Equity markets fell back in December, as the MSCI World All Countries Total Return Index AUD dropped 4.8%.
During December, the portfolio underperformed the benchmark by 1.6%. Global value stocks outperformed growth by 3.2% in Australian dollar terms as global central bank monetary policy remained restrictive.
US consumer price inflation fell to 7.1% year-on-year from 7.7% the previous month, which was below expectations of 7.3%. Core inflation, which excludes the more volatile food and energy items, also moderated.
The US Federal Reserve raised interest rates by 0.50% as expected at its December meeting. The slightly less “hawkish” commentary indicated that the pace of rate hikes could start to slow in the near-term. The US dollar fell by more than 2% in December, while commodity prices were also broadly lower.
Economic growth remains under pressure across all the major economies, with manufacturing especially weak. However, China suddenly abandoned its zero-COVID policy and eased most restrictions at the start of December. This is expected to boost the global economy.
The Fund retains its focus on dynamic growth stocks as positive revisions to earnings-per-share (EPS) should continue to drive outperformance as the economy enters a period of weaker overall earnings growth. The Fund continues to overweight information technology, health care and consumer discretionary, while underweighting financials, energy, and materials.
The Fund’s overweight position in health care contributed to relative returns, while stock selection in information technology and financials also contributed positively. Stock selection in consumer discretionary, industrials and materials were the main detractors from relative returns.
Overweight positions in AIA Group, Novo Nordisk, and Estee Lauder were the strongest contributors to relative performance, while positions in Tesla, Costco, and TE Connectivity were the most significant detractors.
AIA Group and Estee Lauder both benefited from the easing of COVID restrictions in China, which has improved the long-term prospects of an economic recovery in the country.
Analysis of Novo Nordisk weekly prescription data continues to exceed expectations. Consequently the Fund has increased its position in the stock.
Tesla continued to underperform the market in December as the company announced the price of its vehicles in China would be further reduced. Corporate governance concerns grew further, especially relating to the amount of time that CEO Elon Musk is currently spending on Twitter following his recent acquisition of the company. Consequently, the Fund has further trimmed its position in Tesla.
In December Costco reported earnings results that were largely in line with investor expectations. Gross margins were better than analysts had feared, but slightly lower than forecast, leading to the Fund reducing its position in the stock.
TE Connectivity underperformed following weaker-than-expected fourth quarter order guidance within its industrial business. Automotive, which accounts for approximately 50% of total revenue, demand remains firm as the key trends of electrification and enhanced automated safety features drive increasing electric connector content in each vehicle.
The Fund’s sector exposures were broadly unchanged during the month. The underweight position in communication services and the overweight position in health care increased, while the overweight positions in information technology and consumer discretionary decreased.
Tesla, Costco, and TE Connectivity, as previously mentioned, were the largest position reductions during the month. The largest position increases were Baidu, AIA, and Novo Nordisk. The holding in Chinese internet search company Baidu was established in November, and was increased after COVID-related restrictions were eased. Economic recovery in China is expected to support an improvement in digital advertising revenues.
A new position was initiated in JD.com, a Chinese e-commerce company that will benefit as China’s economy recovers. Cost controls that were instituted during the period of zero-COVID policy in China should also improve its operating leverage. China’s reopening is expected to bring a rebound in consumer spending. This is likely to occur faster than is currently reflected in consensus expectations. JD.com is currently valued at an attractive discount to the company’s historical average price-earnings multiple. The Fund expects this discount to narrow over time, as earnings growth re-accelerates and performance improves.
Nvidia designs and develops graphics processing units (GPUs) for data centres, gaming, and auto applications. Following significant weakness in many of its end markets, the company can be expected to accelerate growth in excess of the market consensus forecast. Furthermore, the market valuation is now much more attractive than that seen over the past two years.
During December Hermes’ ESG rating was upgraded to AA from A by MSCI following notable improvements in its labour management practices. Axiom engaged with Hermes on ESG matters twice over in 2022 within its regular engagement process. The September meeting focused on labour practices, specifically retention, training and employee morale. This included incentive programs and training that the company had recently instituted to increase productivity.
MSCI upgraded Amazon to A from BBB after it disclosed a policy to provide whistleblowers with protection from retaliation. Axiom has also engaged with Amazon on ESG matters. In September 2022 the company indicated that some of its policies and procedures were not being reflected in the MSCI report, most notably its code of conduct policies on bribery, anti-corruption and whistleblower protection.
Logistics real estate investment trust Prologis was upgraded to AA from A by MSCI after it disclosed a policy that provides whistleblowers with protection from retaliation. Furthermore, members of the company’s board of directors were no longer deemed to be over-boarding, i.e. taking on excessive levels of external board commitments.
MSCI upgraded STMicroelectronics to AAA from AA following improvements in board composition and the alignment of its performance pay structure to shareholder outcomes, which leads global peers.
No positions were downgraded during the month.
Managing Director/Portfolio Manager
CEO/Chief Investment Officer
The Pengana Axiom International Fund (Hedged) 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.
1. From 4 June 2021 the capital component of the foreign currency exposure for the Fund is hedged back to Australian dollars.
2. Axiom was appointed fund manager as of 5 May 2021. June 2021 represents the first full month of Axiom managing the Fund.
3. 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 (HHA0002AU) in the table above which is the continuous performance of both the current and previous strategies.
4. Axiom Global Equity Strategy inception 1 Jul 2004.
5. Prior to 1 June 2021, the Axiom Global Equity Strategy performance (labeled ‘Current Strategy (Partial Simulation)’ and shown in the shaded area) includes the strategy performance simulated by Pengana from the monthly gross USD returns of the Axiom Global Equity strategy. The Axiom Global Equity Strategy performance does not include the Pengana ethical screen
6. Prior to 4 June 2021 hedged performance has been simulated by Pengana for both the Fund and Index. This was done by: 1) using 3 month rolling forwards to hedge movements in the AUD/USD spot rate, and 2) deducting the Pengana International Ethical Fund (Hedged) management fee of 1.35% p.a. from the Fund’s performance.
From 4 June 2021, index performance is from the MSCI All Country World Total Return in AUD (Hedged). Prior to 4 June 2021, index performance is simulated from the MSCI All Country World Total Return in USD
7. 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.
8. Annualised standard deviation since inception.
9. Relative to the MSCI All Country World Total Return in AUD (Hedged).
*For further information regarding fees please see the PDS available on our website.
