Perpetual Global Share Class A (PER0733AU) Report & Performance

The Fund’s largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Rheinmetall AG is one of the leading defense contractors in Europe. The stock continued its outperformance in the first quarter following several positive events. Toward the end of last year, Rheinmetall announced an accretive acquisition of Spanish ammunition manufacturer Expal. This further increases its exposure to its highest-margin business wherein demand is also very strong. Rheinmetall also saw a pick-up in orders as strong demand is starting to convert to new business, and on the back of strong share price performance, the stock was included in the German DAX index in March.

Baidu, Inc. Class A is the largest search engine in China and leader in new technologies such as AI and autonomous driving in China. The stock outperformed during the quarter on stronger December quarter results with a positive outlook for 2023 on improving macro and recovering in advertising spend post-COVID. In addition, Baidu also launched its version of the Chatbot and will integrate its AI capabilities across operations to help boost search and expand market share and size in the future. Although its Chatbot is still early in development and monetisation, investors were excited about Baidu’s leadership in the space and the potential additional opportunities this could generate in the future. Fidelity National Information Services, Inc. was a detractor during the quarter after providing initial earnings guidance below expectations. This was exacerbated by concerns surrounding the banking industry broadly, given the collapse of two US regional banks. The company is a technology solutions provider for banks and capital markets institutions, and therefore any concerns about banks and potential future bank spending can weigh on the stock. However, we believe these concerns specifically for the stock have been more than priced in, as no customer accounts for more than about 1% of their revenue, and over 80% of the revenue within their banking segment is recurring.

Insurance companies American International Group, Inc. and Allstate Corporation were among the top detractors in the quarter, following the path of other industries within the Financials sector, specifically banks. We believe that fears in the market about available for sale and held to maturity securities at banks was read through to insurers who typically have large investment portfolios but do not have “run on the bank” liquidity risk. Given the recent sell-off in these stocks and the lack of material new news, we believe the risk/reward of the insurance companies is very compelling at current levels.

The Fund’s largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Air Products and Chemicals, Inc. added to performance as the company posted another strong quarter of double-digit revenue and earnings growth. A new plant coming online in Asia helped volumes while pricing was strong globally, offsetting some of the recent cost inflation. Their backlog continues to grow and remains meaningfully higher than history, over US$21B now versus their entire company’s gross plant, property, and equipment of US$29B today.

As the company executes on this backlog, distributable cash flow could more than double, and this embedded future growth remains underappreciated in shares today. Merck & Co., Inc. benefitted from the market’s tendency to favor more defensive sectors, as Health Care was one of the better-performing sectors in the quarter, with Merck doing better than peers. Strength in the quarter was not driven by any dramatic change in fundamentals, but rather by a steady progress on pipeline drugs and the earnings coming slightly ahead of expectations.

The market also sensed a meaningful change in Merck’s commentary on M&A, now indicated as focused on collaborations and small tuck-in acquisitions rather than larger deals. We like this capital discipline. Despite the recent strong outperformance, we see the risk/reward profile sufficiently reasonable to continue owning the shares. Fidelity National Information Services, Inc. detracted from performance in the quarter as the company reported disappointing earnings in November driven by higher-than-expected costs, slowing revenue growth, and foreign exchange/interest expense headwinds from the stronger dollar and higher interest rates. Despite challenges for the stock price in the quarter, we remain positive on what we believe is a solid business following management change, board turnover, and an activist investor now helping drive shareholder value creation.

The stock is compelling at approximately 10x forward price-to-earnings, a meaningful discount to where this business has historically traded. Medtronic Plc had two disappointments in the quarter, causing the stock to detract from performance. First, its 2nd renal denervation trial failed to hit the primary endpoint in the most recently conducted studies, thus creating a market controversy on the future revenues that can be expected from this blood pressure-reducing procedure. Additionally, the company announced results that missed on organic growth and guided lower top-line growth. Although disappointing, we believe the full renal denervation data combining all the trials is still compelling for a very prevalent condition in a difficult-to-treat population. We believe the company offers good long-term value within the Medical Devices group.

