A strong underlying labour market and persistent inflation

During October 2021, the Pengana Axiom International Ethical Fund outperformed the benchmark with a return of 3.0% versus 1.1% for the MSCI All Country World Index (“Index”), in AUD terms.

The Fund outperformed in October largely due to security selection. While there was an underlying rotation to growth stocks in the market, other factors such as strong performance of energy and financial stocks offset their impact.

We have also included a recording of our recent investor webinar below.

Some thought pieces from our investment team

Top Holdings (alphabetically)

Adobe Inc

United States

Information Technology

Alphabet Inc

United States

Communication Services

Amazon

United States

Consumer Discretionary

Asml Holdings

Netherlands

Information Technology

Copart Inc

United States

Industrials

Danaher

United States

Health Care

Generac Holdings Inc

United States

Industrials

Microsoft

United States

Information Technology

ServiceNow Inc

United States

Information Technology

Tesla Inc

United States

Consumer Discretionary

With a strong underlying labour market and persistent inflation, market expectations for interest rates continued to rise and nearly reached year-to-date highs in October- as the ten-year US government bond yield rose to1.74%. This narrative drove performance in value stocks for the early part of the month, however, the growth tenant of the US Federal Reserve Bank’s mandate came under scrutiny as third-quarter earnings reports told a story of lack of product availability and increasing challenges to profitability. Peak cycle concerns took hold and drove rates back down and market rotation to growth stocks.

At the stock level, Tesla and Generac were top performers over the month, while Moderna and Paypal were among the largest detractors. Tesla stood out as one of the only automotive companies in the world to procure enough components to deliver unit growth. They also continued to benefit from green policies and company-specific strategic actions such as partnering with Hertz. Moderna reacted negatively to headlines of strong efficacy of oral COVID therapeutics from Merck. As we’ve noted in the prior months, the Fund continued to reduce Moderna from the top overall holding to one of the smaller positions.

The Fund initiated a position in B2 rated Recruit Holdings in October. For a variety of reasons including COVID spikes, lack of childcare, and generous unemployment benefits, companies have struggled to find labor in the post-COVID world. Companies across the services and manufacturing industries have talked up both lack of labor availability and wage pressures. Recruit Holdings has a variety of technology and staffing businesses that assist employers in identifying the talent they need. Their key platform Indeed.com has the largest network of job seekers globally and has seen a significant step up in growth as employers increase spending to attract employees to their job postings. As a result, Recruit delivered a 16% revenue beat in their last quarter driven by Indeed and raised guidance significantly. Despite the guidance raise, the company’s forecasts leave room for both revenue and EBITDA upside. This supports the high returns rating. In addition, the company has several domestic digital consumer properties including dining reservations, real estate classified, automotive classified, and others. These provide the next level of upside to forecasts as a speedy deployment of vaccines in Japan drives a consumer recovery.