Markets rose strongly in the September quarter, further consolidating surging asset prices in the previous quarter. The portfolio achieved strong absolute returns, above long-term return expectations, as we maintained our long-standing fundamentally and valuation driven risk-aware approach.
The A.I. thematic took firm hold of both markets and economics, with investor sentiment fuelling momentum-led markets (and vice versa in circular fashion) whilst A.I. capital expenditure continued its momentum.
Growth asset classes all produced very strong returns against a backdrop of weakening global economic trends and continued trade tensions. Australian equities were powered by large-cap resources and materials names and small companies, which produced almost two-years' worth of expected returns in the quarter. US and Chinese technology names single-handedly drove global equity markets, powered by anything and everything related to A.I. Real assets (global listed property and infrastructure) also performed well but lagged surging equity markets.
There was an extremely wide variance in underlying manager returns. L1 Capital Long Short and Macquarie Australian Small Companies were the highlights, with both providing more than one years’ expected return in the quarter alone! L1 continued its strong resurgence, benefiting from broad-based gains across multiple positions with 19 stocks each contributing more than 0.5% to returns. Exposure to copper and gold miners also contributed to the quarterly return of 13.36% for this fund. Australian small companies surged ahead of large companies in the quarter, as small resources, and small gold stocks in particular rocketed higher as commodity prices rose. Macquarie’s systematic approach took full advantage of the small resources rally, with momentum factors benefiting from the strong sentiment in precious metals spot prices, delivering an astonishing 17.42% for the quarter.
Greencape underperformed in the quarter, due to underweights to financials, namely CBA, and overweights to healthcare and energy hurt relative returns. Although Australian Eagle has enjoyed a strong return of 15.02% for the past 12 months, the past quarter it was adversely impacted by its long positions in CSL, Telix, and QBE and short positions in Mineral Resources and IDP Education. Allan Gray’s return of 4.41% for the quarter broadly kept pace with the index with their overweight to the materials sector assisting returns.
Positioning assisted as Asian and emerging markets equities powered ahead boosted by Chinese A.I. names. All developed market-focused global equity managers were not able to keep pace with the broader market as they largely kept away from the most recent surge in tech stocks. Their valuation discipline and diversified approaches kept them either out of, or underweight mega-cap US technology names. Investors rotated out of stocks deemed to be at risk of A.I. disruption and used the more defensive sectors as a funding source for investment into the perceived A.I. beneficiaries.
GQG continues to be significantly overweight defensive sectors and significantly underweight technology and consumer discretionary sectors. T. Rowe Price holds an underweight position in mega-cap US technology names and exposure to some financials and healthcare stocks, however their investment in real estate and utilities stocks were a positive contributor to their performance. The fund’s overweight position in Asian stocks provided some support within the portfolio as Asian stocks more broadly benefited from surging investment sentiment for Chinese A.I. related names.
The portfolio had mixed results from global mid and small-sized company manager selection. Our mid-cap exposure through Artisan Global Discovery fund had a more modest return for the quarter, adding 2.45%. Arrowstreet Global Small Companies was able to add another 6.48% return for the quarter to add to it strong return over the full 12 months.
In contrast, Pzena Emerging Markets Value powered ahead, providing a strong absolute return of 9.10% for the quarter. The region benefited from surging investment sentiment for Chinese A.I. related names. Stock selection was the main contributor for Pzena, including holdings in Samsung, Alibaba, and Baidu.
Both asset classes underperformed tech heavy global equities. Our 0% allocation to Property therefore assisted the portfolio. ATLAS Global Infrastructure fund had a modest return for the quarter due to its allocation to European holdings which were negatively impacted by political risk (France), fiscal concerns (UK), and upward pressure on European government bond yields.
Asset allocation settings and managers selected were also reviewed during the period with a manager change to the global equity lineup and adjustment in some portfolio allocations to opportunistically take advantage of market movements. This included the following previously communicated changes:
We think the portfolio is well balanced for both the risks and opportunities ahead, and particularly well positioned to take advantage of uncrowded parts of the market as investors draw their attention back to both market and company fundamentals.