Saxo Morningstar USD High Dividend Q3 2019 commentary

Market overview

Positive returns were delivered for investors in Q3 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 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 economic growth which was supported by an active central bank response. China and major Western economies are slowing down, and recessionary signals came to surface: 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 citing 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

• Anixter International Inc is a leading distributor of network, security, electrical, and utility power products and services. The position in the portfolio increased 16% throughout 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.
  
  
• AT&T Inc is a wireless communication provider which connects more than 100 million devices to 70 million customers. Elliot Management, which owns 1% of AT&T, called for a strategic review to enhance shareholder value: including a more concrete allocation plan and stronger management oversight. The position in the portfolio rallied 14.4% this quarter and its dividend yield stands at 5.44%.
  
  
• SSE Plc is an energy holding company based in the United Kingdom. They currently offer a dividend yield of 6.5%, and its guided earnings-per-share for next year represents an increase compared to guidance offered in the prior 12 months. In addition, the company is on track to sell its gas production business. Q3 saw SSE increase by 14% in the portfolio.

Worst-performing positions

• BT Group is the incumbent fixed-line phone company in the U.K.: providing phone and internet access, as well as television services, to residential and business customers. Whilst the stock currently offers a dividend yield of 7.5%, it is is underway with realising synergies from prior acquisitions, which are likely to be drawn over years to come due to regulatory and operational hurdles. The position detracted 6.7% in Q3.
  
  
• Invesco Ltd provides investment management services to both retail and institutional clients. Although company revenues have been encouraging, in the short term MIM believes Invesco faces a challenging Q4. Invesco’s quarterly dividend increased at the start of Q3 and the current dividend yield is 7.89%. Despite this, Q3 saw the position in the portfolio detract 15.7%.
  
  
• Pact Group is the largest rigid packaging plastics manufacturer in Australia and New Zealand and has a growing footprint in Asia. Guidance released by Pact for modest earnings growth implies weakness in the core business in fiscal 2020. This was enough to create market fear and sent Pact’s share price sharply lower. In Q3 the position declined 24%, despite a dividend yield of 5% and (according to MIM) being priced cheaply in the market.

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, whilst still pursuing opportunities that will deliver positive portfolio outcomes.