Global growth companies strengthened as interest rates approach their peak

• Shares in global growth companies strengthened during May as interest rates approach their peak
• Value stocks were generally weaker as consumer spending continues to soften
• The Fund returned 3.0% in May, while the benchmark returned -0.4%

Top Holdings (alphabetically)

Amazon

United States

Consumer Discretionary

Amazon.com, Inc. is an online retailer that offers a wide range of products. The Company products include books, music, computers, electronics and numerous other products. Amazon offers personalized shopping services, Web-based credit card payment, and direct shipping to customers. Amazon also operates a cloud platform offering services globally.

Apple

United States

Information Technology

Apple Inc. designs, manufactures, and markets personal computers and related personal computing and mobile communication devices along with a variety of related software, services, peripherals, and networking solutions. Apple sells its products worldwide through its online stores, its retail stores, its direct sales force, third-party wholesalers, and resellers.

Asml Holdings

Netherlands

Information Technology

ASML Holding N.V. develops, produces, and markets semiconductor manufacturing equipment, specifically machines for the production of chips through lithography. The Company services clients worldwide.

Eli Lilly & Co

United States

Health Care

Eli Lilly and Company discovers, develops, manufactures, and sells pharmaceutical products for humans and animals. The Company products are sold in countries around the world. Eli Lilly products include neuroscience, endocrine, anti-infectives, cardiovascular agents, oncology, and animal health products.

Hermes International

France

Consumer Discretionary

Hermes International designs, produces, and distributes personal luxury accessories and apparel. The Company operates a chain of boutiques under the Hermes name that sells items such as leather, scarves, men's clothes, ties, women's fashions, perfume, watches, stationery, shoes, hats, gloves, and jewelry products.

Microsoft

United States

Information Technology

Microsoft Corporation develops, manufactures, licenses, sells, and supports software products. The Company offers operating system software, server application software, business and consumer applications software, software development tools, and Internet and intranet software. Microsoft also develops video game consoles and digital music entertainment devices.

Novo Nordisk

Denmark

Health Care

Novo Nordisk A/S develops, produces, and markets pharmaceutical products. The Company focuses on diabetes care and offers insulin delivery systems and other diabetes products. Novo Nordisk also works in areas such as haemostatis management, growth disorders, and hormone replacement therapy. The Company offers educational and training materials. Novo Nordisk markets worldwide.

NVIDIA Corp

United States

Information Technology

NVIDIA Corporation designs, develops, and markets three dimensional (3D) graphics processors and related software. The Company offers products that provides interactive 3D graphics to the mainstream personal computer market.

ServiceNow Inc

United States

Information Technology

ServiceNow, Inc. provides enterprise information technology (IT) management software. The Company designs, develops, and produces prepackaged computer software, cloud services, and IT service management platform. ServiceNow serves customers throughout the United States.

Visa Inc

United States

Financials

Visa Inc. operates a retail electronic payments network and manages global financial services. The Company also offers global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities.

Global equity markets were slightly weaker overall in May. 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 Total Return in AUD (Hedged) fell 0.4%. 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.