The Fund’s largest overweight positions include Merck & Co., Inc., Allstate Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Seven & I Holdings Co., Ltd. is a global retailer with market leadership in convenience stores. The shares outperformed during the period, driven by continued earnings strength, and management has now upgraded guidance multiple times this year. The company is benefitting from market tailwinds such as higher fuel margins, as well as currency benefits, in addition to company-specific initiatives such as strict cost discipline and achieving synergy milestones post the acquisition of Speedway. We remain constructive on the shares, especially as management has renewed its focus on capital discipline and corporate governance reforms, which we view as additional upside drivers. Hess Corporation, a global independent oil and gas producer, boosted relative performance as its operations in Guyana continued to deliver.

Recent discoveries have increased the resource base and production proceeds are starting to contribute to overall cash flow. Management reactivated its share repurchase in order to return this excess cash to shareholders, in addition to dividends. The valuation remains attractive ahead of the continued ramp-up in Guyana asset growth potential as well as its other production areas, including the Bakken and Gulf of Mexico. Rheinmetall is well positioned to benefit from a material step-up in defence spending following the invasion of Ukraine. This transformation of the growth outlook drove very significant outperformance in the first half of the year with the stock nearly doubling. The stock then underperformed in the third quarter as it gave back some gains and momentum cooled, with some large orders expected for 2022 deferred to 2023. The strong growth outlook remains intact, however, and the valuation is attractive at less than 8x 2023 EV/EBIT. National Grid plc detracted from performance as Utility stocks failed to provide downside protection against the backdrop of higher interest rates. Further, within the UK and across Europe, governments have talked about using pricing caps, which could impact profitability. We believe that the move down in National Grid is more macro driven versus any issue with its underlying fundamentals and, looking through this macro-overhang, we believe the company continues to offer a compelling risk/reward opportunity over the long term.

The Fund’s largest overweight positions include BAE Systems Plc, Merck & Co., Inc., and Air Products and Chemicals, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.

Merck & Co., Inc., a multinational pharmaceutical company, was a top contributor to relative performance driven by strong performance across its segments. Its animal health and vaccine franchises continued to deliver strong growth and look to continue to compound those results in the future. Given the sharp decline seen in smaller pharmaceutical firms’ valuations, management commented on remaining disciplined in terms of capital deployment. Within Merck’s pharmaceutical franchise, its key immuno-oncology drug Keytruda posted another solid quarter of growth. Dollar General Corporation, a leading discount retailer, was a top relative contributor in the quarter, benefitting from better-than-expected earnings results against its most challenging year-over-year comparison of the year. Margin headwinds from elevated transportation costs are easing as ocean shipping rates have fallen by more than a third since the beginning of the year. As well, Dollar General remains well positioned given its mix of sales is shifting back towards consumables versus non-consumables.

SeaWorld Entertainment, Inc. detracted from relative performance. We noted previously that despite reporting very strong operating results, the stock traded lower along with the broader Consumer Discretionary sector. SeaWorld has historically seen only relatively modest impacts to its business from slower economic climates and, given pent-up demand for travel and attendance levels that entered the year still below 2019 levels, we believe current outcomes are likely to rhyme with the past. The company is also aggressively repurchasing its shares this year at what is near an all-time low valuation, given its excess cash position and the strength of its balance sheet. Koninklijke Philips N.V. reported mixed results early in the quarter. Personal Health outperformed revenue and EBITA expectations, while margins in Diagnostics & Treatment and Connected Care trailed. Overall, adjusted EBITA was better than consensus. Importantly, company management maintained guidance for the year. However, the update on the Respironics CPAP recall was incrementally disappointing. The company increased its provision to account for +300k more units to be replaced/remediated.

The Fund’s largest overweight positions include Seven & I Holdings Co., Ltd., Merck & Co., Inc., and Allstate Corporation. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.

