Trident Global Growth Fund – Quarterly Fund Manager’s Report – 31 March 2016
Quarterly Fund Report – 31 March 2016
Fund Commentary
The Trident Global Growth Fund unit price fell 6.3% during the quarter, as markets around the world remained extremely volatile. The biggest detractor during the December quarter was the rise in the Australian dollar that stripped 4.60% from performance. If this is taken into account the equity performance of the Fund was a fall of 1.7%, which is not far away from the market fall of 1.1% over the quarter.
The feature of the quarter was the close correlation between the markets and the oil price. This is very unusual in that a fall in the oil price is perceived to be helpful to 90% of company earnings and also helpful to the economy. Yet in the March quarter it seemed the markets were reading exactly the opposite. The reason may be due to the concerns that an oil price plunge would also hurt energy company profits, as well as threaten the viability of several small US based energy producers and a possible default on loans and bonds and this may affect the financial sector.
There were also concerns that geo-political issues would arise due to the low oil price particularly in the Middle East, Russia, Nigeria and Venezuela. This oil price correlation made markets incredibly volatile and very difficult to invest in. A result we maintained a high level of cash throughout the quarter, usually remaining at over 25%. We see this as prudent until investors reduce their nervousness and fundamentals again come into focus, particularly earnings and forward guidance.
We also took the step of diversifying the portfolio into what could best be described as “defensive” stocks such as US based Telco Verizon and global brand 3M. Both these companies have strong market positions and pay good dividends. We maintain these positions at the time of writing.
One of the sectors hardest hit in the March quarter was Healthcare. As we were heavily invested in this sector we did see outsized affect on our portfolio. This was due to comments by US Preidential front runners Hillary Clinton and Donald Trump that they would somehow force biotech and pharmaceutical companies to lower prices or they would regulate prices. This we believe is political rhetoric and would be extremely unlikely to pass through Congress into law, yet investors took their comments on board and sold many helathcare companies down to valuations not seen since the Global Financial Crisis in 2008-9.
We are buyers of quality healthcare companies as most analysts agree that over the next 1 to 5 years, healthcare will be the highest growth sector due to favourable demographics globally. As a result we have taken positions in or have increased our investment in companies such as biotechs AbbVie, Amgen, Celgene, Biogen, heart appliance maker Edwards Lifesciences, medical appliance maker Medtronics, Australian hospital operator Ramsay Healthcare and global healthcare company Johnson and Johnson. We also see opportunities in health insurance, digitised medical records and pharmacies, building positions in an number of strongly growing companies while prices remain under pressure.
Outlook
In our last report I stated that the start of 2016 was disastrous for the markets and it remained so until March when the market had a very rapid recovery from the Febraury lows, this caught many investors by surprise. While we missed most of the downturn, having gone to substantial cash levels we also couldn’t really make the most of the violent upswing as we maintained high cash levels and only put money to work in oversold stocks such as healthcare, which in April is now showing good signs of recovery justifying our view that this sector has been too harshly treated by investors.
While we do remain a little sceptical of the rapid recovery in March and expect some degree of “consolidation” at current market levels before a move higher in the second half of the year, we have been slowly putting money back to work where we can see value. However, we expect to maintain high levels of cash in the seasonally volatile June to September period and expect during any volatility there will be bargains made available by nervous investors.
We also recognise that the US Federal Reserve remains a “wild card” as we said in our December report and that our read back then was that the Fed would be unable to follow through with the rate hikes it said it would. As it turns out that prediction was correct with Fed chair Janet Yellen backing away from the plan and stating that 2 rate hikes are still possible. We still maintain that this is ambitious and unlikely to occur. Our prediction is one hike in December after the US Presidential election. The result of the Fed’s backdown has also seen pressure come off the US dollar (hence the rise in the Australian dollar) and this should see US based multinationals have and improved top and bottom line in coming quarters, which may surprise the markets. Healthcare and Technology being a major beneficiaries of this change.
