August Report

• Volatility returned to global equity markets at the start of August upon fears of a US recession, but stocks finished the month higher after inflation continued to moderate.
• Technology underperformed upon mixed earnings results, especially amongst some semiconductor stocks.
• The Portfolio returned -1.9% in August, while the benchmark returned -1.2%, as a weaker US dollar detracted from global equity returns in Australian dollar terms.

Join Portfolio Manager Rick Schmidt for a webinar update where he will discuss the Portfolio’s current holdings, the factors influencing recent performance, and some of the market variables the investment team is considering moving forward. Register here.

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 stock markets rallied following a sharp sell-off in early August, closing the month higher in local currency terms. Equity markets initially fell steeply after the Bank of Japan’s surprise 0.15% increase in its interest rate at the end of July gave rise to a scramble to unwind carry trades. These involve investors borrowing in currencies with low interest rates (e.g. yen) to invest in securities with higher return prospects (e.g. US Treasuries or tech shares). The unwinding of these trades brought an appreciation in the value of the yen, which sparked a 12% plunge of Japan’s Nikkei index on 5 August.

Share market falls accelerated after weaker US labour market data suggested a faster slowdown in the US economy than markets had been expecting. Negative sentiment reverberated across global markets and measures of volatility spiked to levels not seen since the early days of COVID-19.

However, after falling 6% in the first three trading days of August, the MSCI ACWI Index finished August 2.6% higher, after lower inflation brought growing expectations of lower interest rates. European shares rose 3.9%, and even Japan’s market delivered a modest 0.5% gain.

Health care was the strongest performing sector, returning 5.5% in August, while information technology, energy and materials underperformed. Semiconductor stocks stumbled in late August after NVIDIA’s forward earnings guidance fell short of some investors elevated expectations, despite better-than-expected June quarter earnings. This heightened concerns that the returns on AI investments might be more gradual than had been anticipated.

Portfolio Commentary

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

Strong stock performance in financials and communications services and an overweight position in healthcare was offset by weaker stock performance in healthcare and industrials.

The Portfolio’s exposure to financial stocks is focussed on securities and derivatives exchanges such as CME Group in the US and B3 in Brazil, rather than banking groups which account for much of the sector. Unlike many financial companies, exchanges do not carry credit risk; they also enjoy high operational leverage and robust cash generation. Exchanges often benefit from market volatility as trading volumes increase upon selling pressure, which drove CME Group’s outperformance in August.

Both CME and B3 have created high barriers to entry by vertically integrating their own clearing houses and by operating across multiple asset classes to offer greater capital efficiency for clients. This structure creates a more diverse and stable revenue base compared to exchanges dependent on a single asset class. Additionally, CME and B3 benefit from a strong network effect, where their market-leading liquidity attracts more liquidity, reinforcing their competitive advantage and boosting profits.

US-based multinational technology group Meta Platforms, which owns Facebook, Instagram and WhatsApp outperformed in August. This reflected continued investor enthusiasm for the company’s investments in AI tools designed to enhance the value of its platform to digital advertisers.

US-based biologic drug company Repligen underperformed following reports it intended to acquire Maravai Life Science (a developer of technology used in manufacturing COVID-19 vaccines) upon fears the takeover could dilute existing Repligen shareholders.

Atkore is a leading US-based global manufacturer of pipes, tubing, electrical cables and security-fencing products. It underperformed upon weaker-than-expected volumes for its PVC conduits and increased competition from steel conduits imported from Mexico.

The Portfolio has exited its position in UK-based Spirax-Sarco, a market leader in steam management systems and fluid path technologies. Shares have become highly priced, and a significant portion of the company’s future earnings are expected to come from its Watson-Marlow business, which primarily serves the biopharmaceutical industry. While biopharmaceutical capital spending has been recovering, the portfolio already holds several strong companies which are focussed on drug-development, but which enjoy more attractive valuation levels.

The Portfolio has established a new position in Alfa Laval, a Swedish manufacturer of specialty heat-transfer, centrifugal-separation and fluid-handling products. It is a market leader in providing products addressing three environmental issues faced by shipping companies: ballast water, exhaust emissions and waste fuel oil recovery. The company has a long history of generating attractive profit margins. Moreover, Harding Loevner believes that regulations designed to reduce the environmental impact of shipping will increase the long-term demand for Alfa Laval’s products.