With the outbreak of war in Ukraine, the portfolio’s holdings in defence stocks Rheinmetall AG and BAE Systems plc were up firmly in the quarter as European governments recognised the need to spend more on their national defence given years of underinvestment. Rheinmetall is one of the leading defence contractors in Europe, with market-leading positions in land vehicles, large calibre weapons, and ammunitions and electronic solutions. The company is a key supplier to the German army as well as a range of both NATO and non-NATO countries around the world. Similarly, BAE Systems plc is the largest non-U.S. defence contractor in the world and has a diversified portfolio with a strong technology focus covering air, land, and sea. BAE Systems plc performed strongly on the back of potentially higher defence spending, but also reported full-year 2021 numbers in the quarter with EPS and free cash flow ahead of consensus and guided free cash flow meaningfully over the next few years.

We continue to hold both names as we see a compelling risk/reward profile. Vertiv Holdings Co. Class A, a leading provider of power management and thermal systems for data centres and other critical infrastructure, faced issues with their suppliers delivering the necessary components as planned and securing transport of those components at previously agreed upon prices along with broader inflationary pressures. Management stepped in and took swift action to remedy the internal processes and adjust price/cost to balance, however, near-term earnings are currently depressed, with shares trading at 16.5x forward EV/EBITDA. Should their margin profile normalise as we expect, the stock is trading at a notable discount to its peers and create a re-rating potential as results match or exceed expectations. Axalta Coating Systems Ltd., a performance coatings business with leading positions in automotive refinish and OEM, faced rising input prices for solvents, resins, and pigments driven by rise in oil prices. Management remains committed to raising prices, though there will be some lag until they catch up. They also continue to invest into sustainability initiatives, helping offset rising carbon costs and drive efficiencies. Semiconductor shortages persisted, impacting new car production volumes, as people are still returning to their normal driving habits. A normalisation in miles driven should create the need for accident repair. These headwinds are well-known, and more likely to be opportunities for upside improvement as they reverse in the future. Shares are very attractive with solid free cash generation in the interim and trade at 13.7x forward price-to-earnings.

The Fund’s largest overweight positions include Opendoor Technologies Inc, JOYY, Inc. Sponsored ADR Class A, and GXO Logistics Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet Inc. Class A.

The overweight position in digital infrastructure provider Mawson Infrastructure Group, Inc. (+88.7%) contributed to relative performance. The stock rose sharply following an announcement that it had completed a ~US$37m private equity offering of its common stock. The offering was oversubscribed and supported by new and existing institutions, high-net-worth investors, and family offices. The proceeds are intended to be used to acquire additional bitcoin mining hardware as well as capital expenditure relating to its facilities and infrastructure. The overweight position in pharmaceutical producer Merck KGaA (+38.7%) contributed to relative performance. The stock rose after reporting that it had entered into a manufacturing agreement with Kenya-based Universal Corporation Ltd. for the large-scale production of a new paediatric medication. The medication is used to treat the neglected tropical disease Schistosomiasis in children under six years of age and is currently in late-stage development. The agreement with Universal Corp includes the build-up of extensive production capacities in Kenya for the future provision of the treatment in endemic African countries.

The overweight position in British online fashion retailer Boohoo Group Plc (-9.2%) detracted from relative performance. The stock came under pressure after reports emerged that the company’s executive chairman, Mahmud Kamani, was ordered to give evidence in a lawsuit alleging that the company had deceived US customers with fraudulent pricing. The deposition will cover issues related to class-action certification of the lawsuit and Boohoo’s pricing and markdown practices. Management has denied all wrongdoing and will intends on defending itself against these allegations.

The overweight position in Chinese social communications platform provider JOYY Inc, Sponsored ADR Class A (-13.5%) detracted from relative performance. The stock was adversely impacted after Chinese regulators tightened rules to restrict companies from listing overseas. The revised rules would require firms using a variable interest entity structure to obtain approval from Beijing before listing in Hong Kong or the US. The new legislation is reportedly designed to govern cross-border data flows related to overseas listings and intensify punishment for companies that fail to comply in order to prevent illegal activities in the securities market.