BlackRock Advantage Intl Equity Fund (BAR0817AU) Report & Performance

The strategy portfolio outperformed in the second quarter 2023. Sentiment and Themes drove positive performance while Fundamentals were flat.

As the market breadth broadened in June there was a rebound in performance. This was led by bottom-up Sentiment insights. Faster moving insights using NLP text analysis, online sales and web traffic were among the top performers.

Macro Themes performance was mixed during the quarter but finished positive. On one hand, strongest gains across the macro insights were centred around signals focused on more granular themes such as AI beneficiaries, and stocks with adverse exposure to the challenges across the US banking industry and commercial real estate. However, pro-inflation/defensive themes which were winners over 2022 and industry selection continued to struggle for traction against frequent rotation in leadership, most notably in Health Care.

Within Fundamentals, traditional valuation and anti-growth signals which were amongst the top performing signals in 2022 struggled during this period; underperforming earlier in the quarter before recovering through June. Quality measures evaluating companies’ financing were also additive over the period while ESG insights struggled as investors focused on macro dynamics and AI.

The MSCI World Ex Australia Index gained 1.2% in unhedged AUD terms and declined 0.2% in fully hedged to AUD terms in May 2023. Most major asset classes declined in May as US debt ceiling negotiations dominated headlines. Global equities, as measured by the MSCI World Ex Australia Index (hedged), were down 0.2%, while the unhedged index finished the month up 1.2% as currency moves offset the decline in international share prices. Technology stocks were a positive outlier in May buoyed by upbeat sentiment around generative artificial intelligence, which prevented the broader equity index from falling further. Developed Markets outperformed their Emerging Market counterparts, with divergences observed across geographies and sectors. Fixed Income markets, as represented by the Bloomberg Barclays Global Aggregate Index (hedged), also closed the month down 0.5%.

The strategy portfolio underperformed in May, with most insight groups negative. Sentiment led the underperformance for the month, specifically the machine learned complex. Online sales, web traffic and brand sentiment contributed positively but not enough to offset losses elsewhere. Within Value, signals that were the top performers over 2022 such as long-term reversal and anti-growth struggled the most. Within the Quality suite, contrarian quality signals led the underperformance of the fundamentals complex. Across Macro, positioning in energy, pharma, and food producers where the portfolios are overweight were amongst the top contributors to negative performance over the month. All of these are pro-inflation/ defensive themes which were winners over 2022 and drove positive fund performance last year. Another area that was problematic over the month was positioning within the semiconductor industry

The MSCI World Ex Australia Index gained 3.16% in unhedged AUD terms and 1.64% in fully hedged to AUD terms in April 2023. Financial markets were relatively calm over April despite the uncertain macroeconomic outlook.

Global equities, as measured by the MSCI World Index, increased by 3.1% over the month in Australian dollar terms as investor sentiment held steady. Developed Markets outperformed their Emerging Market counterparts. Fixed Income markets, as represented by the Bloomberg Barclays Global Aggregate Index (hedged), remained relatively volatile but also closed the month in positive territory up 0.4%.

Overall, the model ended the quarter in the positive territory after a negative start to the year. Macro Thematic and Sentiment insights regained traction through the quarter. On the other hand, Fundamental signals finished the quarter negative. A sharp rotation in market leadership was observed over the opening weeks of 2023 and the portfolio retained exposure to several 2022 winning macro trades that detracted from performance such as an overweight in Energy, Healthcare and Staples. However, Macro insights regained traction over the remainder of the quarter with stubbornly hawkish central bank rhetoric and renewed turmoil in the banking sector re-igniting growth concerns. The stock selection across IT also ended up contributing to performance. The Sentiment complex, along with the Macro Thematic insights, emerged as the dominant driver of performance following the challenging start of the year. Proprietary measures of momentum detracted but suffered a shallower drawdown than traditional insights. For the remainder of the quarter, a strong recovery in performance from bottom-up measures such as broker, management and hedge fund sentiment added to performance as investors refocused on forward looking measures of sentiment. Within the Fundamental signal complex, Value signals were the worst performers mainly due to their positioning in Financials. Quality signals also struggled during the quarter. Specifically, contrarian quality strategies tracking levels of equity dilution were among the main detractors.

The portfolio generated a small outperformance to the benchmark, primarily attributable to positive Sentiment signals. In contrast to the previous month, Quality signals that measure firms’ capital financing were among the weakest performing signals during the period. Along the ESG dimension, results were mixed with signals tracking carbon commitments showing negative performance and human capital corporate culture measures contributing positively. Within the Value complex, signals observing balance sheet ratios performed well while measures of fundamental value focused on short term mean reversion detracted. Within Sentiment, several measures of forward-looking momentum recovered January losses. These included insights designed to track the sentiment of analysts and company management. Additionally, a signal evaluating product ranking among online retailers was among the top contributors.

However, a signal tracking mobile app usage detracted from performance. Macro Tactical signals had positioned the portfolio for a continuation of the softer inflation/macro landing which had played out over the turn of the year. However, February saw positioning from these insights generally run against the grain of a re-emerging inflationary impulse. Notably, poor performance from normally inflation defensive US Healthcare stocks provided a further data-point suggesting some level of disconnect between equity and fixed income markets. Additionally, an overweight position in Canadian Energy stocks represented a pro-inflation stance which, more intuitively, failed to protect the portfolio.

The MSCI World Ex Australia Index gained 3.95% in unhedged AUD terms and 7.17% in fully hedged to AUD terms in Q4 2022. Major asset classes rose over the final quarter of 2022, although growing recession fears saw sentiment wane in December. Global equities, as measured by the MSCI World Index, increased by 3.9% over Q4 in Australian dollar terms, supported by the unwinding of China’s zero-COVID policy and softer inflation data. Emerging Markets outperformed their Developed Market counterparts. For the full year, global equities remain in negative territory at -12.5%. Fixed Income markets, as represented by the Bloomberg Barclays Global Aggregate Index (hedged) gained 0.6% over the quarter after suffering sharp losses earlier in the year.