WCM Quality Global Growth (Managed) (SWI1413AU) Report & Performance

The portfolio delivered a return of 1.08% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 2.82%. The portfolio has delivered returns in excess of the Benchmark over five years and since inception.

Global equity markets posted their third straight positive month in July. The combination of better-than-expected inflation and economic growth numbers in the US brought optimism that the US Federal Reserve may be on track to engineer a ‘soft landing’.

While Federal Reserve chairman Jerome Powell did not give any firm guidance on whether July’s rate rise would be the last of this tightening cycle, he did indicate that a recession in 2023 was now less likely. Economic news in the rest of world was in general supportive of markets too. UK June inflation was lower than expected and the European Central Bank hinted that interest rate rises may be close to pausing. While economic growth in China slowed in the June quarter, policy easing plus expectations of further stimulus to come were additional positive signs for investors. July’s global equity market gains were broad based with all the major country indices posting positive returns. Investors’ increased risk appetite was reflected in the outperformance of emerging markets relative to developed markets and smaller capitalisation stocks versus large. Basic Resources, Banks and Energy were among the best performing sectors with Health Care and Utilities lagging. There was minimal dispersion at a factor level.

Security selection was the primary contributor to the portfolio’s underperformance in the month. The strong relative returns from Technology, Consumer Staples and Industrials holdings were more than offset by stocks in the Health Care, Financials and Consumer Discretionary sectors of the portfolio. From a sector allocation perspective, the underweight exposure to Consumer Staples, zero position in Utilities and above benchmark weight in Consumer Discretionary added to relative performance. On the other hand, the above benchmark weight in Health Care and zero position in both Communication Services and Energy detracted from performance. The strong returns from global equity markets year-to-date have been achieved against a backdrop of many market commentators warning of the need for caution in the face of an expected economic downturn. As markets have risen these same commentators are now highlighting ‘stretched valuations’ as another reason for caution. For the Quality Global Growth strategy (the Strategy), it is encouraging that its year-to-date returns have been primarily driven by earnings growth as opposed to price-to-earnings multiple expansion. A market environment like this (i.e., one which is rewarding company fundamentals) typically bodes well for the Strategy. Regardless of the market outlook, the investment team at WCM Investment Management remains confident its focus on positive moat trajectory businesses with well-aligned adaptable cultures will deliver positive long-term outcomes for investors.

The portfolio delivered a return of 2.99% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 2.63%. The portfolio has delivered returns in excess of the Benchmark over one month and one year. The strong finish to the financial year brings the total return for the portfolio in FY2023 to 22.65%, outperforming the Benchmark of 21.51%.

Global equity markets rallied in June completing a strong first half rebound from the steep falls of 2022. The economic news in June was consistent with that of most of the year to date, namely, that growth continues to slow, but the global recession many had forecast has yet to materialise. Headline inflation has declined but absolute levels are still higher than those targeted by central banks. The better-than-expected growth outcomes have supported equities, while the disappointing core inflation numbers have prevented similar strong returns from bonds. The strong performance of equity markets in June was broad based with all sectors posting positive returns. At a regional level the US was the best of the major markets. Poor June economic data in the UK and China contributed to their equity markets being the laggards of the major markets for the month. Value as a factor had a positive month but growth was more mixed, stronger in developed markets but weaker in emerging markets. The Australian dollar was stronger in June, reducing the returns for unhedged portfolios.

Positive stock selection in the Financials, Materials and Industrials sleeves of the portfolio were more than offset by underperformance in the Information Technology, Consumer Discretionary and Health Care sectors. From a sector allocation perspective, Communication Services (zero weight) was the largest positive contributor to relative performance, followed by Industrials (overweight) and Consumer Staples (underweight). On the other hand, Health Care (overweight) detracted from relative performance, as did Information Technology (overweight) and zero allocation to Energy.

The marked reversal in market sentiment year to date once again highlighted the importance of consistency of process and long-term perspective. The worst performing asset classes of 2022, including growth equities, have led the way in 2023. Equally the best performing assets of 2022 such as commodities have been amongst the worst this year. The Quality Global Growth Strategy has benefited from the team at WCM Investment Management remaining committed to the investment process which has delivered consistent long-term outperformance of market benchmarks. This process is based on identifying companies with corporate cultures that help drive the expansion of their competitive advantages.