As we predicted in the last report, markets would settle when the oil price stabilised and that is exactly what happened when oil settled into a more “comfortable” med $30’s to $40 range, which removes much of the “default” threat from smaller oil companies. We still see that oil and commodity markets remain over supplied and that this will drag on central bank inflation targets and may from time to time kick up volatility as central banks continue “currency wars” in attempt to ignite some growth into their economies. However, with most countries engaging in this practice it will result in very little happening and I expect that the low growth environment that we have seen for the last 5 years will continue for the rest of 2016. Interest rates will remain lower for longer with little change until probably 2018.
We remain significantly invested in US listed equities with global exposure and are increasing our exposure to individual sectors such as Financials, Cyber Security, Technology, US Consumers and Healthcare.
Our Ten Largest Positions
These are are our ten largest positions in the Fund.
1. Alphabet: Formerly known as Google, Alphabet is the western world’s most populat Internet search engine. The core business is Internet advertising but also has investments in other businesses as it expands it reach into “the internet of things”, electronic home control such as Nest, self driving cars and software, the Android operating system for mobile phones, Gmail, Chrome operating system, hardware products such as the Nexus phone and Chromebook, Google Maps, Google Earth and Google Wallet payment system. The company is very innovative and may soon be on the cusp of monetising some of it’s “projects” to diversify the earnings base. Holds over $60 billion in net cash. Forward P/E is 18 and expected long term growth is 17%pa.
2. AmerisourceBergen: One of the world’s largest pharmaceutical products and healthcare provider. They are the world’s largest purchaser of generic drugs and distribute them worldwide to pharmacies, clinics, hospital and governments.The forward P/E is 13 and expected long term growth is 14%pa.
3. Amgen: One of the world’s leading biotechnology companies. They operate in over 10 countries and focus on therapies for cancer, heart disease, inflammation and brain disorders. They are also a global leader in human genetics. Forward P/E is 13 and expected long term growth is 9%pa.
4. MasterCard: MasterCard is the world’s second largest credit and debit card processor. MasterCard Incorporated provides payment solutions and services under the MasterCard, Maestro, and Cirrus brands. Like competitor Visa, it operates globally and will be a beneficiary of increased e-commerce payments as well as less cash usage. In addition, MasterCard will also benefit by the introduction of payment systems such as Apple’s Apple Pay and Google’s Wallet who both use MasterCard as a payment processor. Forward P/E is 22 and expected long term growth is 17%pa.
5. Walt Disney: Our new largest holding and a very worthy company to hold that honour. In my opinion probably the best managed “household name” company in the world and the results in recent years support that view. CEO Bob Iger never misses a beat and it seems the Disney can do no wrong, particularly with the film studios of Pixar, Disney and Marvel turning even their “filler” movies into massive multi-billion franchises. For example, Frozen was supposed to an animated feature to fill a gap in production, now it’s the most popular animated film in history with Frozen now set to become a multi-film franchise with new Frozen rides in the theme parks, a range of merchandise and toys released. The money from Frozen and other franchises will keep rolling for decades. The first Disney produced Star Wars film was released in December and immediately broke box office records and is tipped to be easily the highest grossing film in history with several more to come.
This global entertainment enterprise that operates Resorts, 14 Theme Parks, Retail Shops, Merchandising, Cruise Line, TV Networks (ABC, Disney, A+E and ESPN), Hulu, Movie Disney, Maker, Marvel and Pixar Studios and popular franchises such as Star Wars, Muppets and Marvel (X-Men, Spider Man, Iron Man, Thor, Captain America, The Avengers, Incredible Hulk, Fantastic Four). Most of us have grown up with Disney being part of our childhood and these days the company is no less prominent with it’s “top shelf” entertainment offerings, both presently and for the future. Forward P/E is 15 and expected long term growth is 14%pa.
