June update


Fund Commentary
26 Jul 2017


To mark the first half of 2017, this report will include: (1) a brief snapshot of the U.S. economy, (2) an overview of the upcoming earnings season, and (3) a review of the Fund and the changes that have been implemented in June.

(1) All in all, the U.S economy had a sluggish start to 2017, as consumer spending and business inventories did not progress as anticipated. In the first quarter of 2017, business investment grew at the fastest pace since 2011. The largest increase in spending came from non-residential structures, as oil producers escalated the number of rigs in operation. Even though the impressive gain is unlikely to be repeated, financial conditions are accommodative and lending standards have eased (modestly), thereby supporting U.S. companies. Additionally, uneven consumer spending through the first quarter of 2017 was attributed to a significant drag in utilities consumption, with output being much weaker than the seasonal norm.

Looking forward, even if weather patterns (and thus heating and energy consumption) don’t completely normalize, a significant increase in the contribution from the utilities component is expected. On a technical level it would already backfill a good portion of the first quarter weakness in consumer spending growth. As such, a majority of market participants are still bullish on the economy’s outlook, as (a) the combination of rising asset values and persistent gains in hiring point to a recovery in general consumption and (b) fiscal stimulus is still expected to strongly boost growth this year. However, the Investment Adviser currently expects the second half of 2017 to be very similar to the first half of 2017, as Trump’s agenda faces complications. Indeed, one of the prevailing sources of uncertainty for both, global and U.S. growth outlooks is the president’s agenda. For example, U.S. trade policy is still subject to many questions. No clear message has been passed on since the election. Even though Trump’s administration highlighted the desire to “rip up NAFTA”, pull out of the Trans Pacific Partnership and punish countries that run large trade surpluses, world trade activity has increased.

(2) The 2nd quarter earnings season is expected to be positive, as economic activity remained solid. Consensus expectations currently points at a 6.8% year-over-year EPS growth rate for Q2, which is around half of what was delivered in the first quarter (13.9%). Excluding energy, the S&P 500 is expected to grow by 4%, led by Information Technology (+10% expected) and Financials (+6% expected). For the Investment Adviser, above-trend economic growth (first quarter GDP revised slightly higher in third estimate) and surprisingly positive economic data indicate that results will probably be published above expectations.

(3) In terms of allocation, the Fund’s relative overweight exposure to Healthcare was the largest contributor in June, whilst its relative underweight exposure to Financials was the primary detractor. Additionally, on a total attribution basis, consumer discretionary was the largest detractor. Consequently, it isn’t surprising that the top three contributors in terms of selection were Envision Healthcare, Celgene and Biogen, whilst the top three detractors were Kroger, Dollar Tree and AutoZone. Positions in Alliance Data Systems and Canadian Pacific Railway were closed during the month, as their fundamental growth drivers slowed on both an absolute and relative basis. As such, the Investment Adviser progressively increased the weighting of Facebook and Marriott International (which offer significantly more compelling investment opportunities), whose positions had been established the previous month. Overall, the Investment Adviser is confident with the Fund’s strategy to select companies that are strong secular growers at reasonable prices. Generally, growth stocks outperform in moderate growth environments, and the Investment Adviser expects to see such an environment persist at least until the end of 2017.

The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 17/07/17 and are based on internal research and modelling.