Market overview

The year got off to a rocky start and although global equities managed to eke out positive returns, the returns mask the volatility experienced during the quarter. By mid-February some exchanges had entered bear market territory and were down over 20% from their 2015 highs. The S&P 500 was one of the better performers, falling 11% from where they ended in 2015, but then rallying strongly in the second half to new highs for the quarter. China was the catalyst behind the declines. In this regard slower economic growth plus a weaker renminbi both contributed to a risk off environment. Reassurance from central bankers across the globe – particularly the ECB increasing the scope of bond purchases as well as the Fed backing off from further rate hikes – helped ease concerns. This, coupled with a weak dollar, resulted in oil prices rebounding 25% from their lows. From a sector perspective it should therefore come as no surprise that Resources led the way; however, utilities also outperformed due to lower bond yields.

Portfolio review

The Fund performed in line with the benchmark during the quarter. On the positive side Veritas had a particularly strong start to 2016, outperforming by 2.3%. Stock selection was the main driver and they continue to impress with their ability to identify M&A targets. The latest target being the London Stock Exchange who were bid up by a merger with Deutsche Bourse and then speculation of a counterbid by ICE, owner of the New York Stock Exchange. Aberdeen also delivered strong results, generating excess returns of 3.4% as things that detracted last year rebounded. To this end their overweight in Brazil, which gained 26%, contributed as the real appreciated and emerging markets (EM) in general rebounded. Related to this mean reversion of returns was our passive mandate with AB. Value outperformed versus momentum and other more growth areas of the market that sold off dramatically. On the downside Hosking struggled, underperforming by 3.2%. This was largely attributable to their overweight in Financials and more specifically, Italian banks. Capital also lagged by 1%; a disappointing result given their EM overweight. The largest change worth noting was our completion of the transition out of the Fidelity mandate and the appointment of Arrowstreet, a quant manager that complements our bottom-up fundamental stock pickers.

Portfolio positioning and outlook

At the beginning of the year we warned of rising volatility but certainly didn’t anticipate the violent swings experienced during the quarter. While we remain concerned about earnings growth, the magnitude of negative revisions implies the bar from current levels is not as high. Therefore lacklustre results could be enough given the market seems to have discounted lower productivity and rising wages. Another positive is our view that the benefit of lower commodity prices will manifest itself this year. We do however; worry about the impact negative rates from QE will have on financials business models – as evidenced by the Insurance and Banking sectors falling 4.3% and 8% respectively during the period under review. Healthcare, while not as challenged, also struggled given new tax inversion laws. This could potentially have a negative impact on M&A activity.