Saxo Morningstar Moat portfolio Q2 2018 commentary

Market overview

The investment landscape is offering both opportunities and challenges, and the second quarter of 2018 was testament to this, with an undercurrent of risk-off sentiment yet broad market resilience. 

A key focal point has been the trade-war rhetoric, with emerging markets being put under significant pressure as capital outflows persisted. This is true both at an asset level and at a currency level, although the fundamental thesis and economic progress is largely unchanged. Related to this development, a meaningful move was a stronger US dollar (especially relative to the euro and sterling), helping bolster returns for non-U.S. investors. 

For some time now, investors have had to grapple with the implications of increasing borrowing rates. This theme continued through the second quarter, as most central banks (excluding Japan) have made it clear that they are either unwinding, or planning to unwind, the monetary stimulus that has persisted for the best part of a decade. This has muted returns from bond markets, especially government bonds with longer duration, whilst inflation-protected bonds continue to be shaped by a rollercoaster of changing inflation expectations. Corporate bonds have also had to deal with a modest rise in bond yields, albeit from a low base, which has hampered performance. 

Meanwhile, European investors have also had to come to terms with Italy’s precarious political situation and a closing deadline on Brexit. This has dampened risk appetite in the region as investors contemplate the possible repercussions on the European banking system and any contagion risk associated. Tensions related to Brexit have heightened once again, although U.K. multinationals have generated stronger investor interest, especially as sterling fell over the quarter. 

Interestingly, despite the dual headwinds of European political vulnerabilities and escalating trade-war fears, broad equity markets have managed to deliver reasonably robust outcomes. Within this, investors have seemingly sought solace in higher-quality investments, sometimes carrying little regard for the price they must pay. Country and sector dispersion is alive and well, with an example being the 20% performance differential between U.S. technology and emerging market telecoms over the past quarter alone (in local currency terms). Strength in technology, healthcare and consumer staples was offset by a weakness in telecoms and financials. Similarly, at a country level, resilience among companies in the U.S., Japan and Russia was offset by significant price falls in Brazil, China and Turkey.   

Portfolio performance

Best performing positions

Greenhill & Co. is an independent investment bank that derives most of its income from financial advisory. The stock performed extremely well in the second quarter following strong earnings results, with significantly higher financial advisory revenues and outperformance over its peer group. Despite these results, profit was taken and the position closed, albeit with concern that there is a high degree of uncertainty over its ability to continue this positive story.

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 continued positive performance reflects Morningstar’s expectation that TripAdvisor’s network advantage will remain robust over the long term. Given that the stock is now trading close to its fair value estimate, profit has been taken and the position closed as we enter the third quarter.

Andeavor is engaged in the refining and retail marketing of refined petroleum products. The company operates 10 refineries with a total crude oil capacity of 1.2 million barrels per day after the acquisition of Western Refining in 2017. The stock performed well in the second quarter, with Andeavor reporting first-quarter earnings of $164 million, compared with $50 million one year ago. The improvement was largely attributable to the refining segment, where operating income increased to $205 million from $34 million the prior year.

Worst performing positions

Based in Singapore, Oversea-Chinese Banking Corporation (OCBC Group) is a banking institution that provides consumer and corporate banking and treasury services throughout Asia. After a solid earnings result for the first quarter, the stock price detracted, which we believe is due to slightly disappointing net interest margins. The position is maintained into Q3 2018, expecting organic regional growth, with Singapore city-state remaining a core earnings driver.

Flour is a global provider of engineering, procurement, fabrication, construction and maintenance services to customers including oil and gas, manufacturing and mining companies. A poor earnings announcement for the first quarter of 2018 meant the stock prices slumped. Having digested the results, Morningstar reduced its fair value of the stock, lowing its attractiveness and thus, cut the position.

Sina is a leading online media company in China. In 2009, Sina launched the first Twitter-like social media platform in China, Weibo, which has reached 361 million monthly active users and 159 million daily active users. Despite a good earnings announcement, the stock price incurred negative performance over the second quarter. The position is held, on the belief that it is underpriced.

Outlook

While the portfolio has performed well in the first half of 2018, the clouded and changing sentiment of the market requires careful judgement. Behavioural changes are afoot, although investor complacency still appears to be widespread (global confidence surveys have generally moved from strong optimism to moderate optimism). Perversely, any continuation of this move could see fear-driven price action and this would be the springboard for great long-term opportunities to develop.