30
|
THE INVESTOR
THE INVESTOR CENTRE
T
he last quarter and year have provided
good returns despite the strong pound.
We continue to lag as weaker companies
rebound.The 10-year bond yields of Spain,
Italy and Ireland are now in the mid-to-
upper 2% range, similar to those of the
US and the UK, and provide a proxy for
what has occurred in equities. Our quality
portfolio has a dividend yield in the low
3% range and an earnings yield in the low
sixes.We think this represents good value
in expensive markets.We added to our
position in Publicis after the stock was our
worst performer following the cancellation
of the Omnicom merger, and after we had
one of our best management meetings of the
year with Publicis’ CEO. Publicis is a front-
runner in the growing digital advertising
market. Digital advertising represents 40%
of Publicis’ revenues, and management is
focused on widening this competitive moat.
The company has allocated capital well, with
current and 10-year average after-tax return
on capital employed (ROCE) of 16%;
similar to Omnicom and notably higher than
competitorsWPP, Interpublic and Havas.
Publicis also earns the highest margins,
with plans to increase them by 2%-4% by
2018, enabled by world-class back-o ce
platforms. Lastly, its shares are trading for
less than 11 times EV/operating pro t.
BURGUNDY
Joint manager: Greater European
and Greater European Progressive
A good run of returns but weaker
companies rebounding creates a lag
We continue to
lag asweaker
companies rebound
Kenneth A. Broekaert
W
orld equity markets continued
their ascent in the second quarter
of 2014. Economic news continued to
be unexciting but positive on balance,
with China’s growth having stabilised,
peripheral Europe bottoming, and growth
returning to the UK economy. Oil prices
rose towards the end of the quarter as
chaos in Iraq and Syria threatened to
spread to other parts of the Middle East.
After a di cult 2013, bonds staged a fairly
powerful rally in the rst half of 2014,
confounding the bearish attitudes and
positioning of most of the industry.At the
very least, this rally indicates that there is
little concern about in ation in most world
economies.This opinion was reinforced
late in the quarter by Mario Draghi’s
dramatic action of reducing the European
Central Bank deposit rate from 0.0% to
-0.1%. Corporate news was generally
positive. Negative surprises were relatively
few, perhaps because corporations have
managed investor expectations well.An
unusual aspect of the equity markets was
the decline in volatility to all-time low
levels late in the quarter.The result was a
market of steadily appreciating stocks, with
no stable leadership by any industry group.
Valuations are rather extended though not
extreme. Central banks remain extremely
accommodative.There seems to be no
reason to anticipate a dramatic change in
market dynamics as long as that remains
the case.
BURGUNDY
Joint manager: Worldwide Managed
and Worldwide Opportunities
Economic picture unexciting but
positive as equity markets climb
There is little concern
about in ation inmost
world economies
T
he world’s largest economy continues to
be the main driver of global growth and
also the leading force in policy normalisation
as its domestic recovery broadens out.At
the same time, the European Central Bank
appears set to embark down its own path
of targeted‘money printing’ to weaken
the euro, boost lacklustre growth and ease
de ation worries across Europe.The fund
has been impacted by the market rotation
away from companies exhibiting‘growth’
and‘momentum’ throughout Q2, causing
investors to move away fromwhat have
been strongly performing shares in recent
quarters. In addition to the momentum
reversal, there has also been a signi cant
change in the performance trend between
large and mid-cap shares.The fund has
returned -2% and so has pared back some of
the strong returns achieved in the previous
six months (generated by many of the same
shares still held today).A naked long position
in Essentra (industrials) was the main
detractor in this period followed by Paragon
( nancials) due to the reversal summarised
above.The strongest gains from the naked
long book came from Shire Pharmaceuticals
(healthcare). Reed Elsevier (consumer
services) also boosted performance in the
pair book.While interest rate expectations
may be brought forward, this will be
only gradual at best and from a low base.
Bottom-up stock selection remains the
single most important determinant to the
performance outcome.
BLACKROCK
UK Absolute Return
US economy driving global growth as
ECB prepares to calm deflation worries
Anaked long position
inEssentrawas the
maindetractor
Nigel Ridge
Richard Rooney
All information correct as at 30 June 2014
