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THE INVESTOR CENTRE
THE INVESTOR | 35
MAGELLAN
International Equity
Investments in Tesco, Target, PayPal
and Yum! Brands performed well
Turbulent start to 2016
as concernsmounted
around global growth
LOOMIS SAYLES
Investment Grade Corporate Bond
Positions in consumer, energy and
mining companies have added value
Februarywas amonth
of twohalves asmetal
andoil prices improved
J O HAMBRO
Joint manager:
UK & General Progressive
Focus on finding companies that
can generate above-average returns
January’s sharp sell-
offhas leftvaluations
looking unappealing
John Wood Kenneth M. Buntrock Hamish Douglass
Equity markets had a turbulent start
to 2016.Oil prices reached a
12-year low and markets were
generally weak as concerns mounted
around global growth trends.
During Q1, investments inTesco,
Target, PayPal and Yum! Brands made
the largest contributions to
performance.Tesco has trended higher
following the release of a trading
update,with management confirming
it expects to achieve its full-year profit
guidance.Target rose strongly after
releasing its Q4 earnings result and
providing 2016 guidance of 9-15% eps
growth,which was ahead of consensus
estimates. PayPal also delivered
above-consensus results and 2016
guidance for double-digit revenue and
eps growth.Yum! Brands rallied as
sentiment on China’s outlook
improved and risks associated with the
separation into two companies reduced.
Currencywas a tailwind acrossmuch
of the portfolio, including our US dollar
cash position, due to weakness in
sterling. Positions in Intel and eBay
were the notable detractors from
performance. Intel declined in the
early part of Q1, as did the broader IT
sector. eBay’s quarterly earnings report
included disappointing projections.
Once again, our essential message
remains the same: absolute
valuations within the UK stock
market, artificially inflated by QE and
ultra-expansionary monetary policy,
are unattractive to us as fundamental
investors in the absence of an
improvement in underlying corporate
remain faithful to
our absolute valuation discipline,
meaning we retain our high cash
balance – our cash balance actually
rose in February as the recovery in
markets from January’s sharp sell-off
has left valuations again looking
distinctly unappealing to us.
Our focus continues to be on
identifying companies that can generate
above-average returns over the long
term through compounding growth.
Unfashionably,we seek to buy and
hold stakes in companies characterised
by high-quality franchises that generate
plentiful free cash flow and which have
solid balance sheets marked by low
levels of debt.High-return
investments are scarce in the low-
return environment now facing us, but
we believe we can achieve attractive
long-term returns through the patient
process of holding stocks that regularly
compound their growth over time.
T he year began in the negative
mood of late 2015.Global credit
continued to underperform through
mid-February. Corporate spreads
widened, as government yields fell,
due to persistent worries of Chinese
and global growth concerns,
commodity weakness, talk of Brexit,
and the risks of a potential US
recession.
However, February turned out to
be a month of two halves, especially
for industrial sectors, and the euro
and US dollar markets. Spreads have
since reversed course tighter on signs
of improvement in metal and oil
prices.The exceptions have been the
sterling market and banking issuers,
which have lagged. Fund positioning
in consumer, energy and mining
companies has added value.These
selections have more than
compensated for underperformance
among banks,where lower rates for
longer and Brexit commentary have
weighed on the sector.
We do not believe that the world
economy will relapse into global
recession this remain
comfortable that corporate bonds
will outperform government bonds
in coming periods.