October Report

• The Portfolio returned 2.9% in October, while the benchmark returned 3.8%.
• Global share markets moved lower in October, as investors grew more concerned about stretched valuation levels, longer-term inflation risks and continued weakness in China, however a stronger US dollar supported global equity returns in Australian dollar terms.
• Falling interest rates, lower oil prices and some resilient quarterly earnings reports provided a measure of support to equities, especially in the US which benefitted from US dollar strength.

Portfolio Manager Rick Schmidt provides a portfolio update and insights from the reporting season. A recording is available below for your review. CPD points are applicable for Australian Financial Planners HERE.

Top Holdings (alphabetically)

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.

UnitedHealth Group Inc

United States

Health Care

UnitedHealth Group Incorporated owns and manages organized health systems. The Company provides employers products and resources to plan and administer employee benefit programs. UnitedHealth serves customers in the United States.

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 share markets declined in October as they retraced following strong gains earlier this year. The US was the strongest market during the month, reflecting solid earnings results from a number of US companies and the strength of the US dollar.

Economic weakness in Europe led to its share markets underperforming global equities. Eurozone inflation fell to 1.8% in September, below the European Central Bank’s (ECB) 2.0% target. This enabled it to reduce interest rates by 0.25% to 3.25%, its third cut this year.

Emerging market shares fell when Chinese equities gave back much of their recent gains, as China’s economic growth slowed to 4.6% in the September quarter. Investors worried that the magnitude of recently announced fiscal and monetary policy stimulus measures may fail to boost consumption. Moreover, its economic model based on exports supported by low-cost finance and other inputs may face increasing challenges following the US presidential election in November.

The strongest performing sectors were financials and communications services. Communications services’ company earnings are benefitting from the adoption of AI technology and hopes that a possible Trump election victory will bring less intensive regulatory scrutiny of mega tech businesses. The financials sector was boosted by some strong quarterly earnings reports by leading banks. Disappointing sales in China impacted the earnings of many global consumer staples stocks.

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 consumer discretionary, an overweight position in communications services and underweights in consumer discretionary and materials boosted relative returns in October. This was offset by an overweight position in health care, an underweight in financials and weaker stock performance in financials and industrials.

One of the strongest contributors to relative returns in October was the Portfolio’s overweight position in US-based Booking Holdings, an online travel agency which owns brands such as Booking.com, Priceline and Agoda. The company is improving its customer experience and increasing workforce productivity by integrating artificial intelligence (AI) tools. The business benefits from economies of scale and network effects, which deliver strong cash flows to shareholders.

Booking Holdings is actively securing its competitive market position through investing in several AI innovations. These include an AI trip planner, a ‘smart-filter’ interface that makes 200 trip planner filters more accessible, a new chatbot to onboard partners, a voice bot called Penny Voice that enables verbal conversations with trip planners and broader AI deployments at specific brands such as Kayak, Agoda, and OpenTable.

Hong Kong-based pan-Asian life insurance giant AIA Group won two new provincial licenses allowing it to expand its operations in Mainland China. However, it underperformed during October due to weak sentiment across the broader Chinese share market, reflecting ongoing economic weakness.

Sweden-based industrial tool and equipment maker Atlas Copco underperformed upon reporting that orders, sales and profit growth for its compressors were slightly below analysts’ expectations.

In October, the Portfolio established a position in DBS Group, one of the ‘big three’ banks in Singapore and the largest bank in Southeast Asia by assets. It is a commercial bank, active in business areas outside traditional lending, including in investment banking, treasury and stockbroking. DBS operates in Singapore, one of the most stable economies in Asia, which has attracted non-resident capital from neighbouring countries.

Singapore’s financial regulation is conservative, bringing stability to the overall banking system which has fared well in past periods of financial stress. DBS’s current management team has spearheaded a digital transformation of the company that has led to strong growth in both transaction banking and wealth management revenue. This leaves DBS well positioned to benefit from ongoing growth in Southeast Asian trade flows and wealth levels.

The Portfolio exited its position in French fashion house Kering. Its measures to turn around the flagship Gucci brand – including replacing the Gucci CEO with an interim head – have not succeeded in delivering shareholder value.