Saxo Morningstar Moat Portfolio Q1 2018 commentary

Instruments traded
Asset classesGlobal equities (excluding emerging markets)
Investment styleFundamental analysis focused on quality and value
Quarterly return–6.9% (net of fees)
Q1 2018 daily return volatility1%

Market overview

The start of 2018 has proved to be a behavioural minefield for investors. Like most of 2017, investors are grappling with a backdrop of trade tensions, political instability, rising interest rates and a mature business cycle. Yet, perhaps of more importance, investors are now also questioning their own unbounded optimism and recognising that markets won’t always go up.

What is interesting is that the market setback in the first quarter came at a time when the fundamentals remained intact. Corporate earnings continue to rise in the majority of instances and default rates remain low. Hence, the unwinding of performance appears more complex than an unassuming turn in the business cycle. 

In this regard, fear-inducing headlines were not hard to spot, with Donald Trump’s threat of a trade war beginning to materialise. Export-oriented markets began to suffer alongside the US, with multinational corporations in Germany, Japan and the UK selling off on the back of this news. Even at a sector level there has been little respite, with deteriorating performance across the board. Interestingly, emerging markets were among the most resilient, presumably due to a combination of cheaper valuations and a market composition that is increasingly focused on domestic growth. 

Elsewhere, a combination of rising interest rates and widening credit spreads (especially in the US) have boosted bond yields from historically low levels. This shift is meaningful, as fixed income and equity markets have shown similar vulnerabilities under this development. The impact was most felt during February and March, with inflation-linked bonds and corporate debt failing to add any value over government bonds.

In contemplating the chain of events, the impact of currency must also be considered. For instance, the US dollar weakened against sterling during the March quarter, dragging on local returns and influencing risk management.


Portfolio performance

January +0.4%

Best performing positions

  • TripAdvisor is the world’s leading travel metasearch company. The website offers over 570 million reviews, and information on 4.4 million restaurants, 1,150,000 hotels, 780,000 holiday rentals, and 875,000 attractions. The stock gained following its earnings results, which were better than expected. Morningstar expects TripAdvisor’s network advantage to remain in place over the next decade, supported by a solid global position, low penetration of travel advertising spending allocated online, and increased marketing spend. The position is held into Q2 2018
  • Flour is a global provider of engineering, procurement, fabrication, construction and maintenance services to customers including oil and gas, manufacturing and mining companies. Strong earnings results and an improved outlook boosted the stock price in the quarter. The stock is maintained into Q2 2018, on the basis that the federal income tax reform, repatriation incentives and regulatory reforms will together raise customers’ anticipated after-tax return on capital projects and allow certain customers to finance projects with cash formerly trapped overseas
  • Embraer, based in Brazil, manufacturers regional aircraft with fewer than 130 seats, business jets and defensive and security products and services. The stock price has lifted in alignment with impressive growth thanks to its Phenom 300 aircraft and now has a dominant position in the lower-end segment. The position is now sold on the basis that we feel the company is facing increasing competition and that Embraer will face margin pressure as it transitions to a new regional jet production in Spring 2018

Worst performing positions

  • General Electric is a manufacturing giant in multiple industrial segments including power, oil and gas, renewable energy, lighting, aviation, healthcare and transportation. The stock price suffered following a January update in which it announced it needed USD 25 billion of capital contributions to bolster reserves in its insurance business, and higher-than-expected long term tax rates, resultant of the tax reform. The position is maintained into Q2 2018 on the basis that GE plans to sell USD 20 billion of assets over the next few years, with the aim of driving down excess corporate costs
  • Mattel is a manufacturer and marketer of toy products sold to wholesale customers and direct customers. Its turnaround remains delayed, having been hindered by the recent bankruptcy and liquidation of Toys “R” Us, which has negatively affected the stock price. Morningstar believes Mattel’s new turnaround plan, which places a heightened focus on core brand productivity and better manufacturing alignment, should bear fruit in the second half of 2018. The position is maintained into Q2 2018
  • Stericycle is the largest (US) domestic provider of regulated medical waste management, with operations in several other countries globally. Earnings results in February presented a decline in gross profit and earnings per share in comparison to last year, knocking back the stock price. Despite this, the position is held into Q2 2018 on the basis that it is a leading provider in its space, that business should grow with an aging population, and that there are significant opportunities yet to be realised

Performance summary

Q1 2018Inception
 –6.9% +32% (17.09.2015)


Considering the longer-term outlook, it could be tempting to attribute the recent market falls to a single factor and extrapolate some form of future expectation. For instance, a trade war between the US and China is a scary prospect with no clear winner. Morningstar Investment management ultimately believe that the market will redirect its attention to the difference between price and the underlying fundamentals.

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