October turmoil

BY ERIC STURDZA

As stated in the previous commentary, the Investment Adviser is still positive regarding equities’ short term potential to regain ground, but is cognizant that this scenario requires some positive developments on the international front and the economic backdrop to remain healthy.

Following the September rate hike, rising bond yields were seemingly highlighted as the cause behind the broad sell off. That said, October’s performance pattern is more consistent with general defensiveness rather than increasing interest rates. This observation is based on the principles that (1) utilities and staples are historically negatively correlated with increasing bond yields and (2) outperformance in Consumer Staples and Healthcare is usually associated with risk-off trading.

 At the fund level, Comcast was the largest monthly contributor to performance (+0.17%), followed by Dollar Tree (+0.08%) and Intercontinental Exchange (+0.05%). The largest detractor over the period was Celgene (-0.67%), followed by Allergan (-0.57%), and Becton Dickinson (-0.41%).

During the month, Celgene reported their quarterly earnings with a modest beat of $7c, mainly attributed to inventory and better than expected results associated with Otezla (used in the treatment of certain types of psoriasis and psoriatic arthritis). That said, the rest of the update was lukewarm. In light of the likelihood of a generic settlement by February 2019 and positive news on Luspatercept (which is still in clinical trials) upside is much better than downside from current levels in the Investment Adviser’s opinion. Nonetheless, in a quarter during which biotechnology stocks have suffered, investors might have to wait for actual catalysts to see an upside rather than receive some relief from ongoing doubts. For now, the overall risk/reward profile is positive and as such the position is maintained.

Allergan reported a decent third quarter, with 1) Aesthetics consistently growing in the low double digit range this year, 2) the older cash flow generating products holding well (net positive revenue) and 3) competition to key franchises (for Restasis and Botox aesthetics) being delayed. Currently, free cash flow exceeds 30% of revenue, with the pipeline making progress (aCGRP validation and upcoming Rapastinel). All in all, this has been a year of good business performance despite some areas expected to grow at a slower pace (such as Linzess and CoolSculpting) and data for Allergan’s new drug abicipar not being particularly exciting. Looking forward (next three years), there is no material or novel stock-specific concern apart from the acknowledged loss of Restasis. All in all, the Investment Adviser believes that current levels offer a compelling risk/reward profile and that the recent sell-off (post earnings release) is exaggerated.

Becton Dickinson had a tough month due to the overall sentiment regarding international stocks but also its direct link to incremental tariff hits, foreign exchange, and resins. In the Investment Adviser’s opinion, the fundamental story is still in place and playing out very well. The Bard integration is going well, with the debt pay down on schedule (even slightly ahead), core margin expansion on track and a nice amount of interesting new products to be digested in the context of sustainable mid teen top line growth. To conclude, the Investment Adviser still strongly appreciates the predictable nature, diversified product offering and cash flow generation this Company is able to deliver quarter after quarter. This position doesn’t discredit the real impact of the mentioned headwinds, which for now can be qualified as temporary (or out of control) and as such do not derail the fundamental outlook.

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The views and statements contained herein are those of the Eric Sturdza Banking Group in their capacity as Investment Advisers to the Fund as of 09/11/18 and are based on internal research and modelling.

Further insights

November 2018

Japanese companies have strength to deliver profits

In October, the market declined due to rising interest rates in the US and increased fears about a future deterioration of the US and global economy. The market fell after the US market plummeted following the release of weak housing statistics amid a worrying quarterly earnings season.
November 2018

October update - A preference for defensive portfolio positioning

The Strategic Europe Value Fund declined -4.24% in October, outperforming its index by 1.07 percentage points. The best performing sectors in terms of alpha were Materials and Industrials, due to strong stock selection. The Fund’s overweight to the Consumer Staples and Health Care sectors and its slightly higher cash position also helped.