By Eric Sturdza
November was a one-sided month for US equities as stocks extended the rebound initiated on 17 October and consistently hit new highs throughout the month.
The Fund continued to outperform in that period, supported by consensus beating earnings for all of the Fund’s companies who had not yet reported. With the earnings season now over, the Fund’s companies averaged above 20% (yoy) earnings-per-share growth, demonstrating their continued strength in a sometimes challenging environment.
Significant positive earnings surprises in the month included Cognizant Technology who beat expectations, raised its guidance and provided further evidence of the resilience in their end market. Their previously announced acquisition of TriZetto also closed during the month, and should cement their lead in Health care related IT services. November was also an eventful month for Actavis – likewise beating consensus, raising guidance and later announcing their intention to acquire Allergan for $66b, a strategically sound move, albeit at a consequential price tag. The release of their targeted synergies did impress the market, implying a higher accretion than initially suspected and if executed successfully, will prove very profitable for existing shareholders. Given the company’s track record in delivering on their M&A transactions and the attractiveness of the base case going forward, the Fund remains invested in Actavis and will closely monitor the company for any signs of contradictory data.
Portfolio turnover reverted towards a more normal level following a number of additions in October; noteworthy transactions were the Fund’s closing of its position in Credit Acceptance and O’Reilly Automotive given the strong performance of the stocks which, in the Investment Adviser’s opinion, leaves little additional upside. The Fund also closed its position in Qualcomm, as the Adviser could see no sign of an impending turnaround in their Chinese patent/royalties disputes.
The month ended on the news of OPEC’s decision to maintain a 30 millionbarrel – a-day production target, a de facto lowering of the price by maintaining the status quo in an oversupplied global market. With prices already at multi-year lows, this news further pushed the price/barrel down to a level not seen since 2009. While a clear positive for the US consumer and through the consumption channel a net positive for aggregate US profits too, this development also maintains a tight lid on inflation and thus creates at the margin, even less urgency at the Federal Reserve to implement their first hike. Despite this proving a net positive for equities, the consequences on the US energy sector are real and the ripples are being felt throughout the industry: as the producers see their margins compress and some fields become uneconomical, many have already announced cuts in the constant capex needed to keep production from its natural depletion curve. In turn, this causes real headwinds for those suppliers and service providers who until now rode the boom in capex and economic activity in the region. The Fund has virtually no first-order exposure to these ripples, outside potentially diminishing rail freight volumes for Norfolk Southern and some revenue headwinds at Teledyne.
On the flipside, the positive consequences for disposable income/gas prices are materialising in positive retail sales and miles driven, which will be favorable to many of the Fund’s holdings such as Apple (Christmas sales) and its semiconductor supply chain (NXP Semiconductors, Skyworks, Avago); Mastercard (transaction volumes); Polaris (sport vehicle sales & cost of use); and Autozone & Advance Auto Parts (miles driven), among others.
Commentary provided by Banque Eric Sturdza in their capacity as Investment Advisers to the Fund as of 12 December 2014