Price and Performance

Volatility in the equity markets continued over May as markets digested further monetary policy action from the US Federal Reserve (‘Fed’). The Fed hiked rates at the start of the month by 0.5 percentage points which was the largest increase in over two decades. Despite the size of the increase, markets were relieved as the Fed’s guidance appeared to rule out an even bigger rise of 0.75 percentage points for now. Fed policy aside, the conflict in Ukraine continues to weigh down on global growth and in turn, the equity markets through oil price and supply chain impacts. The MSCI All Country World Index ended the month down -0.3%. The Company’s NAV Total Return was +0.9%, some 1.2% above the benchmark and the Total Shareholder Return was -0.7%, as discounts widened in the sector.

Within the Company’s portfolio, from a regional perspective, strong stock selection in the Americas delivered outperformance of +0.6%. The US has seen a lot of volatility over the period as a result of the Fed’s policy changes and the Company’s energy stocks were among the biggest outperformers whilst technology positions were the main laggards. Stock selection also contributed to relative outperformance in Europe, contributing +0.2% to relative returns. TotalEnergies (multinational energy), Continental AG (auto parts manufacturer) and Bayer AG (pharmaceutical, life sciences and agricultural chemical company) were the key contributors there.

From a sector perspective, Energy, Utilities and Financials were the strongest performing sectors as they benefited from the inflationary market environment. The portfolios overweight to energy stocks added +0.2% to relative returns but strong stock selection in the consumer sectors (Staples and Discretionary) was the biggest driver, adding +0.6% vs the benchmark. One of these successful stock picks was owned by Jupiter, H&R Block Inc, an American tax preparation company.

The company beat analyst expectations on its latest earnings report and raised forecasts for 2022 leading to the stock rising over 30% in May. Additionally, the portfolio’s lack of exposure to Tesla Inc, an American automotive and clean energy company, added to relative returns as its share price dropped over 10% on the back of the continued sell-off in growth stocks.

In terms of manager performance, GQG continues to be one of the strongest performing managers in the portfolio, benefitting from strategically repositioning their portfolio towards energy and materials stocks and away from growth/technology stocks. Jupiter was the biggest contributor to the portfolio’s outperformance in May, with their position in the previously discussed H&R Block being the biggest driver. Sands was the biggest underperformer over the month as the manager’s growth portfolio continues to suffer as monetary policy tightens. The manager retains high conviction in the long-term growth potential and earnings power of the companies that it owns.

At a stock level, Petroleo Brasileiro SA was the biggest contributor to the portfolio’s outperformance. The state-owned Brazilian petroleum corporation continued to benefit from high oil prices. Exxon Mobil Corporation, TotalEnergies, NRG Energy and BP plc also benefitted similarly and are among the top contributors to the portfolio’s outperformance. As well as H&R Block, discussed earlier, not owning Apple or Tesla were the other key contributors to outperformance. Walmart and MercadoLibre Inc were the two biggest detractors relative to the benchmark. For MercadoLibre, despite above expected earnings, the Latin American e-commerce company has seen a decline in its share price as the company pointed to a number of headwinds that they are expecting in the coming months. These include strained consumer spending, rising interest rates and inflationary pressures. The company is held by Sands and Sustainable Growth Advisors. Walmart Inc, an American multinational retail company, returned -15.8% in May. The company slashed its earnings forecast for the year pointing to high food price inflation taking demand away from general merchandise. The position is held by GQG but was trimmed during the month.

As the market is still experiencing volatility, and the geopolitical situations remain uncertain, gross gearing levels have been maintained at around 9%, below our long term 10% target.