July Report

• Global equities moved higher in July as the continued slowdown in inflation raised expectations that this will bring lower interest rates later this year.
• July saw a rotation out of high performing growth stocks into a broader range of shares, which led to value outperforming growth.
• The Portfolio returned 2.7% in July, while the benchmark returned 4.1%.

Top Holdings (alphabetically)

Alcon Inc

Switzerland

Health Care

Alcon, Inc. engages in the development, manufacture, and marketing of market surgical equipment and devices, pharmaceutical eye drops, and consumer vision care products to treat eye diseases and disorders. It operates through the following segments: Surgical and Vision Care. The Surgical segment offers implantable products, consumables and equipment for use in surgical procedures to address cataracts, vitreoretinal conditions, refractive errors, and glaucoma. The Vision Care segment comprises daily disposable, reusable and color-enhancing contact lenses, as well as portfolio of ocular health products, including over-the-counter products for dry eye, contact lens care, and ocular allergies, as well as ocular vitamins and redness relievers. The company was founded by Mr. Robert Alexander and Mr. William Conner on 1945 and is headquartered in Geneva, Switzerland.

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.

Meta Platforms Inc

United States

Communication Services

Meta Platforms, Inc. operates as a social technology company. The Company builds applications and technologies that help people connect, find communities, and grow businesses. Meta Platform is also involved in advertisements, augmented, and virtual reality.

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.

Netflix Inc

United States

Communication Services

Netflix, Inc. engages in providing entertainment services. It also offers activities for leisure time, entertainment video, video gaming, and other sources of entertainment. It operates through the United States and International geographic segments. The company was founded by Marc Randolph and Wilmot Reed Hastings on August 29, 1997 and is headquartered in Los Gatos, CA.

Rockwell Automation Inc

United States

Industrials

Rockwell Automation, Inc. produces industrial automation products. The Company offers products such as control systems, motor control devices, sensors, and industrial control panels. Rockwell Automation markets its products worldwide.

Schneider Electric SE

France

Industrials

Schneider Electric SE manufactures electrical power products. The Company offers car chargers, home security goods, light switches, access control, sensors, valves, circuit breakers, cables, accessories, signaling devices, fuse, motor starters, and voltage transformers. Schneider Electric serves customers worldwide.

Thermo Fisher Scientific Inc

United States

Health Care

Thermo Fisher Scientific, Inc. manufactures scientific instruments, consumables, and chemicals. The Company offers analytical instruments, laboratory equipment, software, services, consumables, reagents, chemicals, and supplies to pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, universities, research institutions, and government agencies.

Vertex Pharmaceuticals Inc

United States

Health Care

Vertex Pharmaceuticals Incorporated discovers, develops, and commercializes pharmaceutical products. The Company develops drugs for the treatment of cystic fibrosis, cancer, inflammatory bowel, autoimmune disease, and neurological disorders. Vertex Pharmaceuticals serves healthcare sector worldwide.

Market Review 

Global equity markets rose a further 1.6% in US dollar terms during July, making gains across all major economic regions. This followed a further slowing in inflation, which raised hopes that major central banks will ease interest rates later this year. Australian dollar weakness further boosted returns in Australian dollar terms.

Share market gains broadened in July, with a much wider group of stocks performing well. Global value stocks outperformed growth by over 5.7% during the month. July saw a reversal in the momentum of the concentrated group of stocks aligned to the growth trends in generative AI and GLP-1 weight loss drugs that had previously led equities higher.

Shares of semiconductor stocks dragged the information technology sector lower. Investors grew more fearful that projections of earnings growth from commercial applications of generative AI were too optimistic. The same concerns weighed on the internet platform giants in the communication services sector, such as Google-owner Alphabet and Facebook-owner Meta Platforms.

While the market leaders in developing GLP-1 weight loss drugs US-based Eli Lilly and Denmark-based Novo Nordisk underperformed during July, the broader health care sector performed well overall.

Portfolio Commentary

The Portfolio is focussed on identifying great companies through bottom-up analysis and continues to find exciting opportunities in communications services, health care and industrials, in which it maintains overweight positions.

The growth of the global biological drug industry has been a powerful long-term trend that is expected to continue for many years. However, successfully identifying the winners among early phase drug candidates is a notoriously difficult task.

During a gold rush it is said that often it is the sellers of pickaxes and shovels, rather than those mining for gold, who are more likely to strike riches. Similarly, the Portfolio has invested in manufacturers of bioproduction components and consumables, such as US-based Thermo Fisher, Danaher and Repligen. These high-quality businesses are expected to deliver more stable earnings growth through their alignment to the structural growth in health care, than those chasing uncertain medical breakthroughs.

Historically, these businesses have delivered steady growth in revenues and profits. However, their experience during and since the COVID pandemic has led them to appear deceptively cyclical. COVID-related research and inventory stocking initially turbocharged sales, but normalisation of demand led to a fall in revenue as customers ran down their supplies. As stock prices weakened, the Portfolio added to its exposure to all three over the past 18 months. Recent corporate earnings results provide evidence that the industry’s long-term growth trends are now back to normal.

The Portfolio’s strong stock performance in health care and information technology and its overweight exposure to health care and industrials contributed to relative returns. Its weaker stock performance in communications services and consumer discretionary, and its overweight position in communications services detracted from relative returns.

The Portfolio’s largest contributor to relative returns in July was its overweight position in Japan-based Chugai Pharmaceuticals. This followed continued strong sales of its haemophilia treatment Hemlibra. Furthermore, investors expect sales of Chugai’s oral anti-obesity drugs to grow earnings. One was developed in partnership with Switzerland-based pharmaceutical company Roche Holding. The other was developed by Chugai, which receives a revenue share from US-based pharmaceutical company Eli Lilly.

The most significant detractor from relative returns in July was the Portfolio’s holding in US-based image-sharing and social media platform Pinterest, which had outperformed strongly during the second quarter. It announced better than expected June quarter revenue and profits, but its September quarter revenue guidance was weaker than the consensus forecast.

This month the Portfolio sold its position in French cosmetics giant L’Oréal due to concerns that its market valuation had reached an excessive level. While L’Oréal is still a quality company, growth in the overall beauty market is expected to slow, as consumer spending across the global economy weakens. Stagnation in China’s economy is expected to have a particular impact on sales. Hence, the portfolio managers believe L’Oréal’s long-held premium valuation is no longer justified.