Global equity markets were slightly weaker overall in May in US dollar terms. Growth stocks continued to perform strongly as, while the US Federal Reserve continues to raise interest rates, falling US inflation suggests it is nearing a peak in rates. Meanwhile, value stocks were lower in aggregate as consumers continue to be impacted by weak real income growth and rising borrowing costs. The MSCI All Country World Index gained 1.0% in Australian dollar terms, supported by Australian dollar weakness. The Fund outperformed the benchmark due to its positions in stocks exposed to artificial intelligence (AI) and industrial automation, and its zero exposure to the energy sector which continued to weaken.
Economic growth trends remained consistent with those seen in April as purchasing managers’ data was slightly weaker in the Eurozone, while US manufacturing’s contraction eased slightly. China’s manufacturing activity started to pick up in May, although the recovery is largely driven by the services sector, especially travel and entertainment.
The Fund retains its focus on dynamic growth stocks. Positive revisions to earnings per share (EPS) drive outperformance as the economy moves into a period of weaker overall earnings growth. The Fund continues to overweight information technology, consumer discretionary and health care, while underweighting financials, energy, and materials.
Strong stock selection and an overweight position in information technology, and strong stock selection in industrials, were the largest contributors to relative returns. Negative stock selection in consumer discretionary and consumer staples detracted from relative returns.
US-based technology company Nvidia contributed to outperformance when it announced first quarter earnings results and forward guidance, which were well ahead of even the highest investor expectations. Artificial Intelligence (AI)-related chips have seen a dramatic acceleration in demand following the commercialisation of products from OpenAI/Microsoft, Alphabet and others. Nvidia’s pricing power is high, driving a step-change improvement in its gross margins.
US enterprise software company ServiceNow recently held an investor day that got investors excited about its potential to grow AI-related earnings. Improved operating leverage guidance offset the potential foreign currency impact, leading to a positive estimated earnings revision.
Taiwan Semiconductor Manufacturing Company is the world’s largest semiconductor business. It outperformed the market following the release of Nvidia’s earnings guidance as it is the sole foundry partner producing Nvidia’s chips.
US-based multinational cosmetics company Estee Lauder detracted from relative returns after it reported quarterly earnings results and forward guidance that fell short of investor expectations. The disappointing results were driven by a surplus of inventory in the travel retail channel, as China’s economic recovery was slower than anticipated. This led to the Fund reducing its position size, but Estee Lauder’s brand positioning remains strong and its long-term earnings prospects remain attractive.
US luggage manufacturer and retailer Samsonite delivered a positive update on its business, but slower travel data from China impacted sentiment in the sector, leading to the stock underperforming. However, China represents only a small portion of Samsonite’s revenue, which suggests the fall in its share price is excessive. In a recent conversation with the management team, the company advised it is not experiencing any slowdown in business and it remains confident in the guidance provided in its last business update.
US sports equipment manufacturer Topgolf Callaway Brands underperformed after reporting negative sales growth in its golf equipment business. It also delivered guidance for same store sales which was below expectations for the remainder of the year. This detracted from relative returns. The business has done particularly well over the last two years and the deceleration in revenue growth could indicate some weakness in demand. The Fund had reduced its position size by 50% in advance of the earnings results.
The Fund’s sector allocation was broadly unchanged during the month. The Fund reduced its exposure to consumer discretionary and consumer staples, while increasing it to information technology. Topgolf Callaway Brands, Deere, and ASML were the largest reductions during the month following weaker earnings reports.
The Fund increased its position in Nvidia in advance of the earnings results. This followed positive changes in procurement data which the Fund had identified, leading to the belief that there was a high likelihood that the consensus earnings forecasts were too low.
The Fund also increased its exposure to Taiwan Semiconductor Manufacturing Company (TSMC), reflecting the positive implications of Nvidia’s forward earnings guidance and TSMC’s inexpensive valuation level. An acceleration in orders is expected in the second half of 2023 and throughout 2024, which will help grow earnings.
The Fund continues to increase its position in US e-commerce and cloud computing company Amazon. The Fund is anticipating an acceleration in Amazon Web Services (AWS) earnings growth in the third quarter, ahead of the market forecast of the fourth quarter, and at a level higher than current consensus expectations.
The Fund’s position in Topgolf Callaway Brands, was exited during the month after the company reported weaker than expected full-year revenue guidance. Having previously reduced the position by half in anticipation of slowing demand for golf equipment, its earnings growth is now being impacted by higher financing costs and the consumer spending slowdown.
During May the manager engaged with the China-based insurance company AIA Group, which is held in the Fund. It discussed progress towards its 2050 net-zero target, board and executive leadership diversity, client data security and ethics training.
Managing Director/Portfolio Manager
CEO/Chief Investment Officer
The Pengana Axiom International Fund invests in companies that are dynamically growing and changing for the better, more rapidly than generally expected and where the positive changes are not yet reflected in expectations or valuation.
The Global Equity Strategy seeks dynamic growth by concentrating its investments in global developed markets, and may also invest in companies located in emerging markets.
The investment manager is Axiom Investors, a Connecticut-based global equity fund manager formed in 1998 with over US$19billion in assets under Management.
Prior to June 2021, the Axiom Global Equity Strategy performance (shown in the shaded area) includes the strategy performance simulated by Pengana from the monthly gross returns of the Axiom Global Equity strategy. This simulation was done by: 1) the conversion of US-denominated gross returns to AUD, 2) applying the fee structure of the stated class. The simulation does not include the Pengana ethical screen. From June 2021 the strategy performance is the performance of the Pengana Axiom International Ethical Fund.
1. Axiom was appointed fund manager as of 5 May 2021. June 2021 represents the first full month of Axiom managing the Fund.
2. Inception date 1 July 2017. Figures shown are calculated from the continuous performance of both the current and previous strategies. For performance see row labelled Fund: APIR (HOW0002AU) in the table above which is the continuous performance of both the current and previous strategies.
3. Axiom Global Equity Strategy inception 1 Jul 2004.
4. Prior to June 2021, the Axiom Global Equity Strategy performance (labeled ‘Strategy (Partial Simulation)’ and shown in the shaded area) includes the strategy performance simulated by Pengana from the monthly gross returns of the Axiom Global Equity strategy. This simulation was done by: 1) the conversion of US-denominated gross returns to AUD, 2) applying the fee structure of the stated class. The simulation does not include the Pengana ethical screen. From June 2021 the strategy performance is the performance of the Pengana Axiom International Ethical Fund.
5. MSCI All Country World Total Return Index in AUD.
6. Performance for periods greater than 12 months are annualised. Net performance figures are shown after all fees and expenses, and assume reinvestment of distributions. No allowance has been made for buy/sell spreads. Please refer to the PDS for information regarding risks. Past performance is not a reliable indicator of future performance, the value of investments can go up and down.
7. Annualised standard deviation since inception.
8. Relative to the MSCI All Country World Total Return Index in AUD.
*For further information regarding fees please see the PDS available on our website.
