T
he US Federal Reserve continued
to taper bond purchases during the
quarter, amid continued improvement in
the US labour market. Eurozone in ation
slowed further. In response, the European
Central Bank (ECB) announced plans to
increase its balance sheet by around €800
billion through two mechanisms. First, it
will provide ultra-cheap funding to banks to
then lend to the private sector. Second, the
ECB will purchase private sector securities,
nanced by money creation, this being a
small-scale quantitative easing.The past
18 months has seen a massive compression
in risk premiums across multiple asset
classes.Within equity markets, this is
re ected in underperformance of lower-
volatility, high-quality stocks.We believe
there is an elevated probability of the risk
compression unwinding over the next year
or so as investors focus on normalising US
interest rates.This could lead to a material
correction in credit and equity markets.
Against this backdrop, eBay was among the
strategy’s top contributors, with its shares
recovering from various issues we believe
have limited materiality to the long-term
investment case. Microsoft reported
strong performance in its core enterprise
business, driven by hyper growth of its
cloud products. Consumer sectors were
the strategy’s main weakness.Tesco declined
after announcing management change and
weak trading, while Yum! Brands fell on meat
quality supply issues.
MAGELLAN
International Equity
eBay and Microsoft among top
performers, while Tesco declines
Consumer sectors
were the strategy’s
mainweakness
THE INVESTOR CENTRE
THE INVESTOR
|
33
O
ptimism over continued economic
growth and accommodating nancial
markets o set geopolitical uncertainty
in the Middle East and Eastern Europe.
Contributors to fund performance included
Amcor, Procter & Gamble and Macy’s.
Amcor reported approximately a 25%
increase in its full-year net pro ts as a
result of growth in emerging markets and
acquisitions made in China,Australia,
India and Indonesia. Procter & Gamble
posted approximately a 37% increase
in its quarterly pro ts as a result of the
company’s cost-cutting e orts and sales
growth in its home care business. Macy’s
bene ted from a rebound in earnings later
inAugust. Individual detractors included
Eaton Corporation, KoninklijkeAhold and
Viacom. Eaton’s share price fell in response
to disappointing second-quarter earnings.
KoninklijkeAhold missed second-quarter
estimates as its US market share dropped.
Viacom also posted lower-than-expected
earnings as ad-sales growth and box-
o ce revenue fell more sharply than had
previously been projected by analysts.
During the month we added Heineken,
The Raytheon Company, Bridgestone,
ComfortDelGro andVerizon to the
fund.We soldAnheuser-Busch InBev,
GlaxoSmithKline, P zer, SES,TimeWarner
andAutomatic Data Processing.We continue
to focus on companies with strong balance
sheets and the ability to maintain or increase
pro t margins.
MANULIFE
Global Equity Income
Focus continues on companies with
strong balance sheets
Macy’s bene ted from
a rebound in earnings
later inAugust
Paul Boyne and Doug McGraw
Hamish Douglass
For
Majedie
see p38
W
e have added to the position in
Tesco.We should have seen that
operating margins of more than 5% would
not last.The new chief executive,‘Drastic
Dave’ Lewis from Unilever, may need to
cut prices further in order to hang on to
market share, now 29%. Lewis has already
stated that stopping the decline in market
share is his primary objective. Investment
in sta and training, more store refurbs
and price cutting are bad for margins in
the short term. But this is, in the end, a
business of high quality. People will always
buy food, and most of the food that they
buy will be in supermarkets, and most
of the supermarkets that they buy from
will be those which are nearest to them.
To be the leader remains a strength.We
expect, therefore, some ugly quarters in
pro tability, but ultimately reemergence.
And then there is the valuation.TheAsian
operations, if sold, would raise probably
well over £8 billion, the Continental
European activities £2 billion.The market
capitalisation of the whole of the company
is only £18 billion.There are many things
that the new management can do and it is
not clear which of them they will choose;
but we feel that it is often when there is
uncertainty that there is also the best value.
OLDFIELD PARTNERS
High Octane
Tesco faces ugly quarters in
profitability before reemergence
O enwhen there is
uncertainty there is
also the best value
Richard Oldfield
