Market Review

Global equity markets continued to digest the prospect of economic reopening and recovery. The Covid-19 vaccine rollouts, a possible 1.9 trillion USD stimulus package and the potential for a surge in pent up demand lifted expectations for growth and inflation. Cyclical sectors such as energy, housing and banks performed well. In contrast, more defensive areas, such as Consumer Staples and Utilities, retreated.

Oil prices continued to rise, supported by tighter global supplies and hopes for a cyclical recovery in fuel consumption. Industrial metals prices reached multi-year highs, with copper breaching 9,000 USD a tonne, its highest level since 2011. The pound sterling strengthened as markets became more optimistic on the recovery of the UK economy, underpinned by a rapid vaccine rollout.

Portfolio Review

The Trust’s equity portfolio outperformed over the month, resulting in a NAV total return of 3.0% vs the benchmark’s 1.0%.

Estée Lauder made the largest positive contribution, following strong Q2 sales numbers. The company invested heavily in online well before 2020 and these channels continue to be more profitable than traditional outlets. We expect that economic recovery should drive up headline numbers, particularly given Estée Lauder’s strong presence in travel hubs.

Microchip Technology continued to capitalise on the surge in demand for microchips, as well as supply constraints related to the pandemic. In a recent conversation with management, the CEO reported that order visibility is at an all-time high, suggesting near term revenue growth should remain strong.

Roche was the largest negative contributor. Full year sales modestly missed expectations, thanks to covid-19 headwinds and a larger than expected impact from biosimilar competition. Guidance for next year looks conservative and Roche’s pipeline in oncology and neuroscience remain promising.

Iberdrola was also weak, as investors rotated into more cyclical areas of the market. Iberdrola has a healthy pipeline of projects that will drive growth in the business in the years come. The company is a clear beneficiary of the secular shift towards renewables.

Significant Transactions

Fleetcor is a business to business payments technology company. The digitalisation of corporate payments is a long-term structural trend as businesses seek to improve efficiency, offer more flexibility to their employees and reduce fraud. Fleetcor does have exposure to some cyclical industries which negatively impacted earnings during 2020. A historically low valuation combined with the prospect of a reopening of the global economy provided an opportunity to initiate the position at an attractive price.

We exited our holding in Citigroup to fund the purchase of Fleetcor. The shares have rallied strongly as the economic outlook has improved. However, our preference in the financial sector is for companies with recurring revenue, structural growth opportunities and a lower exposure to interest rates.

Market Outlook

Towards the end of February inflation expectations and bond yields began to surge from what had been very depressed levels. Within the stock market this has benefitted the cyclical and interest rate sensitive companies that languished throughout much of 2020. The possibility of a very rapid economic recovery driven by pent up demand has led to fears that the global economy could soon be running hot, which could force central banks to rein in monetary stimulus and possibly even raise interest rates. This has caused valuations to derate amongst higher growth companies, as well as bond proxies such as consumer staples and utilities.

There have been several such episodes over the past decade since the end of the global financial crisis. In each case, economic growth strong enough to cause a sustained rise in inflation ultimately failed to materialise. There is perhaps more of a case for it this time given the extent of potential pent up demand that is about to be unleashed. However, it is important to remember that this is still primarily a cyclical – and therefore temporary – driver of economic activity. There remain powerful structural forces such as demographics, digitalisation and high levels of debt that will continue to exert deflationary pressure onto the global economy.

For these reasons, we believe it is unwise to express a strong macroeconomic view into the Trust’s equity portfolio, which consists of a wide range of companies across many different industries, some of which will benefit from a cyclical recovery and others which are more defensive. We regard short term macro and equity market volatility as a potential opportunity to exploit attractive long-term valuation anomalies.

Companies with outstanding track records that are being unfairly punished for a lack of cyclical exposure (for example within healthcare and consumer staples), are now presenting attractive opportunities to initiate or increase positions. Equally, there are steady compounders more closely tied to economic cycles trading at valuations that provide a margin of safety and substantial upside potential in even a gradual reopening of the global economy. In the event of further volatility this disciplined, active approach should continue to serve the Trust well.