M
arkets are a conundrum in that
company fundamentals remain
becalmed i.e. no earnings growth, and
valuations look to be slightly higher than
the long-term averages. However, with
US companies holding $1.6 trillion of
cash, private equity with $1 trillion of
loose change and retail investors reported
more liquid than ever, the ingredients
are there for equities to become more
expensive in the absence of other
investment alternatives.Therefore,
whatever our reservations about the
lack of fundamentals, it is likely that the
market can make progress as a result
of this liquidity. Not high quality, but
reality.Within our UK holdings, yield has
been found in large-caps; and its relative
cheapness gives this part of the market
the best risk and reward. Looking at our
transactions over the period, much of our
activity was allocating cash ow to existing
positions.We have put a bit more emphasis
on oil weightings given the previous
comments about areas of undervaluation
and above-average yield. In the face of
some disappointing macro data, we have
reduced our mining exposure somewhat
and we sold theVerizon holding which was
received as a result of aVodafone bid.
O
n the back of broad optimism, global
markets continued to climb higher in
April and May, with the MSCI All Country
World Index rising to a new all-time high.
Several of our stocks reported solid results
during the quarter including Royal Bank
of Scotland (RBS). Quarterly earnings
at RBS showed improved underlying
performance and some initial progress
on its restructuring plan.Top performers
also included Illumina, a leading provider
of genetic testing systems.We believe
Illumina’s clear leadership in genetic
sequencing is supportive of a longer-term
pro t cycle. Keurig Green Mountain, maker
of the Keurig single-cup brewing system,
was another top performer. Coca-Cola has
increased its stake in the rm as it continues
making good progress on the rollout of its
next-generation brewing systems.We added
Citigroup to the portfolio this quarter.We
believe its global banking franchise makes
our entry price of 0.85x tangible book value
highly attractive.We exited our investments
inTotal and Coal India as both reached our
estimate of intrinsic value.We also exited
GreatWall Motor Co, China’s largest
sport utility vehicle (SUV) maker: we
believe the inde nite delay of its H8 model
SUV is a sign of execution struggles. Similar
to last quarter, we remain cautious and
focused on valuations.We believe stocks are
mostly fairly valued and our cash position
remains elevated.
T
he second quarter felt a di cult one
with con icting in uences, though
returns from equities and bonds were
positive. Data on economic growth were
mixed: Europe was shown to be weak, the
speed of the US recovery after Q1’s bad
weather was inconclusive, and China has
been a little better recently; but only the
UK was above trend. Events surrounding
Ukraine and Crimea were unhelpful. M&A
activity, particularly in the pharmaceutical
sector, was a positive in uence, though
P zer’s bid for AstraZeneca was
withdrawn. Such activity and their relative
undervaluations triggered a move to larger
companies from smaller ones; as well as
a signi cant rotation from highly-rated
growth stocks into better-value stocks.
This rotation was particularly unhelpful to
our portfolios given our GARP (growth
at a reasonable price) style.We made
no signi cant change to asset allocation,
continuing to hold more cash than normal
rather than own more government bonds,
where yields are so low. In Europe the
European Central Bank’s latest package of
measures to stimulate growth and avoid
de ation was good for sentiment, but
more may ultimately need to be done. In
the UK we may need to wait until later in
the year for the earnings growth that will
be needed to push prices higher.
Adrian Gosden and Adrian Frost
Dan O’Keefe and David Samra
Richard Peirson
THE INVESTOR CENTRE
THE INVESTOR
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27
ARTEMIS
UK & International Income
Equities set to be more costly in the
absence of investment alternatives
ARTISAN PARTNERS
Global Managed
Global
Cautious outlook remains with a
firm focus on valuations
AXA FRAMLINGTON
AXA Framlington Managed
Balanced Managed
A difficult second quarter but positive
returns from equities and bonds
We have put a bit
more emphasis on
oil weightings
Several of our stocks
reported solid results
during the quarter
Wemade no
signi cant change
to asset allocation
A
Dan O’Keefe, David Samra and
James Hamel
R
