What’s Going On in the Market?

In 2019, we have witnessed two distinct market environments, both heavily influenced by macroeconomic developments. From January to April, we experienced strong market performance both in and outside of the United States. The rally was largely driven by changing interest rate expectations, as the U.S. Federal Reserve signaled a pause in the tightening activity, and investors interpreted that as the possibility of interest rate cuts this year. In May, however, the market environment changed quite substantially, influenced by a breakdown of trade talks between the U.S. and China. Through the first five months of the year, the MSCI All Country World ex-U.S. Index (the “MSCI ACWI ex-U.S.”) benchmark is up about 7.5%. However, as the charts below illustrate, there has been significant dispersion among the constituents within the ACWI ex-U.S. benchmark across style, region, and capitalization.



How Are Our Portfolios Doing?

There have been both positive and negative factors that have impacted our relative portfolio performance year-to-date. While we build our portfolios on a bottom-up basis, and regional and sector weights are a result of where we are finding opportunity, our regional and sector positioning has been beneficial. We have been overweight Europe, which has outperformed and have been underweight in Japan and Emerging markets, which have both underperformed. From a sector perspective, we have been overweight technology and consumer discretionary, while underweight energy – all three of these stances have been beneficial to our relative performance.

Some elements of our style positioning have been beneficial and some have been hurtful. Our growth slant has proved helpful, but our small- and mid-cap exposure has hurt as larger cap stocks have fared better.

Our portfolios have also been hurt by our low exposure to dividend yield, a factor that has performed well this year as most of the growth companies we invest in are putting their money back into their business as opposed to distributing it to shareholders.

Year-to-date, as of May 31, 2019, stock selection has also detracted from our relative performance, most notably within the consumer discretionary and communications services sectors. Two individual stocks, in particular, that have underperformed (performed negatively) and detracted from our overall relative performance, year-to-date, are Samsonite and United Internet.

SAMSONITE

The world leader in luggage and travel accessories has been engrossed in the uncertainty surrounding tariffs. Samsonite, which also owns the Tumi brand, benefits from the increasing societal desire to travel, seen both in emerging and developing economies. Additionally, the company benefits from its own scale and is gaining market share from less able competitors that cannot match its marketing or R&D spend. However, much of the luggage that Samsonite sells in the U.S. is manufactured in China and thus subject to tariffs. With additional tariffs taking effect in May and the threat of more tariffs looming, the stock has underperformed so far in 2019.

UNITED INTERNET

The German reseller of broadband communication and business applications to small and medium sized businesses has historically generated strong business results operating with an asset-light model and reselling the capacity of existing telecommunications providers. However, United Internet surprised investors in 2019 announcing that they would be investing in their own broadband infrastructure to ultimately become less reliant on the infrastructure of others. The subsequent uncertainty regarding how much capital the company might need to spend, as well as their potential return on that investment, has hurt United Internet year-to-date.


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