Download Global Equity Income Fund (Unhedged)

COVERING OCTOBER 2016
FUND COMMENTARY
THREADNEEDLE GLOBAL EQUITY INCOME FUND
(Unhedged)
Summary
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Global equity markets fell back in October.
The fund underperformed its benchmark.
Regional allocation detracted, as did stock selection in sector terms.
Significant positive contributors included Reynolds American and Kroton
Educacional.
 AstraZeneca and Cypress Semiconductor detracted.
 The fund opened positions in Wells Fargo, Novo Nordisk and Watsco, and
exited National Bank of Canada, Canon and Outfront Media.
Market Background
Global equities fell back in US dollar terms in October. Factors influencing
sentiment included earnings reports from high-profile US companies, uncertainty
over the manner of the UK’s exit from the EU, poor Chinese trade figures and, as
ever, speculation about potential changes in central-bank policy. Fluctuating oil
prices were also in the headlines. Early surges, driven by OPEC’s productioncutting agreement and Russia’s subsequent support for it, gave way to declines
as hopes faded that OPEC members would actually follow through on the deal.
US economic data painted a mixed picture. Job-creation figures for September
undershot expectations, but retail sales were up, the non-manufacturing
purchasing managers’ index (PMI) hit its highest level in a year, and the thirdquarter GDP estimate came in well above expectations. After a disappointing
start, earnings releases generally improved as the month progressed. Banks did
particularly well, and hopes increased that the US might have escaped the
“profits recession” that has been in place since the second quarter of last year.
Sterling continued to weaken, despite better-than-expected GDP growth in the
UK. In a speech at the Conservative Party conference, Prime Minister Theresa
May outlined plans to invoke Article 50 by next March and voiced her
determination to regain control of immigration. In response, the pound fell to a
fresh 31-year low amid fears that Britain was heading for a “hard Brexit” (i.e.
without access to the European single market).
Early in the month, the eurozone composite PMI for September was shown to
have fallen to a 20-month low, but still at a level indicating continued expansion.
There was some better data as the month progressed. The flash composite PMI
reading for October rose to a 10-month high, helped by growth in German
manufacturing.
In Japan, the yen fell against the dollar during the month. This was perceived as
positive for the export-heavy Japanese stock market, and sparked anticipation
that Japan’s third-quarter results season may beat forecasts as overseas
earnings are translated back into yen. Asian emerging markets underperformed,
pressured by some poor Chinese export figures.
FOR INVESTMENT PROFESSIONAL USE ONLY
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Issued November 2016 | Valid to end February 2017
FUND COMMENTARY | NOVEMBER 2016
Performance
The fund underperformed its index on a net basis. Regional positioning detracted, driven by the overweight
in the UK and the underweight in Japan. Despite the fund’s picks in the US performing well, stock selection
detracted overall, especially in Japan and East Asia ex Japan. At the sector level, the overweight in real
estate was unhelpful. While selections in the consumer sectors and energy contributed strongly, those in
financials, utilities, technology and healthcare detracted.
Reynolds American led positive stock-level contributors over the month; the company’s shares surged after it
became the target of a takeover bid by British American Tobacco. By contrast, BAT’s share price fell back
amid concerns related to the deal.
College operator Kroton Educacional rallied on the announcement of solid Q3 results. Suncor Energy traded
higher, after bouncing back from difficulties earlier in the year to record a healthy third-quarter profit. Themepark operator Six Flags Entertainment rose during October and, in a strong month for financial stocks,
JPMorgan Chase gained after reporting a sizeable rise in its trading revenues.
Among detractors, AstraZeneca slipped after one of its treatments for heart disease failed to show
appreciable benefits over an older drug. Cypress Semiconductor dipped following broker downgrades, while
shares in consumer-goods giant Unilever fell after the company became embroiled in a dispute with Tesco
over the wholesale pricing of one of Unilever’s products.
Activity
During the month, the fund exited its position in National Bank of Canada, switching instead into Wells Fargo
to benefit from the latter’s greater sensitivity to a rising US interest rate.
The position in Merck was trimmed to fund a purchase of Novo Nordisk. This is a high-quality Danish pharma
business and a market leader in diabetes care. Its recent sell-off offers an attractive entry point.
An overreaction to a recent earnings miss provided an opportunity to build a position in Watsco, a premier
US heating, ventilation and air conditioning (HVAC) distributor. The company should benefit from pent-up
demand in the replacement market, particularly within the Sun Belt states where it is over-indexed. In
addition, Watsco will continue to consolidate a still-fragmented market with deals tending to be highly
accretive.
The fund also topped up positions including Advanced Semiconductor, Deutsche Telekom and Legal &
General.
Among sales, Canon was exited due to concerns that its competitive position within printers could be eroded
following Hewlett Packard’s purchase of Samsung’s printer operations. Japan Retail Fund and Outfront
Media were sold to fund better ideas.
Outlook
Political and macroeconomic uncertainty will continue to dominate investor sentiment, likely resulting in
additional rotations that have characterised equity markets this year. Against this backdrop, the fund
continues to focus on its ‘quality income’ approach, seeking competitively advantaged companies with strong
cashflow generation that offer high, growing and sustainable dividend yields. In the fund manager’s view, a
strategy that emphasizes both income and growth characteristics should be attractive to long-term investors
against the current market backdrop of low economic growth and low interest rates.
Despite the market’s hunt for yield, the fund manager’s research continues to show that dividend stocks
trade at attractive valuations relative to the broader market. Geographically, the fund still favours the
developed markets; despite some reduction to the exposure to Europe, the fund manager has been
increasing positions in North America. While the fund is currently underweight in emerging markets,
valuations across the region are looking more attractive and offer interesting opportunities to invest in
financially robust companies with good dividend yields. The portfolio remains well balanced and diversified.
FOR INVESTMENT PROFESSIONAL USE ONLY
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Issued November 2016 | Valid to end February 2017
FUND COMMENTARY | NOVEMBER 2016
Ironbark Asset Management (Fund Services) Limited ABN 63 116 232 154 AFSL 298626 (“Ironbark”), is the issuer of units in the
Threadneedle Global Equity Income Fund (Unhedged) ARSN 161 086 497 ('the Fund'). Ironbark is the responsible entity of the Fund
and has selected Threadneedle International Limited ('Threadneedle’) to manage the investments of the Fund.
The information contained in this report is not personal financial product advice, does not constitute an investment offer or invitation to
anyone in any jurisdiction in which such offer is not authorised. This publication has been prepared without taking into account the
objectives, financial situation or needs of any particular person. Before making an investment decision to continue to hold units in the
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Ironbark, nor its directors, officers, representatives, employees, associates or agents of Ironbark, or any party named in the PDS
guarantee the repayment of capital or the performance of the Fund. Past performance and asset allocation is not a reliable indicator of
future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by
exchange rate fluctuations. This means that an investor may not get back the amount invested. Please note that the securities
mentioned herein should not be considered a recommendation to purchase or sell any particular security. The information stated,
opinions expressed and estimates given constitute best judgement at the time of publication and are subject to change without notice to
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FOR INVESTMENT PROFESSIONAL USE ONLY
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Issued November 2016 | Valid to end February 2017