February Report

The Pengana Harding Loevner International Fund fell -7.3% in February compared to the MSCI ACWI (Total Return in AUD) which fell 5.4% for the month.

Top Holdings (alphabetically)

Alphabet Inc

United States

Communication Services

Amazon

United States

Consumer Discretionary

Deere & Co

United States

Industrials

First Republic Bank

United States

Financials

Meta Platforms Inc

United States

Communication Services

Microsoft

United States

Information Technology

Nike Inc

United States

Consumer Discretionary

SVB Financial Group

United States

Financials

UnitedHealth Group Inc

United States

Health Care

Vertex Pharmaceuticals Inc

United States

Health Care

Already coping with rising inflation and the prospect of further interest rate increases, investors were stunned by Russia’s invasion of Ukraine at month-end. Strong punitive sanctions from Western nations against Russia lead to the closures of the Russian domestic stock markets, and deep declines in shares of Russian companies traded elsewhere. Oil and commodity prices soared, benefiting Energy and Materials, the two strongest-performing sectors over the month which was a headwind relative to the benchmark as we have no exposure to materials and very little exposure to energy in our portfolio. Information Technology lagged as software companies reported slowing growth due to subsiding COVID-induced demand. By region, countries rich with natural resources performed relatively well, including Australia and South Africa.

The Global Equity strategy was largely shielded from the direct impacts resulting from the Russian invasion of Ukraine, as it had no holdings based in either country. However, we did have indirect exposure to the region through EPAM, a US-headquartered IT services company that has over half its engineers based in Ukraine, Russia, and Belarus. We sold our shares of the company in late February; as tensions rose as we grew concerned that EPAM’s customers, including many US-based corporations, would become increasingly reluctant to entrust their digital transformation programs to EPAM.

February Attribution:

• Our Financials holdings were a bright spot; in late January, US commercial bank SVB Financial raised its already strong guidance for 2022, boosting share prices.
• In Communication Services, shares of Meta Platforms declined sharply after the company announced a rare decline in profits. The company also warned of slowing growth due to rising competition from Tik Tok and changes to Apple’s privacy features. Our analyst met with Meta following the announcement to better understand the company’s plan to navigate potential headwinds and to confirm that the company continues to meet our quality-growth criteria. We believe that Meta should be able to adapt to Apple’s privacy settings and continue to generate revenues from ad sales, albeit perhaps at a lower level. Our analyst remains impressed by Meta’s effective development and use of AI, which will help Facebook continue to innovate, diversify, and grow.
• In Information Technology, PayPal shares fell after the company delivered surprisingly weak guidance on future new user growth. PayPal management withdrew its medium-term user growth targets as it shifts its focus to deriving more revenue from its existing user base. We are actively evaluating the investment implications of the revised guidance. We currently believe our investment thesis for PayPal remains intact and that the company should continue to meet our growth criteria. However, we have lowered our long-term revenue and earnings growth forecasts, and continue to debate PayPal’s expected post-pandemic growth rate.

Year-to-Date Attribution

• Style headwinds have weighed heavily on recent benchmark relative returns, as high-quality growth companies significantly underperformed. Year to date, the least expensive quintile of the index, comprising the stocks referred to as “value”, has outperformed the most expensive by nearly 18%.
• In Health Care, China’s WuXi Biologics declined after two of its manufacturing sites were added to the US Department of Commerce’s Unverified List, potentially subjecting the company to tighter US export controls. WuXi’s lawyers are working to have the company removed from the List; however, even if the company remained on the List, we do not believe that its revenues or growth will be impacted. Inclusion on the List does not prevent WuXi from selling to its US-based clients or impact its ability to operate in the two sites. WuXi has ample inventory and is able to source products comparable to what it produces in the US from other countries
• Additionally, Japanese lab device manufacturer Sysmex fell on concerns of slowing growth in China. Chinese health care companies have been encouraged to buy instruments and materials that are made within China. Sysmex is in the process of expanding its domestic Chinese production to counter this headwind.

In the midst of geopolitical uncertainty and strong style headwinds, we feel even more resolved to stick to our knitting, tune out noise, and stay disciplined in focusing on our quality growth framework and the balance sheet strength of invested companies. Our portfolio is composed of high-quality, dynamic growth businesses that are well-positioned to navigate periods of uncertainty and to create and compound value over the long term. We anticipate opportunities may arise to add to these holdings where we believe that the recent dislocations in stock prices fail to reflect the long-term growth prospects of the businesses.