Dear Advisers, Consultants and Fellow Investors,
Thank you for your ongoing support and interest in our suite of Arnhem Global SMA strategies. Please find attached and below our February 2018 performance for both the ‘Global Growth’ and ‘Australia+’ Portfolios. Given the heightened volatility in global markets witnessed at the beginning of the month, we thought it prudent to share with you how our Global SMA’s are positioned as we head deeper into 2018. Some commentary from the team is discussed below.
My thanks also to those of you that commented on our recent purchase of Regeneron Pharmaceuticals (listed on Nasdaq). I appreciate discussing a stock where they key drug and revenue source ‘Eylea’: which is injected into the eye to treat diseases of the retina such as wet age-related macular degeneration and diabetic macular edema’ isn’t exactly dinner conversation. I’ve an instructional YouTube video on its practical application at hand but fear this will make things worse!
In the event that market weakness persists, Arnhem’s Global SMAs are well positioned. In our Global Growth SMA for example, the portfolio has 9.5% of its value allocated to cash, and has maintained this higher than normal cash balance since mid-2017 in anticipation of increased volatility. We will use this cash to increase the portfolio’s weight in oversold stocks and to establish new positions in quality companies at attractive prices. Furthermore, we have selectively sold down positions in outperforming higher PE names (like Nvidia and Paypal) to reflect a macro environment of higher inflation expectations (that will lead to higher interest rates which in turn typically leads to pressure on stocks with higher valuation multiples). As a result, the portfolio still has the growth characteristics that we are looking for, but is better positioned to withstand a volatility based correction as we witnessed 4 weeks ago.
We remain confident in the outlook for the portfolios’ current holdings which are characterised by strong cash flow, conservative gearing and exposure to structural high-growth industries. Despite the portfolio’s bias to high-growth industries, valuation remains integral to Arnhem’s investment process. This valuation discipline has resulted in a large allocation to defensive growth stocks trading at modest price to earnings multiples, and we expect these stocks to fall far less than the market in a sell-off. For instance, Continental on 14x price to earnings ratio, Siemens 16x and Roche 14x . These stocks also have defensive earnings if the economy were to falter. Under this scenario, the portfolio has stocks leveraged to consumers trading down during difficult economic times such as Dollar Tree and TJX Companies. In recent periods of volatility, China has been on the front foot at providing stimulus and we have exposure to China through our healthcare names and consumer companies such as Tapestry and Nike.
The portfolios will have to be more nimble in this volatile environment. Given the team’s experience, and sector specialisation, we have a long shopping list of names for our SMAs to buy as opportunities present themselves.
Please contact your Carrick Aland Wealth Planning Advisor if you have any questions.
Samuel Stobart | Arnhem Head of Distribution