Performance Review
International equity markets posted a negative return in May. A large proportion of this negative return was driven by US dollar strength, with the US Dollar Index returning about 2.33% over the month. The MSCI ACWI ex USA Value Index returned -4.07% for the month, lagging both the MSCI ACWI ex USA Index and the MSCI ACWI ex USA Growth Index by 1.76% and 3.50%, respectively. Against this backdrop, the Fund (Class I Shares) returned -2.24% in May, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned -2.31%, and its secondary benchmark, the MSCI ACWI ex USA Value Index.
The main detractors over the month come from within more fashionable growth stocks in Asia software, including Tencent and Alibaba. More than half of the relative underperformance came from being underweight the ‘BANTS’ group, Chinese tech giants (Baidu, Alibaba, NetEase, and Tencent). We did manage to overset this with our holdings in hardware and semiconductors within Korea and Taiwan, which performed well over the month.
The largest positive contributor was materials where stock selection drove returns across a range of holdings in metals & mining and chemicals within emerging Asia and continental Europe.
On the back of political uncertainty in Italy and Spain, jitters returned to European markets resulting in a broad based market sell-off. Against this backdrop, our exposure to financials was a negative contributor, however, our focus on better quality yet deeper value stocks within Europe saw a relative positive contribution over the month.
Portfolio Positioning
We continue to see opportunities across the full spectrum, from deep value in resources and Japan to high-quality yield in consumer staples and healthcare companies.
The most significant exposure remains financials. We continue to be focused on attractively valued stocks while also being conscious of the quality of the company to assess its risk. Deep value remains within some European and Asian banks, but one of the benefits of our systematic approach is our buy and sell discipline, taking profits when stocks rally and using share price weakness as a buying opportunity. The recent relative performance of European insurance has meant valuations have risen above our view of the appropriate trade-off between value and quality resulting in some profit taking.
At an aggregate level, while we may appear to have similar exposure to defensive sectors relative to the broader index, what we own is different. Attractive valuations remain across a range of high-quality companies and we added to positions in healthcare and consumer staples over the quarter, primarily among European companies. Our exposure in telecoms saw little change over the quarter. We retained a particular focus on integrated telecom companies mainly in Asia.
Resources continue to be a significant holding in our portfolios. Our preferred holdings have been focused on chemicals and integrated oil & gas, which offer an attractive valuation given their quality attributes. We trimmed some positions as many of our energy names performed strongly over the month.
In more cyclical areas, we continue to find opportunities across a number of areas; although, overall, we are underweight relative to the Index. Most of our underweight comes from our lack of exposure to more expensive and very fashionable technology companies as well as lower quality larger auto manufacturers. Over the month, the weakness in many industrial companies led us to increase our exposure as valuations became more attractive.
