting valuations will be beneficiaries of world economies normalising. There would seem to be ample opportunities for stock pickers.
PORTFOLIO POSITIONING: GLOBAL MANAGED
At quarter-end, Global Managed was positioned with just under 70% in growth, or risk, assets comprised of the following:
- 56% effective equity
- 4% in property
- 3.5% in infrastructure
- 1.5% in convertible instruments
- 4.5% in high yield credit.
The remaining 30% of the Fund is invested in either more stable assets, or diversifying assets, which we think have lower correlations to equities:
- 7% in commodities
- 5% in inflation-linked bonds
- 5% in hedged equity
- 13% in investment-grade fixed income (with 5% in short-dated treasury bills and 4% in corporate credit).
PORTFOLIO POSITIONING: GLOBAL CAPITAL PLUS
At quarter-end, the Fund was positioned with c.47% in growth, or risk, assets comprised of the following:
- 28% effective equity
- 5% in property
- 4% in infrastructure
- 2% in convertible instruments
- 8% in high yield credit
The remaining c.53% of the Fund is invested in either more stable assets, or diversifying assets, which we think have lower correlations to equities:
- 8% in commodities
- 5% in inflation-linked bonds
- 6% in hedged equity
- 33.5% in investment-grade fixed income (with 9% in short-dated treasury bills and 29% in corporate credit).
As highlighted in prior commentaries, we continue to feel that the fundamental diversification evident in this portfolio construction, with an intentional tilt towards inflation protection at the expense of nominal government bonds, is both more appropriate and more robust than that of Global Managed’s benchmark, which includes a 40% weighting to global government bonds. As a reminder, the bond index as a whole offers an expected return (if held to maturity) of less than 1% and a duration of approximately seven years. Setting this meagre return against the risks, which we feel are significant, including huge budget deficits and elevated debt levels, suggests to us that this part of the Fund’s benchmark offers a poor risk-reward trade-off and that investors will do well to avoid these instruments entirely. In our view, they will be better served over the long term in diversifying assets, as outlined above.
Thank you for your continued support and interest in the Fund.