A good start to second quarter earnings


Fund Commentary
17 Aug 2016


The month of July was dominated by second quarter earnings publications, a mixed bag of macroeconomic data updates and to a lesser extent the Federal Reserve.

Despite consumer spending, payroll employment, and housing starts ending the second quarter on a strong note, the 1.2% GDP growth reported for the same period was below consensus estimates of 2.5% – leaving the average growth for the first half of the year at 1%. Nonetheless, strength in consumer spending remains encouraging and households should continue to contribute to growth as historically low interest rates and solid labor markets remain supportive. Business investment however, is a concern as its pullback has been broadly based and not just limited to the energy sector. The Fed’s latest policy statement highlighted these various trends and provided a more optimistic assessment of the economy than the second quarter GDP release suggested. In terms of interest rate hikes, the market is seeing a low probability of a near-term alteration. Additionally, the disappointing GDP result will probably fortify the case put forward by Committee members favoring a “wait-and-see” approach – until inflation settles at or above the Fed’s 2% target.

By the end of July over 60% of S&P 500 companies had reported their earnings. Most of them beat consensus earnings estimates, whilst just over half were in line or beat revenue expectations with information technology and healthcare leading the way. In light of the market anticipating another quarter of earnings growth declines, stakeholders seemed extra sensitive to downside risk as share prices reacted more aggressively toward companies that reported below their consensus estimates. For the Fund, 20 companies representing approximately 70% of the portfolio have released their results and beat expectations by an average of 2.9%. Biogen, our top contributor for the month, surprised consensus forecasts on both EPS (+11%) and Sales (+3.6%). The company increased its full year guidance on both metrics mainly due to (1) its strong price realization in its multiple sclerosis segment and (2) improvements in operating cost controls. Alliance Data Systems also performed well as it beat expectations and raised its guidance for the year. Some key concerns were addressed as (1) despite continued weakness in its agency business, Epsilon seems better off as revenues were above forecasts and (2) investor concerns over consumer credit quality were proven to be overdone as most importantly loss rates matched guidance and gross yield beat management’s forecasts.

Overall, the Fund has outperformed its benchmark by 0.3% in July and companies confirmed their strong and above-market underlying growth trajectory. As the earnings growth rate of the companies held in the Fund continues to be significantly superior to that of the market and opportunities continue to form in secular growth segments where valuations have compressed, it is the Investment Adviser’s belief that the Fund is in a good position to deploy cash more aggressively in these compelling risk/reward situations.


The views and statements contained herein are those of the Eric Sturdza Private Banking Group in their capacity as Investment Advisers to the Fund as of 12/08/16 and are based on internal research and modelling.