Our portfolio

The view from our Investment Manager, 30 June 2022

Over the second quarter of 2022, the Company’s total shareholder return and NAV total return were -7.7% and -8.4% respectively, with the MSCI All Country World Index (ACWI) returning -8.6%. Equity markets over the quarter have seen a lot of volatility as the global economy faced high inflation, rising interest rates, and the continued supply chain and energy challenges associated with the conflict in Ukraine.

Over the quarter the U.S. Federal Reserve continued to aggressively tighten monetary policy to combat rising inflation. This, coupled with weak economic data and the continued pressure on the global economy from the ongoing conflict in Ukraine led equity markets to sell off as they became increasingly concerned about a possible recession. In April and May we saw a continuation of the trends seen earlier in the year as longer duration growth companies, particular in the technology and consumer discretionary sectors underperformed and energy stocks performed strongly on the back of higher energy prices.  However, in June, the concerns regarding recession appeared to take over and investors became more risk averse, with defensive sectors such as healthcare and consumer staples holding up and significant weakness in cyclical sectors such as energy, technology and consumer discretionary. There was some positive news towards the end of the quarter as China started to ease its COVID restrictions and China markets performed strongly, reversing some of their previous losses

In the Alliance Trust portfolio, GQG continued to be the strongest stock picker over the quarter, led by its exposure to energy and other higher quality, more defensive businesses. Other Value-oriented managers outperformed in the quarter including Jupiter and Black Creek whilst Growth-oriented or more cyclically-oriented managers such as Sands, Vulcan and Metropolis lagged.

From a sector perspective, energy has continued to outperform within the Company’s portfolio, partly due to higher allocation to the sector and partly due to strong stock selection. Notable picks were the multinational energy companies of Exxon Mobil Corporation (American), Petroleo Brasileiro (Brazilian)  and TotalEnergies (French) that performed well over the quarter. Strong stock selection in the Information Technology sector also contributed positively to performance relative to the benchmark. This was partly driven by not owning some of the large index stocks that performed poorly, such as Tesla, Inc. and Apple, Inc. and partly by our positions in Visa Inc. whose earnings are expected to be more resilient in this environment and VMWare, Inc (American cloud computing business) that was subject to a takeover bid during the quarter.

H&R Block (American tax preparation company) was the biggest contributor to relative performance held in the portfolio. Over the quarter, the company posted strong earnings results beating market expectations and has raised earnings forecasts for the year. Baidu Inc (Chinese multinational technology company) has benefitted from the easing of lockdown in China as well as improving market sentiment there. The biggest detractor from performance was MercadoLibre Inc. (Argentine online marketplace company). Revenues continue to grow significantly and margins remain high but the market pressure on highly-valued growth companies and shorter-term focus on earnings continues to weigh on the stock price.

We have kept gross gearing levels at around 9%, below the 10% long-term target as we remain cautious on the outlook for equities as markets continue to 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 able to compound attractive returns in the long-run.