Performance Review
Volatility returned to the market during February, resulting in the MSCI ACWI ex USA Index having its first negative month since 2016. The sell-off in international markets was broad based, meaning there was less of a growth or value bias in the markets, although defensiveness (in particular lower volatility) was rewarded in this more risk averse market.
This environment was beneficial to our diverse, valuation, and business-quality focused approach. The Fund (Class I Shares) returned -4.18% in February, outperforming its benchmark the MSCI ACWI ex USA Index, which returned -4.72%.
This outperformance was broad based with most regions and sectors contributing to returns; however, the main detractor came from Pacific ex Japan, particularly the financial sector. The most significant contribution to returns came from our European holdings within more defensive sectors. We have selectively increased our exposure in this area recently, which was rewarded in February, particularly among food and drink companies. Consumer discretionary, in particular advertising companies, were also positively rewarded over the month.
During February, we saw more mixed performance from the more fashionable consumer focus stocks in emerging market Asia, with Tencent and Alibaba both underperforming the broader index. This reprieve from the market focusing on a small cohort of more expensive names allowed our valuation-focused approach to be rewarded. This led to positive contribution from a number of overweight positions we hold in Taiwanese semi-conductor and hardware companies, and IT services within India.
Portfolio Positioning
Our strategy offers a broad range of exposure across multiple value themes across regions and sectors. Currently, this ranges from deep value opportunities in resources and financials, to less expensive and higher quality companies in consumer staples and healthcare.
The most significant exposure remains financials. We are still focused primarily on attractively valued stocks, while also keeping in mind our view on the quality of the company in assessing its risk. The recent relative performance of European financials has meant valuations have risen above our view of the appropriate trade-off between value and quality, resulting in profit taking.
At an aggregate level, while we may appear to have similar exposure to defensive sectors relative to the benchmark, what we own is different to the index. One of the benefits of our systematic approach is our buy/sell discipline, taking profits when stocks rally and using share price weakness as a buying opportunity. Last month, many of our holdings in food & drink businesses where rewarded and we took profits as these stocks rose above the appropriate risk-adjusted position sizes. The telecoms sector is our most significant exposure in this defensive group, and our focus remains on integrated providers where we are overweight across regions.
In more cyclical areas, we continue to find opportunities across a number of areas. Overall, though, we are underweight relative to the broader 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 manufactures. Over the month, the weakness in many industrial companies led us to increase our exposure as valuations become more attractive.
Resources continue to be a significant holding in our portfolios. Our preferred holdings in this sector have been focused on chemicals and integrated oil & gas, which offer an attractive valuation given their quality attributes. We have added exposure in our preferred names when there is weakness.
