Saxo Morningstar Moat portfolio 2019 commentary

Market overview

Positive returns were delivered for investors in the third quarter of 2019. Unlike the first half of the year, it was developed-market government bonds that led performance, enjoying one of their finest periods thanks to central bank activity. 

Equities performed well this quarter. Of note, utilities topped equity sectors and value-style companies had a notable resurgence. The laggards for this quarter were US small growth companies alongside energy and material companies. Iron ore fell 30% in the quarter alone. Emerging market equities continued to struggle as China, South Korea, Hong Kong and surrounds are well down on developed-world peers, although emerging Europe held up. 

The global economy experienced low growth which was supported by an active central bank response. China and major Western economies are slowing down, and recessionary signals came to surface. These included weak manufacturing results and the yield curve turning negative, offset by a continuation of reasonable US employment, retail and housing trends. 

The UK market was worth watching given Brexit, weaker economic data, falling energy prices, tumbling Sterling and Thomas Cook going under. Despite this, it saw a positive September which offset weakness from the Summer period.

Portfolio performance

(Performance is net of all fees)

Best performing positions

• Line Corp is the leading mobile messaging app in Japan, Taiwan, Indonesia and Thailand. The stock rallied 33% in Q3 thanks to strong quarterly customer engagement results. The monthly active users (MAU) increased to 7.4 million from 4.3 million, meaning Line now covers more than 90% of smartphone users. Profits were taken at quarter end, however we maintain the position into Q4 as Morningstar Investment Management (MIM) believes that the company is in a strong position as its share price remains discounted to its fair value
  
  
• Anixter International Inc is a leading distributor of network, security, electrical, and utility power products and services. Its share price increased 21% over the quarter, reflective of its strong gross margins and better operating leverage.  Anixter’s adjusted operating margin also expanded. After a strong first-half performance, management now expects stronger growth and increased earnings expectations. Whilst some profits were taken, the position is maintained into Q4.
  
  
• Tenneco Inc Class A sells emissions-control products which meet strict air-quality legislation, optimise engine performance, improve fuel economy, and acoustically tune engine sound to fit a vehicle's profile. Tenneco rose 18% last quarter thanks to speculation on its successful acquisition of Federal Mogul from Icahn Enterprises. MIM believes the fair value price of the stock is $73. Today it trades just above $11.30. The position is maintained within the portfolio. The position is kept into Q4.
  
   

Worst performing positions 

• Tata Motors Ltd operates in the Consumer Cyclical industry. It owns iconic brands Jaguar and Land Rover (JLR), while offering a broad product line of motor vehicles including compact passenger cars, sport utility vehicles, luxury passenger vehicles and large semi-trucks. Last quarter, Tata dropped nearly 25% due to declining China demand and JLR not performing as expected. Despite this, MIM believes it is now cheaply priced and will be increasing their exposure into Q4 2019.
  
  
• Alexion Pharmaceuticals Inc specialises in developing and marketing drugs for rare, life-threatening medical conditions. The share dropped 21.89% in Q3. At August-end the U.S. Patent Trial and Appeal Board announced it would institute an inter partes review to evaluate the validity of three U.S. Soliris patents (issued in 2017) that would extend patent protection from 2021 to 2027. The news of the IPR took both the market and analysts by surprise, sending shares down 10%. MIM believes the selloff is unwarranted and will maintain their position into Q4. 
  
  
• Baidu Inc is the largest Internet search engine in China with more than 70% of mobile traffic share in the search market. The firm generates 86% of revenue from online marketing services and the rest from other segments. The stock dropped last quarter, by 8.54%, as the market took a negative view to Baidu selling approximately a third of its shares in Ctrip. The position is maintained, given that Baidu is now trading at a significant discount to its fair value price. 

Outlook

We are amidst extraordinary times. Let’s not forget, 70% of Euro zone bonds are now negative. 
Economic growth is souring despite record levels of stimulus. Yet, central banks continue to save the day. So, how does an investor make sense of it all? What should your asset allocation look like?

To be clear, we don’t advocate timing the market—history has shown that investors are rarely capable of correctly calling both peaks and troughs. Instead, we advocate a valuation-driven asset allocation that acknowledges the downside risk.

We believe our asset allocation research will bear fruit for clients, especially once you factor in risk. That is, we are sensitive to protecting capital given the unprecedented nature of markets today — whilst still pursuing opportunities that will deliver positive portfolio outcomes.