A busy August

In August, equity markets reversed their recent ascent, reaching their mid-June levels again. The MSCI World Net Total Return Index fell by -2.1% alongside US equities (approximately -1.8%), whilst the Dollar (DXY Index) gained +0.40%.

Fund Commentary
23 Sep 2019

In August, equity markets reversed their recent ascent, reaching their mid-June levels again. The MSCI World Net Total Return Index fell by -2.1% alongside US equities (approximately -1.8%), whilst the Dollar (DXY Index) gained +0.40%.

During the month, volatility increased at the index level, as investors seemingly took profits following a generally positive quarterly earnings report and await further positive news for the near future.

Similar to July, forward-looking global growth estimates remain somewhat uncertain as ambiguity with regards to the overall landscape continues to linger. In the Investment Adviser’s opinion the equity market’s reaction was therefore not surprising. This said, the team believe that one must keep in mind that the relative strength of US economic data, coupled with either positive developments concerning geopolitical tensions and/or the Federal Reserve’s future decisions, could impact equity markets positively in the short-to-medium term.

Portfolio Development

The Fund’s performance was mainly driven by the fixed income book this month. On the equity side, Dollar General and Unilever were amongst the leading contributors, whilst Ulta Beauty and Netapp were the main detractors.

Dollar General reported its earnings with a +10.5% EPS surprise over estimates, alongside a 1.3% positive surprise on its sales, resulting in a year-over-year EPS growth rate of approximately +14%. As a result, the stock price increased 16.5% during the month.

On the other hand, Unilever reported its earnings before August, with generally lower-than-expected volume/mix growth for the quarter. However, the reiteration of management’s guidance coupled with an upbeat tone for near-term EM growth and interim signs of underlying improvements in three of the Company’s geographical EM revenue exposures, propelled the Company’s stock price to new highs.

Ulta Beauty reported its quarterly earnings with a surprising year-end guidance reduction. The main reason identified was the continued and recently accentuated slowdown in the Company’s cosmetics category. Management justified the slowdown and resulting reduced guidance with a lack of meaningful newness, which the Investment Adviser believes is hard for the market to digest and does not explain such an abrupt slowdown, as the lack of newness has been going on for 2 years within the market segment.

This said, the Investment Adviser continues to have confidence in the Company’s overall business model and despite the short-term disappointment still believes in the solid long-term growth story that currently appears to be pricing in an exaggerated risk/reward profile. The team believe that their view was reinforced by the market’s immediate re-rating and the fact that management highlighted continued market share gains in other categories and overall offerings despite the sharp deterioration.

Netapp, a leading provider of enterprise storage and data management solutions, recently re-rated due to macroeconomic headwinds combined with poor execution in sales and marketing. In August, the Company published its quarterly results largely in-line with expectations. Despite its sharp year-over-year revenue decline, the Company stated its confidence regarding maintaining its margin improvements and was able to deliver on
that statement in its recent publication with a non-GAAP gross margin improvement of 100 basis points. The Company’s recent performance triggered skepticism on its ability to return to a sustainable high growth regime especially amid the competitive environment it operates in. As such, the Investment Adviser decided to profit from the Company’s increased implied volatility and to mitigate the recent downfall with an option strategy,
thereby positioning investors to potentially profit from the Company’s still compelling risk/ reward profile over the medium term.

The views and statements contained herein are those of Banque Eric Sturdza SA in their capacity as Investment Advisers to the Funds as of 09/09/2019 and are based on internal research and modelling.