OUR PORTFOLIO

The view from our Investment Manager, 30 June 2020

Over the second quarter of 2020, the Trust’s total shareholder return and NAV total return were 22.5% and 21.8% respectively, outperforming the benchmark MSCI All Country World Index (ACWI) which returned 19.6% over the period.

The second quarter was a dramatic contrast to the first quarter of this year. Then, we had witnessed the fastest decline of 30% or more in the history of the S&P 500 index and were advocating calm, level headed thinking in what was beginning to be a market panic. Since then, however, we have seen the largest combined stimulus packages in peacetime, with the market dutifully responding by delivering one of the largest market rallies in history. This recovery puts the MSCI ACWI index 0.5% above its starting point at the beginning of the year (in Sterling terms). Quite remarkable when considering the scale of economic damage that has been inflicted since that point.

In further contrast, the first quarter saw acceleration of already established trends with large cap and quality/growth/technology driven stocks generally outperforming and mid-small cap and value meaningfully underperforming. The second quarter was interesting in that we saw continued outperformance of growth as a style, with value underperforming but a change in the size effect with mid and small caps outperforming large caps (+23.2% and +25.3%vs +19.0% respectively), perhaps due to the central bank actions and market concerns about liquidity easing.  There is a lot of discussion in the market about whether growth will continue to outperform or whether value will finally reclaim its title. Our approach remains the same, that we do not need to bet on either but can perform well if we see a broader set of companies delivering performance going forward. It feels like we caught a glimpse of breadth in the second quarter with mid and small sized companies recovering (giving the opportunity for our high conviction stock selection to prove its worth). We are pleased that the Trust’s equity portfolio was able to demonstrate outperformance of 1.2% this quarter, without the need for a reversal from growth to value.

Over the quarter, a position was initiated in Bureau Veritas, a world leader in testing, inspection and certification. It has been expanding its reach in different industries and capitalising on the move to digitisation, whilst experiencing an exponential rise in demand from international governments to implement nationwide medical tests for COVID-19. Both Amazon.com and Microsoft Corp performed strongly over Q2, delivering returns of 42% and 30% respectively as demand for online services accelerated. In contrast, the Trust’s position in global brewer Heineken was liquidated given the impact of the closure of restaurants and bars in key geographies as lockdown measures took effect.

Following the market falls in Q1, the Trust started Q2 with gross gearing of 10.6%. This benefited shareholders as the market rallied strongly and gearing naturally declined. However, in our outlook we consider a range of possible scenarios and given the strength of the market recovery, economic weakness and degree of uncertainty, we reduced gross gearing further to 5.5% at 30 June. We remain true to our approach of high conviction stock selection and diversifying styles, sectors and geographies. As such, we have not tried to time the market recovery, nor are we betting on a change in market dynamics or a reversal of styles – these always prove difficult to get right in a consistent manner. As these factor effects were less extreme in the second quarter, stock selection was able to play a more significant role. These are the conditions in which our managers stock selection skill can come to the fore.

Finally, we have discussed Responsible Investing at prior Board meetings and indicated that we would bring further views on this, particularly in relation to potential exclusions, when our work on this has been completed. Our expectation was that this would be ready for the July Board meeting. However, since then, there have been additional regulatory and legal developments that is causing us to conduct further diligence. As such, our expectation is that we will bring proposals on this topic to the October meeting.