Our portfolio

The view from our Investment Manager, 31 March 2022

Over the first quarter of 2022, the Company’s total shareholder return and NAV total return were -3.8% and -2.4% respectively, with the MSCI All Country World Index (ACWI) returning -2.6%.

The first quarter of 2022 will be remembered in history for the terrible events that have unfolded in Ukraine. The humanitarian crisis that has been caused by Russia’s invasion of Ukraine in mid-February, continues to grow worse by the day. Our thoughts are with those impacted by the events, and we can only hope for the conflict to be resolved soon.

The first half of this quarter was challenging for equity markets as the U.S. Federal Reserve began discussions of reducing its balance sheet and setting out a more concrete plan for raising interest rates. The improving COVID situation has also been a signal to the market that the Fed is likely to be raising rates sooner rather than later. The shifting expectations for inflation and interest rates led to a dramatic repricing within the equity market away from growth stocks. In particular, this has impacted companies with high Price-to-Earnings (P/E) ratios and little profitability as investors started to seek out stocks with more reliable near term cash flows and valuation support. In this period, non-US Value parts of the market outperformed and given the inflationary back-drop, energy and commodity sectors showed particular strength.

In the second half of the quarter the Russian invasion of Ukraine created one of the worst humanitarian crises in recent history as well as triggering economic sanctions on a huge scale. The fall out of these events includes materially disrupted food supplies and other supply chains as well as a public backlash against the use of Russian hydro-carbons, particularly in Europe. This exacerbates some of the exiting trends and in reaction to the conflict, markets continued to fall in the first half of March, led unsurprisingly by Europe but also China as investors increased their concern of geo-political risk. However, markets staged a strong rally of around 10% off the mid-month lows to finish the month higher, leaving the MSCI ACWI index down just 2.6% for the first quarter overall. This late March rally was led by the sharp reversal of previously underperforming US growth stocks, perhaps an indication that the post-COVID liquidity provided by governments’ fiscal support over 2020/21 still remains in the system. However, the most notable market reaction has been in commodity prices and inflation. The energy and materials sectors outperformed materially as constrained supply led to rising prices and expectations of increased profitability. Further, Consumer-oriented sectors came under pressure in anticipation of weaker consumer demand resulting from the cost of living squeeze that is beginning to be felt.

GQG was the strongest stock picker over the quarter. Over the last year or so, GQG has been repositioning its portfolio from their US technology exposure towards energy and materials and this has materially benefited their performance. Other Value-oriented managers outperformed in the quarter including Jupiter and Black Creek whilst Growth-oriented managers such as Sands and SGA lagged. The most notable change to the portfolio structure in the first quarter was the removal of River and Mercantile from the portfolio. River and Mercantile was also performing well in the quarter given its Value/Recovery approach, however, the significant corporate changes, with the sale of the Solutions business to Schroders and acceptance of an offer for the remaining business from Asset Co., reduced our conviction in the long-term stability at the organisation. River and Mercantile's allocation (approx. 6% of the portfolio) was re-distributed amongst the other 9 stock-pickers.

In terms of specific stocks, GQG’s investments in large oil & gas companies, Petroleo Brasileiro and Exxon Mobil Corporation, were the biggest contributors to the Fund’s performance. Their shares have climbed as the conflict in Ukraine has led to oil prices peaking at over $120/barrel. The biggest detractor from performance was Meta Platforms (owner of Facebook). Meta’s stock fell after the market was surprised by news that it’s user growth was beginning to stagnate. In an environment of rising interest rates where valuations of growth stocks are under pressure, news of stagnating user growth on the platform led to swift decline in the share price. Nevertheless, revenue growth was ahead of expectations and some shorter term issues such as revenue disruption driven by privacy changes to Apple ‘s iOS mobile software, and some cyclical reduction in advertising spend is expected to abate in future.

Having maintained gearing at around our target 10% for some time, we reduced gearing slightly to around 9% in January. This is a reflection of the very strong absolute returns achieved by equity markets in recent years, in part supported by central bank stimulus, and we expect more volatility as markets adjust to shifting expectations for inflation and interest rates. The portfolio continues to be structured as a collection of high conviction company investments from a diverse set of skilled stock pickers with different investment approaches that we believe will be to compound attractive returns in the long-run.