March Report

• Large cap global equities continued to make strong gains in March as the global economy remained resilient and inflation continued to moderate, supporting hopes that interest rates will begin to fall this year.
• Smaller companies performed well in aggregate, but gains were again concentrated at the larger end of the small cap investment universe.
• The Fund returned 0.8% in March, while the benchmark returned 3.2%, as the Fund’s overweight position to smaller stocks delivered returns below the small and mid cap benchmark.

Top Holdings (alphabetically)

Gamma Communications PLC

United Kingdom

Communication Services

Glanbia PLC

Ireland

Consumer Staples

Qualitas Controladora SAB de C

Mexico

Financials

Sapiens International Corp NV

United States

Information Technology

Wizz Air Holdings Plc

United Kingdom

Industrials

Market Commentary

Large cap global equity markets continued to make solid gains during March. The global economy remained robust, with the US economy expected to have expanded by around 3.0% – which is above its trend rate of growth – in the first quarter of this year.

Core US inflation nudged down to 3.8% in February, although this was a smaller fall than markets had expected. The economy created more new jobs than forecast, but unemployment edged up to a still very low 3.9%, helping wage inflation moderate to 4.3%. While markets still predict that US interest rates will begin falling this year, strong economic data later in the month pushed back expectations of the timing and number of rate cuts.

Economic activity remains subdued in Europe, with manufacturing activity again contracting in March. However, equity valuations appear attractive relative to other regions and lower energy costs should support manufacturing as global demand recovers. Furthermore, many commentators now expect the European Central Bank to begin reducing interest rates ahead of the US Federal Reserve. This Swiss National Bank became the first major central bank to cut rates, reducing them by 0.25% to 1.50% in March.

Japan’s share market performed well as the yen weakened and its economic recovery continued, with revised fourth quarter GDP data showing the economy avoided a technical recession. Stronger retail sales, economic surveys which indicated a solid March quarter, and inflation above its 2.0% target were all received positively. Yen weakness should support manufacturing.

Global smaller company stocks performed well at an asset class level, supported by the economic recovery. However, returns were much stronger at the larger end of the small cap spectrum, with smaller stocks more impacted by interest rates remaining higher for longer than expected.

Portfolio Highlights

The Fund maintains a strong overweight to smaller stocks (<US$5 billion). This detracted from relative returns as larger companies (US$5-10 billion) outperformed the smallest (<US$1 billion) by over 4.0% in March. When there is greater clarity on the downward path of global interest rates, smaller stocks are expected to perform very strongly and narrow the historically wide discount to larger cap stocks.

The stocks in the portfolio are fundamentally sound, having delivered good profitability through the recent earnings season. The contraction in valuations relative to earnings – despite strong fundamentals – is expected to reverse as interest rates begin to normalise.

The Fund’s holding in Japan-based Infocom – which provides enterprise software and distributes Manga online via subscriptions – was the most significant contributor to relative returns in March. This followed speculation that it would be acquired by its parent, which would allow the company to improve its capital allocation and create value for shareholders. It highlights the slowly improving corporate governance changes now taking place in Japan.

UK smaller companies – which are valued at particular low earnings multiples – delivered better performance in March. The Fund’s holdings in UK supplier of data and voice products Gamma Communications and Ireland-based food ingredients business Glanbia both delivered strong returns. These reflected improved fundamental business performance and the highly attractive valuation levels. This area of the market has significant opportunity to outperform as it recovers.

The Fund’s holding in Polish discount grocery store chain Dino Polska has delivered strong returns over a long period. However, it was the most significant detractor from relative returns in March as foot traffic in stores slowed as the Polish grocery market becomes more competitive. This is expected to bring slower revenue growth and pressure on margins over the next 12-24 months. Accordingly, the Fund has decided to exit the position.

The Fund is currently valued at an attractive 13.8 times earnings, down from 14.4 times at the end of the previous month. Its earnings are expected to grow at more than 15% per year and to deliver returns on equity above 25%. This provides excellent opportunities to outperform over the medium term.