October update - A preference for defensive portfolio positioning

BY WILLEM VINKE

The Strategic Europe Value Fund (EUR I Class) 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.

The largest drag on performance was the Fund’s allocation to the Information Technology sector. October was a challenging month, with most sectors in negative territory, with the worst performing sectors for the benchmark being Information Technology, Industrials and Consumer Discretionary.

The Fund had no significant outperformers at a single stock level in October. The largest detractor to return was Fresenius Medical Care (FMC). The Company pre-released Q3 results, which included significant one-off cuts and a cut to FY net income guidance, which implies a weaker Q4, notably in their North American business. That said, the Investment Adviser believes this weakness to be temporary. Longer-term the investment team continue to find the business model attractive. Over the month, the Fund exited the remainder of its position in Philip Morris International, also selling Amadeus as the share price reached its fair value and exiting the position in Criteo given the large ongoing changes, as well as the fact that it is a small cap stock in a cyclical sector. During the month, the Fund initiated a new position in Lloyds Banking Group. Lloyds is one of the highest quality UK banks due to its strong capital generation, which should allow for ongoing dividend growth and share buybacks. The share price has been weak this year, offering an attractive entry point.

The Strategic Global Quality Fund detracted -6.45% in October, outperforming its benchmark by 0.9 percentage points. Materials and Consumer Discretionary were the best performing sectors, driven by strong stock selection. The Fund’s overweight to the Consumer Staples sector also helped. Information Technology and Health Care were the largest detractors to alpha. It was a negative month for the benchmark, with all sectors in negative territory; the worst being Industrials, Consumer Discretionary and Energy.

The Fund had no significant outperformers during the month. Fresenius Medial Care, Kao Corp, Shiseido, Reckitt Benckiser and Wirecard were the largest detractors to return. During October, the Fund sold its position in Alphabet, Criteo, Oracle and Philip Morris International during October.

The team maintain their cautious view, concerned about the pricing of risk assets given the overall tightening of global monetary policy, the strengthening of the U.S. dollar and the impact of normalising interest rates on Emerging Markets. The global economy appears to be operating at a two-speed market, the U.S. and everything else. Against this backdrop, the economic system is highly leveraged and particularly sensitive to shocks which are starting to appear. Political risk is increasing, with the Investment Team remaining particularly concerned about the U.S. - China relations and Italy’s situation in Europe.

In this current environment of heightened economic and political risk, the team retain their preference for defensive portfolio positioning. Year to date the Investment Adviser continued to make the portfolio more defensive by selling small and mid-cap positions, adding to the Health Care sector and increasing the cash position. The market has started to move to the same defensive way of thinking, and as such the Investment Adviser is now finding attractive opportunities outside of the traditionally preferred sectors. 

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The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the funds as of 12/11/18 and are based on internal research and modelling.

Further insights

November 2018

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