Commentary On Our Funds
By Mason Willoughby-Thomas, Portfolio Manager, Larger Companies Trust
Following on from the excellent returns recorded in the 2012/13 financial year, momentum was maintained, with further strong performances achieved across most global indices over the past 12 months.
The MSCI World Index posted an increase of 20.3% for the financial year, again driven to a significant extent by the US which returned 23.9% (using the S&P 500 as a proxy). Key European indices, notably the German DAX and the French CAC, also delivered strong returns with gains of 23.1% and 21.3% respectively.
A supportive procession of economic data from the US helped provide some fundamental justification for the strong performance of equity markets in 2013/14. However, the primary driver of equity market performance appears to be the ongoing availability of ultra-cheap credit, fueling investor appetite for riskier assets in an attempt to boost portfolio returns. This explanation draws support from the almost unfettered rise in global indices throughout the period, despite a series of confidence-rattling events that would usually precipitate a shift in investor risk appetites. Prime examples include the commencement of QE tapering by the US Fed, a string of global geopolitical disturbances (Syria, China v Japan, North Korean belligerence, instability in Ukraine and the rise of ISIS in Iraq), threats to the shadow banking system in China and currency crises in emerging markets.
The Australian market (ASX 200) returned a robust 17.4%, albeit underperforming the MSCI World Index. The initial flight to safety late in the 13/14 financial year, in response to US Federal Reserve tapering fears, gave way to a resumption in demand for higher yielding assets in 2013/14, including the Australian dollar. Whilst the RBA had hoped that record low interest rates, falling commodity prices and slowing economic growth would reduce support for the A$ and assist the much needed transition away from Australia’s resources driven economy, global appetite for yield ensured the currency remained stubbornly above $0.90. With limited success in stoking a broader base of economic growth, mining sector investment cooling and the Chinese economy showing signs of strain, the underperformance of the Australian market relative to global peers was understandable.
By David Macri, Chief Investment Officer
The International Equities Trust delivered a solid result for the year to 30 June 2014 returning 25.8%, reflecting the generally strong performance of global equity markets.
Persistent appetite for risk supported strong performance from cyclically leveraged industrial and IT sectors, whilst more staid and defensive investments such as utilities lagged behind.
The Australian equity market also benefited from higher investor risk appetite which led to a rebound in the resources sector. However Australian investors’ insatiable search for yield drove a divergence in returns from large versus small capitalisation stocks, with the former returning 17.7% and the latter 13.1%.
The Larger Companies Trust enjoyed the benefits of the favorable performance of large cap companies as well as a strong contribution from its holding in the International Equities Trust, delivering a return of 20.5% against the benchmark return of 19.1%. An underweight position in the banking sector weighed on performance whilst strong gains from the utilities sector, telecommunications and consumer discretionary names such as Fairfax and REA Group more than compensated.
In a more subdued environment for small capitalisation stocks the Small Companies Trust performed admirably, delivering a return of 16.5% which was well ahead of its benchmark return of 13.1%. The primary drivers of this performance were the significant contributions from high conviction positions in the information technology sector with the likes of GBST, Oakton and ASG Group all delivering outstanding returns.