6. Visa: The world’s largest credit card and debit card transaction processing company. Their network covers over 200 countries, 14,300 financial institutions, 2.1 million ATMs and 2.3 billion customers. In 2014 it processed over 100 billion transactions worth over US$7.5 Trillion. Visa is in a good position to take advantage of increased e-commerce payments, as well as less cash usage. In addition, Visa will also benefit by the introduction of payment systems such as Apple’s Apple Pay and Google’s Wallet, who both use Visa as a payment processor. Forward P/E is 23 and expected long term growth is 16%pa
7. Facebook: A phenomenon since it began in 2004 and now a part of most people’s lives with over 1B daily users. It’s hard to ignore it’s success and growth prospects. Since investing in the quarter we have already seen a 10% rise. Forward P/E is 27 and expected long term growth is 33%pa
8. Edwards Lifesciences: A global leader in the science of heart valves and hemodynamic monitoring. The Edwards' proven family of PERIMOUNT surgical valves are the world's most frequently implanted valves. Decades of clinical experience and peer-reviewed data on Edwards' valves provide robust evidence of long-term durability and proven hemodynamics of the PERIMOUNT valve platform. Edwards’ leadership in transcatheter heart valve replacement includes a commitment to meaningful innovation, rigorous scientific study, extensive clinician training and education, and significant investment in new applications of the technology. The Edwards SAPIEN valve platform continues to raise the bar as the most widely studied transcatheter heart valve worldwide. Edwards also offers market-leading technologies that facilitate on-pump cardiac surgery procedures through smaller incisions. Edwards’ minimally invasive valve surgery solutions are comprised of soft tissue retractors, venous and arterial cannulae, aortic occlusion, venting, and coronary sinus catheters. Forward P/E is 33 and expected long term growth is 16%pa.
9. 3M: We have all used 3M products from Post-it notes to Scotch Tape but what people don’t realise is that they produce products in Health Care, Automotive, Safety, Electronics, Consumer, Communications, Energy and several sectors. Forward P/E is 18 and expected long term growth is 9%pa.
10. Verizon: America’s largest telecommunications network. They pay a 4.2% dividend and are regarded as a defensive stock and are currently a bargain based on their forward PE of only 12 and expected long term growth is 5%pa
Our equity holdings are chosen for their ability to not only provide “Growth at a Reasonable Price” (GARP), but also their low risk profile.
Conclusion
We remain focused on the Fund investing in businesses with strong and sustainable growth over the longer term, as well as good cash flows.
Prior to the chaotic markets that have prevailed since August 2015, we had provided significant outperformance for 3 years after having an equally challenging 2011. This strong out performance was due to buying “unloved stocks” with strong fundamentals and future economic tailwinds. We have invested heavily into quality healthcare and technology stocks and expect they will provide significant outperformance in coming years and again our fund will be performing as we all expect.
As one of the largest investors in the fund, nobody is more disappointed by the events of the last 6 months than I am and as my interests are aligned with yours I am determined to get things back on track to where they should be, but as always it takes patience as we must wait for the market to catch up to our investment thesis as it has in the past. Thank you for your patience.
Until next time…
Lance Spicer
Investment Manager
Sydney, 9th April 2016
AMH is the responsible entity and issuer of units in the Trident Global Growth Fund ARSN: 120 329 026. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 02 9241 7959 or visiting www.amhonline.com.au/trident You should obtain and consider the PDS before deciding whether to acquire, continue to hold or dispose of units in the fund.
Lance Spicer is a director and shareholder of Trident Investment Management Pty Ltd, the Investment Manager of the Fund and an authorised representative of AMH (number 295393). Comments and opinions expressed are that of the Investment Manager.
The performance figures quoted are not audited. They are calculated to the end of the relevant quarter using the unit price after all fees and any taxes payable by the Fund have been deducted and assuming all distributions are reinvested. No allowance is made for taxes, which may be payable by individual investors.
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Australian Mutual Holdings Limited (AMH) ABN 90 115 182 137 Australian Financial Services License (AFSL) 295393. The Trident Global Growth Fund (Fund) ARSN 120 329 026. The Fund is issued by Australian Mutual Holdings Limited (AMH) ABN 90 115 182 137 Australian Financial Services License 295393. You need to read the Product Disclosure Statement (PDS) before investing in this product. The PDS can be accessed at www.amhonline.com.au/trident