December report

• Global equities continued to deliver strong gains in local currency terms during December as inflation eased further and the US economy remained resilient.
• Australian dollar strength reduced returns in AUD terms.
• The Portfolio returned 0.8% in December, while the benchmark returned 1.8%, as value stocks outperformed growth.
• The Portfolio completed a very strong year, delivering 30.9%, while the benchmark returned 21.4%, by identifying early those stocks which saw big shifts in their market size and earnings.

As we move into the start of 2024 we will look to deliver a ‘year in review’ Fund update. Please let us know any questions you would like us to cover, either specific to the sector, Portfolio, or any portfolio holdings below.

Some thought pieces from our investment team

Top Holdings (alphabetically)

Adobe Inc

United States

Information Technology

Adobe Inc. develops, markets, and supports computer software products and technologies. The Company's products allow users to express and use information across all print and electronic media. Adobe offers a line of application software products, type products, and content for creating, distributing, and managing information. Adobe serves customers worldwide.

Alphabet Inc

United States

Communication Services

Alphabet Inc. operates as a holding company. The Company, through its subsidiaries, provides web-based search, advertisements, maps, software applications, mobile operating systems, consumer content, enterprise solutions, commerce, and hardware products.

Amazon.com Inc

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.

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.

Microsoft Corp

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 A/S

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.

Taiwan Semiconductor Manufactu

Taiwan, Province Of China

Information Technology

Taiwan Semiconductor Manufacturing Company, Ltd. manufactures and markets integrated circuits. The Company provides the following services: wafer manufacturing, wafer probing, assembly and testing, mask production, and design services. TSMC's ICs are used in computer, communication, consumer electronics, automotive, and industrial equipment industries.

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.

December ended a very strong year for the Fund, delivering an exceptionally strong 30.9% absolute return, some 9.5% ahead of its benchmark. This outperformance was driven by the Fund identifying early those companies aligned with secular growth themes such as artificial intelligence (AI), automation, electrification, and obesity treatments, and which were delivering positive change. Quantum shifts in their potential market size brought rapid earnings acceleration, boosting stock valuations.

Global equity markets made further gains during December as inflation continued to moderate. Furthermore, investor expectations grew that the US Federal Reserve (Fed) might begin to cut interest rates in early 2024. Value stocks outperformed growth by 1.1% during December upon signs that central banks may deliver a soft landing, benefitting companies in a broader range of sectors across the economy. This meant the Fund’s returns lagged those of the benchmark.

Inflation continues to slow around the world. In the US, the Core Personal Consumption Expenditure (PCE) Price Index, a metric closely watched by the Fed fell to 3.2% year-on-year in November from 3.5% in October. Expectations that the Fed will begin to reduce interest rates ahead of other major central banks pushed the US dollar 2.1% lower against a basket of its key trading partners’ currencies in December. It also fell against the Australian dollar.

Economic growth remains mixed. The US labour market and consumers remain resilient, with November retail sales increasing 5.2%, while they fell a further 1.1% in Europe, where leading indicators are consistent with a contracting economy.

China’s manufacturing sector continues to show signs of limited expansion, although the broader China “re-opening” continues to disappoint expectations. Consumer spending is sluggish, while the highly leveraged property sector remains a drag on economic growth. Travel and entertainment continue to be rare areas of growth in the region.

The Fund retains its focus on dynamic growth stocks, where positive revisions to earnings per share (EPS) drive outperformance as global economic growth moderates. The Fund continues to overweight information technology, consumer discretionary and health care, while underweighting financials, energy, and materials.

Strong stock performance in consumer staples and communication services sectors and the zero weighting to energy contributed to relative returns. Weak stock performance in the information technology, consumer discretionary and industrials were the main detractors.

US cosmetics brand E.l.f. Beauty contributed significantly to relative returns after announcing another quarter of strong earnings growth which was well above expectations. It also raised its full year earnings guidance. The Fund tracks bi-weekly scanner data which continues to show growth that is trending ahead of market expectations over the near-term.

US-based Zoetis is the world’s largest producer of animal medicines and vaccinations. It contributed to the Fund’s relative returns in December after publishing strong third quarter earnings. These should continue to grow as vet visit data tracked by the Fund and industry surveys have been largely positive. It has resolved most of its supply chain issues and received positive initial feedback from the US launch of its osteoarthritis pain medicine Librela.

Taiwan Semiconductor Manufacturing Company (TSMC) is the world’s largest pure-play semiconductor business. It contributed to relative returns when it reported October and November sales ahead of investor expectations. This reflected growing generative AI-driven demand and improving trends in the personal computer and smartphone end-markets.

US-based global software group Adobe detracted from relative returns following a period of strong performance. The company reported fourth quarter earnings ahead of expectations but provided disappointing 2024 guidance. Furthermore, it will no longer go ahead with the US$20 billion acquisition of unlisted software start-up Figma, which is viewed positively by the Fund as this would have initially diluted earnings. Generative AI opportunities offer more compelling opportunities to drive long-term earnings growth.

US-based pharmaceutical company Eli Lilly underperformed in December. This followed a long period of outperformance as investors consider the long-term impact on earnings of its GLP-1 treatments for diabetes and weight loss. This remains an exciting opportunity given its large potential patient base, proven effectiveness and strong safety record.

US-based business advisory firm FTI Consulting also lagged the broader market as US macroeconomic data continues to look healthy. This means that the company’s restructuring business’ revenue growth may fail to accelerate as much as investors had been expecting. The Fund has reduced its position in the stock accordingly.

The Fund continued to build up its positions in cloud-based document database provider MongoDB and Japanese semiconductor equipment group Tokyo Electron which were first established in November. The position in US-based logistics real estate investment trust Prologis was increased following dovish commentary by  Fed officials which seemed to improve the prospects of rate cuts in 2024.

The Fund reduced its position in US-based online vehicle auctioneer Copart. Its market valuation now more fully reflects the Fund’s expectations of its medium-term earnings following its extended period of outperformance. The Fund also trimmed its position in pan-Asian life insurance group AIA Group, as the macroeconomic performance in mainland China continues to be weaker than expected.