Performance Review

International equity markets suffered a sharp fall (-8.13% for the MSCI ACWI ex USA Index) over the month of October as volatility returned to equity markets. The market repriced risk as software companies, which had been expensive, continued to sell off, making the technology sector the worst-performing sector. Concerns over China’s growth and trade disputes also pushed cyclicals down. This led equity investors to move into more defensive areas of the market, with utilities being the best-performing sector, despite losing 4% for the month. 

The MSCI ACWI ex USA Value Index¹ returned -6.87% in October, outperforming the MSCI ACWI ex USA Growth Index², which returned -9.36%. This performance difference was led by the more defensive dividend-yielding (value) stocks, particularly in utilities and real estate, and the lack of exposure to previously sought-after technology growth stocks. Over the course of the year, growth is now underperforming value by 1.4% driven by the more defensive areas of the market. 

When the market moves sharply and focuses on definitional characteristics (as we saw in October with defensive areas), our approach can find it difficult to add additional alpha.³ This is because the market is not focused on the trade-off between valuation and business quality within these defensive areas, but rather rewards all stocks that are defensive no matter the stock’s other attributes. 

Against this backdrop, the Fund (Class I Shares) returned -8.01% in October, outperforming its benchmark, the MSCI ACWI ex USA Index, which returned -8.13%. The main contributors over the quarter were the more defensive areas of the portfolio, including developed and emerging Asian telecommunication services, as broad-based stock selection drove performance. 

This defensive theme continued for us within the healthcare and consumer staples sectors as both provided relative outperformance over the quarter, particularly among our European and Japanese holdings. 

Our continued avoidance of more expensive and fashionable Asian internet companies also provided strong outperformance as these stocks continued to come under pressure over the quarter, led by Tencent, which fell close to 25%.

Our materials holdings, notably chemical companies, came under pressure during the month, amid earnings uncertainty, worries of a Chinese slowdown, and continued fears over trade wars.      

Portfolio Positioning

While investors have largely focused on the more fashionable, or popular, stocks, many areas of international markets have been overlooked. Typically, when this happens, it gives investors the opportunity to look for stocks that offer the right combination of affordability and businesses health (value doesn’t need to simply be high risk). 

We continue to see opportunities across the full spectrum of value, from deep value in resources and Japan, to high quality yield in consumer staples & 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. 

With the recent strong performance of more defensive areas of the market, we took profits from a number of our positions in healthcare and telecommunication services, primarily among European and Asian companies, as these stocks performed strongly over the quarter. 

Resources continue to be a significant holding in our portfolios. Our preferred holdings have been focused on chemicals, mining, and integrated oil & gas, which offer an attractive valuation given their quality attributes. 

In more cyclical areas, we continue to find opportunities across a number of areas. We continue to be underweight technology which comes from our lack of exposure to more expensive and very fashionable technology companies as well as lower quality larger auto manufacturers. Over the quarter, the weakness in deeper value cyclical areas led us to increase our exposure as valuations became more attractive.