The portfolio delivered a return of 1.54% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 1.40%. The portfolio has delivered returns in excess of the Benchmark over one month and one year.

Global equity markets declined marginally (in local currency terms) in May conceding some of the solid gains made year to date. The dominant headline making news for financial markets for most of the month was the US debt ceiling impasse between the Republicans and the Democrats. However, by month end, a compromise was reached which required Congress approval. Economic data in the US and Europe remained mixed with the manufacturing (weak) and services (strong) sector surveys giving conflicting signals in terms of the outlook for growth. The pace of China’s post lockdown recovery showed signs of slowing while in contrast, Japan posted a positive quarter 1, with GDP growth driven by strong domestic demand. Monetary tightening from central banks continued with the US Federal Reserve, the Bank of England and the European Central Bank each raising interest rates by 0.25%. At a regional level, developed market equities outperformed emerging markets. However, the main divergence within markets was at the sector level. Technology stocks, in particular those considered beneficiaries of the surge in artificial intelligence (AI), made strong gains while Energy and Materials were among the weaker performers.

Factor performance during the month reflected this strength in Technology stocks with growth outperforming value. The Australian dollar was weaker in May, enhancing the returns of unhedged global portfolios.

The portfolio’s outperformance during May was largely attributed to stock selection. The sectors most contributing to this were Information Technology, Financials and Consumer Staples. On the flipside, security selection in the Consumer Discretionary, Health Care and Materials sectors detracted from relative performance. In terms of sector allocations, the largest positive contributors included the zero exposure to both Energy and Utilities. The overweight exposure to Health Care and below benchmark position in Information Technology and Communication Services were the primary detractors.

The hype around AI has many investors scrambling over how best to gain exposure to it. Having conducted a detailed research project on AI, the investment team at WCM concluded that adopting a ‘picks and shovel’ approach is the best way to invest in this theme. This approach involves investing in companies that will be providing key inputs into AI as opposed to making binary bets on individual winners. Examples of holdings in the portfolio that stand to benefit from the growth in AI include Microsoft, Entegris, Snowflake and Lam Research.

The portfolio delivered a return of 2.14% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 2.77%. The portfolio has delivered returns in excess of the Benchmark over three months.

Global equity markets made a positive start to the second quarter of 2023. Although reported economic data was mixed, on balance it surprised on the upside. The pace and scale of central bank tightening had spiked fears of a deep global recession but to date, economic activity has remained relatively resilient. This coupled with the continued downtrend in headline inflation has been supportive of risk assets, including equities. While markets are still discounting another 0.25% increase in interest rates in May by the US Federal Reserve (the Fed), the expectation is the Fed will then pause and be cutting rates towards the end of the year. Chinese economic data released during the month was also positive, with first quarter GDP growth of 4.5%, ahead of market expectations. However, continued geopolitical tensions dragged the Chinese equity market lower, in turn, contributing to the underperformance of emerging market equities relative to developed markets.

At a sector level, Energy and Consumer Staples were among the better performers with Information Technology and Consumer Discretionary lagging. In terms of factors, the trends continued from March with large capitalisation stocks and value outperforming small capitalisation stocks and growth respectively.

The Australian dollar was weaker in April, adding to the returns of unhedged portfolios. The portfolio’s small underperformance in April was primarily due to stock selection. While stock selection was positive in the Consumer Discretionary, Industrials and Materials sectors, it was outweighed by the underperformance of the Information Technology, Financials and Health Care holdings.

Portfolio activity has been relatively quiet year-to-date with Cambridge, England based pharmaceutical company, AstraZeneca the only new position added. AstraZeneca meets the criteria the investment team at WCM Investment Management seeks in all portfolio holdings, i.e., a positive moat trajectory supported by a strong, well aligned corporate culture. AstraZeneca’s current leadership has led a dramatic cultural shift which has included reorienting the company to be more focused on earlystage science, thereby improving its success rate in drug development. That effort has helped turn what was once an unproductive research and development organisation into one of the most prolific in the industry. AstraZeneca is now positioned to reap the attendant benefits of this transformation with multiple mega blockbusters, particularly in oncology.

The portfolio delivered a return of 4.36% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 4.05%. The portfolio has delivered returns in excess of the Benchmark over one and three months.

