Portfolio Spotlight: US Banks

The Portfolio returned 3.0% for the month, compared to the Index return of 4.0%.

In this month’s report we provide a quick market review, and then a spotlight on the US banks.

We are pleased to announce that two Australian research houses have now completed their reviews of PIA since the appointment of the new investment team and the Company has received a Recommended rating from both Zenith as well as Independent Investment Research. The reports are available to AFSL holders HERE.

Top Holdings (alphabetically)

Alphabet Inc

United States

Communication Services

Amazon

United States

Consumer Discretionary

Deere & Co

United States

Industrials

Facebook Inc

United States

Communication Services

First Republic Bank

United States

Financials

Illumina

United States

Health Care

Microsoft

United States

Information Technology

Nike Inc

United States

Consumer Discretionary

SVB Financial Group

United States

Financials

Wuxi Biologics Cayman Inc

China

Health Care

Market Review
Markets posted modest gains in July, recovering from a mid-month swoon over concerns about the rapid spread of the more contagious Delta variant of COVID-19. After an initial bipartisan agreement, US Congress efforts to pass a large infrastructure bill appeared to stall after the Biden administration endorsed an ambitious plan to pass another, larger spending bill via a method that would circumvent the traditional legislative process, rendering earlier concessions moot. Both developments diminished prospects for an extended period of economic growth as the world tries to recover from the pandemic.

Information Technology and Health Care led, perhaps in anticipation of a new normal in which many people could be receiving booster shots and continuing to work via remote platforms indefinitely even as they move on with other parts of their lives, including in-store shopping. Consistent with that, shares of e-commerce companies, among the biggest winners during the peak stay-at-home period, declined. Regulators’ crackdowns on online education and other tech-related industries sank China’s stocks nearly 14%, leaving investors to speculate which sectors would be next.

Portfolio Spotlight: US Banks
The portfolio’s two US banks, First Republic and SVB Financial, have powered through times that have challenged other banks. Both are differentiated by the deep client relationships they have developed in their niche markets over time. Net promoter scores (NPS) measure the likelihood a company’s customers would recommend its offerings; the high-net-worth-focused First Republic has NPS higher than Apple’s. Silicon Valley-based SVB doesn’t release its NPS but has 50% share of venture-backed tech and life science banking in the US. Both banks’ high-touch customer service allows them to grow through referrals and cross-selling irrespective of the rate environment. The approach also makes customers less likely to switch to other banks, insulating the pair from competition from larger rivals or fintech players.

July Attribution
• In the US, Alphabet reported stronger-than-anticipated advertising growth, driven in part by the recovery in travel, a top category for search and display ads. Align Technology raised its guidance for the year due to increased demand for its clear trays over more-in-office-intensive orthodontics.
• In the Netherlands, semiconductor equipment maker ASML reported strong order growth as its chip manufacturing customers race to increase capacity to meet robust end-market demand.
• Nearly all our holdings in China declined after the government announced sweeping regulatory changes. Property management company Country Garden Services, biologics manufacturer Wuxi Biologics, and online travel site Trip.com each declined sharply.

Year-to-Date Attribution
· Stocks in the US have contributed strongly to returns, particularly Alphabet and Illumina, the latter of which has benefitted from strong demand for its genetic sequencing equipment.
· Our US-based banks SVB Financial and First Republic Bank have also outperformed, with margins benefitting from the steepening yield curve and surprisingly low credit defaults, even for banks with such high-quality asset bases.
· Within Emerging Markets, Brazil’s COVID-19 struggles have weighed on Itau Unibanco and B3. Polish video game developer CD Projekt also detracted after its botched Cyberpunk 2077 launch.
· In Germany, remote connectivity software company Teamviewer declined on market concerns that growth will slow as more employees return to the office.