Saxo Morningstar Moat Portfolio Q2 2017 Commentary

Instruments traded:Stocks
Asset Classes:Global Equities (excluding Emerging Markets)
Investment Style:Fundamental analysis focused on quality and value
Quarterly Return:-1.34% (net of fees)
Q1 2017 daily return volatility:0.83%


Market Overview

There is no doubt that sentiment over the second quarter of 2017 was dominated by election sentiment, with the perceived election relief in France through April offset by the negative sentiment towards the U.K. election in early-June.

With all that said, markets were reasonably resilient and continued moving forward. The US Federal Reserve hike path has played to plan thus far, with moves in December 16, March 17 and now June 17, which have been mostly anticipated by the market and therefore had very little impact on valuations. Of greater note over the quarter, the euro and sterling were buoyed by the perceived stability in the European Union and the whispers of central bank moves. The euro was the standout against the US dollar and the yen, while sterling also rallied over the quarter, albeit to a lesser extent. Both equity and fixed income markets delivered positive results in the European region, although the UK experienced a late setback as the market grappled with the hung parliament and the implications on Brexit negotiations.

More broadly, excluding currency shifts, it was a resolute and positive quarter for investors. Developed and emerging markets both posted upbeat returns over the quarter. More prominently, sectors labelled “quality growth” excelled, with technology and healthcare both rallying.

For much of the quarter fixed income broadly followed suit, with positive returns that have been curiously correlated to equity performance. However, the last week of trading somewhat altered the landscape, as fixed income yields rose on the back of concerns that loose monetary policy from central banks may be coming to an end. That said, the global aggregate broadly kept pace with both emerging market debt and high yield debt, with all three markets delivering approximately 3% in US dollar terms.

Most remarkably, we continue to witness the rather rapid deterioration of commodity prices. Oil detracted significantly over the quarter, putting abnormal pressure on commodity-related assets. The energy and materials sectors have been reasonably resistant given this weakness, falling to a lesser extent.

Portfolio Performance

April-2.2%
May-2.7%
June3.4%

Best performing positions

  • Valeant Pharmaceuticals is a global specialty pharmaceutical firm with a focus on branded products for the dermatology, gastrointestinal and ophthalmology markets. Its stock price rose in Q2 2016, with the market reacting positively to the announcement of new CEO, Joseph Papa, who has extensive history in the pharmaceutical industry. At this stage, Morningstar Investment Europe Ltd. advise to capitalise on Q2 performance and sell out of the position. It is the their opinion that the company’s debt issues will make it difficult to make necessary reinvestments into the business and pipeline that will sustain longer-term returns on capital.
  • SINA Corp is a leading online media company in China. Its services include Sina.com (portal), Weibo (social media) and Sina mobile (mobile portal and mobile apps). The stock performed well, particularly throughout May, driven largely by Sina starting to monetise Weibo, by rolling out social advertising using social graph interest, and Weibo has been its key growth driver. The position is held into Q3 2017.
  • Vertex Pharmaceuticals discovers and develops small-molecule drugs for the treatment of serious diseases. The company stock price continued to rally in Q2 17 thanks to well-received news regarding its cystic fibrosis (CF) portfolio. Moreover, thanks to the rapid launch of its drug, Orkambi, Vertex saw strong first-quarter sales growth. Subsequent to its strong rally towards the fair value estimate, the position was closed at quarter-end and removed from the portfolios.

Worst performing positions

  • Vocus Group’s key asset is its infrastructure network, consisting of 1,900 kilometres of fibre in nine metropolitan cities in Australia and 4,600 kilometres of inter-city fibre covering New Zealand. Vocus has incurred a number of mergers in quick succession, which have created negative sentiment towards its stock price. Into Q3, the position is maintained, recognising that Vocus' fully integrated business model is such that the fibre infrastructure drives its entire operations and ownership of this fibre infrastructure provides Vocus with a material cost advantage against competitors.
  • Cameco Corp is a Canadian Uranium miner. Its stock price has suffered due to a supply glut and negative sentiment towards nuclear power, with South Korea cutting nuclear plans and also Germany planning to shut down all nuclear power plants by 2022. The position is maintained into Q3 17 as the continued depletion of secondary uranium stockpiles will put increased onus on mined supplies, to meet rising global demand, lifting prices. Furthermore, Cameco owns several of the world's highest-grade uranium deposits; the company's McArthur River mine in Saskatchewan boasts ore grade concentrations 100 times higher than the industry average.
  • Embraer SA ADR is a leader in the aerospace market, with a commanding market share in regional jets, a more comprehensive line-up of business aircraft and the KC-390 transport aircraft. The position is maintained into Q3, principally due to the high barriers to entry in its commercial aviation business. Despite new entrants into the regional aircraft market, Embraer has managed to maintain a leadership position thanks in large part to the intangible assets it has built over the past two decades by judiciously deploying investments across its product portfolio.

Outlook

Looking forward, we continue to live in a world of healthy optimism, strong returns and a fragile footing. Of course, the danger to this is that it increases the chances of future weakness as prices accelerate beyond their worth based on fundamentals. From a portfolio construction standpoint, this implies a level head and discipline as one navigates the course to deliver on their long-term goal.

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