Trident Global Growth Fund – Quarterly Fund Manager’s Report – 31 December 2017

Quarterly Fund Report – 31 December 2017

Fund Commentary

The Trident Global Growth Fund unit price rose 6.04% during the quarter, against a rise of 5.15% for the MSCI World Index Benchmark. Again in the past quarter, the Australian dollar strengthened by 0.5% reducing overall performance. If the Australian dollar had remained stable during the quarter the Fund would have risen in excess of 6.54% during the quarter, easily outperforming the Index. The Fund has now outperformed the Index on 3 of the past 4 quarters on a currency adjusted basis.

While most commentators have expected the Australian dollar to fall, it continues to defy the odds in part due due to many investors expecting US interest rate rises to be slower than previously expected, particularly with a “dovish” chairman expected to be appointed to takeover from Janet Yellen when her tenure ends. It’s now expected that the Federal Reserve will increase interest rates by a quarter point, two, maybe 3 times in 2018. Interest rates in Australia are widely expected to remain stable for 2018, even though some economists are expecting a rate cut now that house prices in Sydney and Melbourne have softened. A cut could see the Australian dollar drop quite dramatically lifting the Fund unit price. We expect the recent rises in the Australian dollar to reverse during 2018.

During the quarter we saw strong outperformance from a number of our stocks including Apple, Amazon, Arista Networks, Becton Dickinson, CME Group, Alphabet, Home Depot, JP Morgan, MasterCard, Microsoft, PayPal, Roper Technologies, Sherwin Williams Co., ST Microelectronics, and United Health.

During the quarter we added to our exposure to US cap stocks, as they will be the major beneficiaries of Donald Trump’s tax cuts that were enacted before the new year. The tax cuts in the US are the main reason for such a strong rally of recent times which should see earnings lifted quite substantially in the coming couple of years.

Outlook

The “Trump Rally” accelerated in the December quarter on the back of successfully getting the tax cuts through Congress. We positioned the portfolio in some of the sectors that we think will be the more favoured beneficiaries of these cuts, such as small caps, US domestic businesses and financials.

In 2018 we see the biggest threat to the market being over-exuberance by investors, which has seen the market rise almost constantly now, without any profit taking pullbacks. We sense that this is due to many investors not having participated in this long bull market since it’s low in 2009. This is also the case for some institutional investors who have also been cautious and underweight equities. It could be the “fear of missing out” now driving some investors to invest now rather than wait for a pullback or a correction.

At the time of writing, analysts were expecting the S&P 500 earnings to be $149 in 2018 and over $162 in 2019. If you then take the long term average PE ratio of the S&P 500, which is around 16 and multiply the 2018 expected earnings, you’ll calculate a fair value for this market at around the 2400 level for the S&P 500. However, when interest rates are low for extended periods of time like they are now, a PE ratio of around 17 is more common, as stocks are more desirable in low interest rate environments. So, the level for the S&P 500 would be more like 2530. However, investors are aware the full effect of the Trump tax cuts will hit in 2019 pushing up earnings quite dramatically and that’s where the focus lies currently. If you look ahead to the 2019 year, we see that fair value for this market would be closer to 2750 to 2800, which is close to the current level of the market. However, as you well know, markets do not go up in a straight line, as this one is currently doing and we expect there to be a pause or minor correction. We expect this is most likely in the June to September (Northern hemisphere summer), which is a period of seasonal weakness. We think it may be prudent this year to some extent to listen to the old Wall St saying, “Sell in May and go away”, as we think the fourth quarter may present some excellent long term buying opportunities and having some cash to put to work may be advantageous.

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. The market is currently at or close to new highs and while we understand the market is acknowledging growing earnings, continued GDP growth, low interest rates and low unemployment – in affect a “Goldilocks” situation, we are also aware corrections and pullbacks occur at regular and sometimes, as in this current environment, irregular intervals. So, fully expect one will come our way this year and will position the Fund to have some cash in that eventuality.

Until next time…

Lance Spicer

Investment Manager

Sydney, 15th January 2018

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

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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