Sources of alpha

Market Development: After two strong months, the MSCI World Index returned -4.25% in December. Investors remain concerned by the signalling from the United States Federal Reserve and the ECB in Europe, and that interest rates have to rise further as both these banks would like to return to a situation of positive real interest rates.

Commentaire du Fonds
19 Jan 2023

Market Development: After two strong months, the MSCI World Index returned -4.25% in December. Investors remain concerned by the signalling from the United States Federal Reserve and the ECB in Europe, and that interest rates have to rise further as both these banks would like to return to a situation of positive real interest rates.

This means that the highly valued segments of the markets remain under pressure. The BoJ adjusted its monetary policy during the month resulting in a sharp appreciation of the JPY. The performance of the S&P and the Nasdaq were -5.9% and -8.7% respectively, while the MSCI Europe was marginally up and the Nikkei was marginally down.

Market Outlook

In our view, the equity market environment remains complicated due to the fact that the central banks in the United States and Europe are intent on raising interest rates further. This is then combined with QT. The combination of these two means that the tightening of monetary conditions is happening at historically high rates and we have not yet seen the full effects of this on the economy.

Of course, we are seeing corrections in the Tech sectors, SPACs, cryptocurrencies and Real Estate markets around the world. Layoffs are now prevalent in the Tech sector with announcements from Amazon, Meta and others.

In a few months, we will have confirmation that the recession started some time ago and then the central banks will be forced to change course. The question which still needs to be answered is how much damage will have been caused to the real economy and the implications for earnings. Thus, we remain cautious in our outlook as we are still in a bear market for the time being.

Fund Performance

The Strategic Global Quality Fund outperformed the benchmark by 2.6% in December. The outperformance was driven by a combination of the selection effect (1.55%), allocation effect (1.08%) and currency effect (0.34%).

At the sector level, the Fund’s overweight to Consumer Staples (30.3% versus 7.9% for the benchmark) was a major driver of alpha (1.21%). The relative underweight positions in the Information Technology (0.53%) and Consumer Discretionary (0.42%) sectors also contributed.

Individual Stocks

At a stock level, it is interesting to see that the alpha contribution came from a wide variety of names, despite the relative concentration of the portfolio with only 39 positions. The top three were SLB (the old Schlumberger +0.19%), Coopers (0.19%) and McDonald’s (0.17%).

As Coopers has been discussed recently, we will touch upon SLB given this follows the strength in SBM Offshore last month. The end markets of SLB remain strong given the ongoing need for global access to fossil fuels while it transitions to lower CO2 intensity in the decades to come.

The recent underinvestment by western oil companies (the Europeans are rebalancing their portfolios towards renewables while the Americans are focussed on financial returns) means that there is a huge amount of catch-up investment to do in order to ensure that supplies remain robust.

Moreover, the focus is on offshore oil, which means more work for SLB while the Middle East is undertaking a huge investment programme. The company expects to grow its top line by double digits for the next few years.

On the negative side, Worldline was a drag on alpha (-0.22%); the payment space has been somewhat volatile during the year (in Europe as well as in the United States) given the concerns surrounding economic growth and the role of the old-tech payment processors.

The switch towards card / online transactions from cash payments has further to run in Europe, while commercial banks are still looking for efficiencies which should result in further outsourcing to the likes of Worldline. Given the valuation and structural trend of the industry, we still feel the stock is an attractive investment.

We invite investors and prospects to contact us should they wish to receive any additional information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

The views and statements contained herein are those of  Banque Eric Sturdza SA in their capacity as Investment Adviser to the fund as of 18/01/2023 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.