Global equity markets surged upwards in the final quarter of the year after the US Federal Reserve surprised investors by signalling that, after aggressive increases in 2022/3 to combat rising inflation, interest rates have peaked. The central bank indicated that July’s increase was the last and that the next move in the cost of borrowing is likely to be down, which investors in shares welcomed as a potential boost to corporate profitability. Similar messages about interest rates peaking were sent to the market by the European Central Bank and the Bank of England.
As a result, our benchmark index, MSCI ACWI, leapt ahead, returning 6.3%. The Alliance Trust portfolio outperformed the index, with NAV returns of 7.6%, and total share price returns of 8.0%, the latter buoyed by a narrowing of the discount towards year end.
The fourth quarter gains added to those in the previous quarters to deliver a total NAV return of 21.6% in 2023, 6.3 percentage points ahead of the index, although the discount movements during the course of the year trimmed total shareholder returns to 20.2%. Still, the annual NAV and total shareholder returns were among the highest of global trusts.
Importantly, this outperformance was driven primarily by stock selection rather than country sector or investment style exposures, demonstrating that our portfolio construction process is succeeding in isolating company-specific factors as the key source of added value. We believe this stock picking skill could become increasingly important in what is likely to be a period of continuing macroeconomic instability.
In the fourth quarter, stock selection was strong across sectors and regions. In aggregate, Vulcan and Veritas’s stocks make the biggest contribution to returns. Vulcan’s standout performers included the global private equity groups KKR and Carlyle, which each rose around 30%, while Veritas’ holdings in Aena, the Spanish industrial group, and Cooper Companies, the US healthcare company, also posted healthy gains.
However, the biggest single contributors to our outperformance were selected by Black Creek and Jupiter. Black Creek’s holdings in Elanco Animal Health, the US-based business which produces medicines and vaccines that help prevent and treat disease in livestock and pets, rose by almost 30% in the fourth quarter after its performance exceeded market expectations. Elanco has successfully completed the integration of Bayer Animal Health and it has some significant approvals and launches ahead of it in 2024, including a drug for reducing cattle gas emissions.
Jupiter’s holdings in Kyndryl Holdings, the US-listed technology infrastructure business spun out of IBM in 2021, also did very well, rising by more than 30%. Kyndryl’s subsidiaries provide applications, data, AI, cloud, and other services. It has partnerships with Microsoft, Google Cloud and Amazon Web Services and accounted for more than a quarter of IBM’s revenues before it was spun off. After an initial slide in its share price, it has recovered strongly in 2023.
The biggest detractors from performance were Bayer AG, the German health care group, US commercial insurance broker Aon, and Baidu, China’s dominant internet search company. Bayer’s shares plunged to the lowest level since 2008 after it announced that a late-stage trial for a blood-thinning drug for heart disease had failed. Jupiter, which owns the stock, continue to be attracted by the company’s very low valuation for its global leading businesses and long-term prospects. Aon underperformed after announcing the planned acquisition of NFP, a middle market broker, which created short-term concerns among investors about earnings and cash flow. But SGA says the acquisition makes sound strategic sense. Together with increased investment in technology and headcount reductions, SGA expects the acquisition to contribute to steady long-term earnings growth for the company. Baidu continues to suffer from generally gloomy sentiment towards the Chinese economy and stock market, but Black Creek, which owns the stock, has not changed its view that it offers attractive long-term value.
Although the year ended on a high note for stock markets, it is not easy to predict how they will evolve in 2024, so we are cautious about the outlook. Inflation is declining and the consensus seems to be that the global economy will enjoy a soft landing. But most economists and analysts were wrong-footed by macroeconomic developments in 2023, with many expecting a recession that didn’t materialise. This highlights the difficulty of basing an investment strategy on predictions of top down-down factors such as GDP growth, interest rates or foreign exchange rates.
That is why we focus on analysing the fortunes of individual companies. Although it could be another bumpy year, especially with so many elections globally in the pipeline, our stock pickers focus on the long-term fundamental strengths of businesses and give us a range of different ideas that pay off at different times, which makes our portfolio resilient to different market environments. We’re confident that they can continue to add value in 2024, while we dynamically manage them and their allocations of capital in the light of evolving market conditions to ensure the portfolio remains diversified and strikes a comfortable balance between risk and reward for shareholders.
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