Global equity markets moved higher in March despite the month being marred by both a major bank failure and state-backed banking merger. The collapse of Silicon Valley Bank, closely followed by the merger of Credit Suisse and UBS caused temporary short-term panic in markets. However, by month end, this fear was replaced by optimism that these events may act as a catalyst for central banks potentially to halt the pace and scale of future interest rate increases. US inflation data again pointed to a declining trend with the consumer price index gaining 6.0% in February, compared with the peak level of 9.1% in June 2022. The absolute level, however, remains considerably above the US Federal Reserve’s target rate of 2.0%. Inflation numbers in Europe also showed a declining trend, although this positive news was partially tempered by concerns over potential contagion effects from the Credit Suisse crisis and the impact of civil disturbance from strikes in France and the UK. At a sector level, Information Technology and Communication Services led markets higher during the month. The US market’s relatively high allocation to these sectors contributed to it being amongst the best performers at an individual country level. The Financial sector, for the reasons described earlier, and Energy were two of the larger sectors posting declines for the month. Factor performance was mixed, with one noticeable feature being the outperformance of large versus small capitalisation stocks. The Australian dollar declined marginally in March, enhancing returns for unhedged portfolios.

Stock selection was the primary driver of portfolio outperformance during the month. This was most evident in the Financials, Health Care and Consumer Discretionary sleeves of the portfolio. Sectors where stock selection detracted from relative performance included Information Technology and Materials. From a sector selection perspective, the zero exposure to Energy and Real Estate and overweight exposure to Health Care were the largest positive contributors. On the flipside, the above benchmark positions in Financials and Industrials and the absence of any exposure to Communication stocks detracted from relative returns.

The March quarter was a positive one for the Quality Global Growth Strategy in terms of both absolute and relative returns, delivering a strong return of 10.92% compared with the Benchmark return of 8.79%. Lower trending inflation and the decline in long-term interest rates provided a positive tailwind for growth-style investing. As evidence of investing often being as much about what you don’t own as you what you do, the Strategy also benefited from the zero exposure to Energy stocks, the worst performing sector over the quarter. This contrasts to the experience of 2022 when Energy topped the sector performance tables. There was one new position added to the portfolio during the quarter, UK pharmaceutical group Astra Zeneca.

The portfolio delivered a return of 3.04% during the month, compared with the MSCI All Country World Index (ex-Australia) (the Benchmark) return of 1.53%. The portfolio has delivered returns in excess of the Benchmark over one and three months.

While global equity markets actually retreated over the month, the Australian dollar was significantly weaker against the US Dollar in February, which resulted in enhanced returns for unhedged global equity portfolios. In general, signs of more resilient economic growth promoted a shift in market sentiment regarding the likely peak and then reversal of global interest rates. These signs included stronger than expected US labour market data, European business surveys showing heightened confidence and evidence of a sharp post COVID-19 lockdown rebound in China. The US Federal Reserve, Bank of England and European Central Bank all increased interest rates in February. The commentary from each suggested that while inflation has declined from the peak, central banks believe their job is not done yet. In terms of individual markets, Europe fared best with each of the major continental bourses posting flat-to-positive returns. Emerging markets were the major laggard with narrow performance dispersion at a sector level. Information Technology and Industrials were among the better performing sectors. Quality and growth factors marginally outperformed value.

The portfolio’s outperformance in February can be largely attributed to stock selection. This was particularly evident in the strategy’s holdings in the Consumer Discretionary, Materials and Financial sectors. Security selection in the Information Technology sector was the largest drag on relative performance. From a sector allocation perspective, the zero exposure to Communication Services was the largest positive contributor followed by the overweight positions in Information Technology and Industrials. On the flipside, the above benchmark allocations to Health Care and Consumer Discretionary and underweight position in Consumer Staples detracted from performance.

February was another month in which the market seemed to flip from the hope of a potential ‘pivot’ in the direction of global interest rates to one of fear over ‘higher for longer’. With central banks showing a preference to err on the side of potentially over-tightening monetary policy to ensure inflation is beaten, rather than move too slowly and risk it becoming entrenched, an economic slowdown and/ or a recession seems likely. This would inevitably put pressure on global corporate earnings. The WCM Quality Global strategy is not constructed based on any macroeconomic forecasts or expectations. However, its exposure to a diversified range of expanding moat companies with aligned corporate cultures should prove relatively robust in a market where investors are putting a premium on earnings certainty.