What started off as a very encouraging second quarter for equities, ended poorly after the Fed indicated the reduction of monetary stimulus might begin earlier than anticipated. A broadening recovery in the US resulted in the S&P 500 outperforming. Japanese equities also fared well; up 50% in late May, the Topix has since fallen back to end H1 up 33% in yen (half of the rise has however been offset by a depreciating yen). The worst performance came from emerging markets where the prospect of a stronger dollar, coupled with an obvious slowdown in China, has hit resource prices, to which emerging economies tend to be closely correlated.
The STANLIB Multi Manager Global Equity fund gained 8.2% after fees, ahead of the MSCI AC World IMI index which was up 7.5% over the quarter. Marathon continued to outperform largely due to their Japan bias and corresponding underweight in emerging markets. YTD they are pleasingly 400bps ahead of the benchmark. It's pleasing to note that Veritas (our manager in the defensive space) outperformed. Their heavy overweight in healthcare has been a significant driver of relative returns. Particularly unhelpful has been their high cash, ranging between 7% and 10%. That they have outperformed despite this cautious positioning testifies to strong stock selection. On the downside Aberdeen has been a big detractor with the portfolio being hurt by a half benchmark weight to the US. Underweighting consumers and overweighting materials and energy has also hurt. In characteristic fashion, the manager has been buying cyclicals on weakness. Temporary underperformance from this long-horizon manager is not unusual. Growth managers have struggled in the face of the strength in defensive shares, and to that end Fidelity have surprised on the upside by outperforming. This can be attributed to their small cap bias and overweight in the US. Conversely, Capital was marginally behind but this needs to be seen in the context of significant outperformance over the last 12 months following the restructure of the global team.
Growing confidence in the US economy has resulted in record highs for the S&P 500. The Fed continues to provide support to the market through its policy of unlimited QE despite recent talk of "tapering". At a regional level Europe appears relatively cheap versus the US and other major markets. On aggregate the portfolio is underweight large caps and we have a lower beta than the market. This is due to sector positioning where the Fund's biggest overweight is healthcare (+3.6%) and underweight financials (-4.8%). The overall portfolio currently trades at a slight discount to the market (PE of 15.9 vs. 16.5) with a dividend yield which is in line with the index at 2.6%.