Global growth seems likely to settle

During September 2021, the Pengana Axiom International Ethical Fund (“Fund”) fell by -4.7%, compared to the benchmark (MSCI All Country World Total Return Index (net, AUD)) which fell by -3.0%.

The Fund underperformed primarily due to sector allocation and security selection effects. Market rotation to value sectors can be seen with the Energy sector being the Index’s only positive performer over the month, and Financials being another leading sector. The Fund maintains some of the largest underweights to these value cyclical areas. Also, the innovation sectors of Information Technology, Communication Services, and Health Care, where the Fund allocates significant capital, were some of the worst performers in the market. As a result, the Fund detracted from relative performance in all these sectors except for Health Care where security selection offset the allocation impacts.

Some thought pieces from our investment team

Top Holdings (alphabetically)

Adobe Inc

United States

Information Technology

Alphabet Inc

United States

Communication Services

Amazon

United States

Consumer Discretionary

Asml Holdings

Netherlands

Information Technology

Danaher

United States

Health Care

Facebook Inc

United States

Communication Services

Microsoft

United States

Information Technology

Moderna Inc

United States

Health Care

ServiceNow Inc

United States

Information Technology

Tesla Inc

United States

Consumer Discretionary

Moderna continued to be one of the Fund’s top performers in September and has generated much of the Fund’s outperformance in the third quarter. As we have been highlighting, the stock continued to benefit from the increased appreciation of the duration of vaccine sales, and as a result, sell-side earnings estimates have been continually revised higher. The Fund has continued to reduce the position size following its strong 100% return as forecasts are now approaching our expectations. Other positive single stock contributors include US financial, SVB Financial, and pandemic recovery stock in the live events space Live Nation.

The largest detractors were perceived stay-at-home beneficiaries RingCentral, Adyen, and Chegg. The Fund continues to maintain holdings in all of these positions as there has been continued evidence of strong performance in earnings results and other checks.

As discussed above, the Fund continues to overweight Information Technology, Consumer Discretionary and Communication Services, and underweight Financials, Materials, and Consumer Staples. In September, we added capital to Consumer Discretionary and reduced Health Care. We also started a new position in biologics company Lonza and exited home improvement company Pool Corp.

We are approaching the one-year anniversary of the announcement of vaccines. While the recovery is continuing, year-on-year economic comparisons get more challenging. Also, we are seeing some policy headwinds from proposed tax and interest rate hikes globally. Furthermore, input prices, especially related to energy and logistics, represent ongoing economic challenges. Notwithstanding the challenges, global growth seems likely to settle into a more moderate expansion supported by ongoing reopening and supply chain restocking, absent additional major policy or health shocks. As growth moderates, value stocks seem likely to face renewed challenges having benefited from the cyclical tailwinds.  We remain positive about the opportunities to differentiate Axiom’s portfolios through dynamic growth stock selection with a medium and longer-term time horizon.