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Podcast: Portfolio resilience despite volatile markets

Head of Global Long-Term Unconstrained, Zehrid Osmani, on the key factors that have underpinned returns and exciting structural opportunities.

Date published
20 Aug 2020
Tag
Zehrid Osmani Head of Global Long-Term Unconstrained

The key factors that have underpinned portfolio resilience and exciting structural opportunities in areas like healthcare, infrastructure and robotics & automation.

Includes:

  • The important contributors underpinning returns
  • Exciting new opportunities in the post-Covid global economy
  • Four unknowns that mean volatility is likely to stay high


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In terms of contributors to performance across the fund since the start of the year, healthcare and industrials, in particular, have been positive contributors.

Script

It's Zehrid Osmani, head of Global Long-Term Unconstrained equities at Martin Currie and manager of Martin Currie Global Portfolio Trust with an update on the funds.

We manage high-conviction, long-term, unconstrained funds with the time horizon of five to ten years. Focusing on quality/growth type of ideas which we find in a fundamental way with a systematic approach to risk assessments and an ESG process that is embedded in our fundamental analysis.

The year so far been an unprecedented year, to say the least. We've had a pandemic crisis that has pushed markets into recession in record time, followed by a very sharp rally since the lows reached in March.

We've effectively had the fastest bear market since World War Two in a few weeks in March, followed very rapidly by the fastest bull market since the early 70s. The world is going through one of the most severe recessions experienced as a result of the pandemic crisis. The markets have recovered most of their loss ground. If you look at the US market, it's close to its all-time highs. The world market is within a couple of percentage points of that all-time high. The emerging market indexes is within four percentage points off the all-time highs. While the Nasdaq is up 23% since the start of the year, making an all-time high.1

So, it's been a very volatile market so far this year and it would have been very easy, as investors, to get whipsawed by activity.

Our funds have shown resilience as a result of us focusing on investing in sustainable business models with attractive long-term growth profiles and high returns potential. We typically buy companies that have high entry barriers, a dominant market position, strong pricing power, low disruption risk, have structural growth prospects, generate high returns, strong compounding cash-flows, have quality management and corporate culture - and that we see as attractively valued. These typical characteristics have helped the resilience of the funds.

In terms of contributors to performance across the fund since the start of the year, healthcare and industrials, in particular, have been positive contributors. In healthcare, we would single out Coroplast, the ostomy, urology and wound care specialist. In industrials, Atlas Copco, in particular, has done very well. This is industrial power tools benefiting from the potential for pick up in infrastructure spend.*

Other positives contributors at the sector level have been financials and energy, which are two sectors where we have big under weights. Financials have been under pressure, in particular in banks given the low yield environment, and energy has been underperforming as a result of the collapse in the oil price in the first half of the year.

On the negative side, luxury goods companies Kering and Moncler, as well as sports apparel company Adidas, have detracted from performance as a result of the weak demand coming out of the consumer, given the forced lock down throughout the globe.

For us as long-term investors, it's important to keep thinking about the long-term, attractive structural growth trends that we foresee. We have a very clearly defined thematic framework which focuses on three megatrends

Turning quickly to some thoughts on the market. We've had decisive of action by policymakers, both central bankers, through rate cuts and liquidity injection, and governments with sizable fiscal expansion. Central banks have averted liquidity crises and provided much needed funding to the economy. Fiscal policies are ensuring recovery gets underway.

The magnitude of the fiscal stimuli that have been pledged have, at times, been colossal. Representing close to 10% of GDP for some of the main economies.2 The shape of the recovery is, however, uncertain. We don't know what the post-Covid world looks like. The labour market deterioration is a worry. The speed of channelling the stimuli into the economy will be an important determinant of how rapidly the economist recover and there is a pandemic relapse risk to think about.

There are other uncertainties out there. The ongoing geopolitical tensions between the US and China. The US presidential elections, given the uncertain outcome. The valuation gap between growth and value will be an ongoing talking point. And the unusually low government bond yields through large parts of the market, bringing a clear shortage in yield attraction across the market for investors. All these unknowns, and the uncertainty that they bring, will keep volatility high in the markets.

For us as long-term investors, it's important to keep thinking about the long-term, attractive structural growth trends that we foresee. We have a very clearly defined thematic framework which focuses on three megatrends: Demographic Changes, Future of Technology and Resource Scarcity. This framework helps us to identify the attractive areas of the market in order to position the portfolios on the long-term, attractive growth opportunities that we foresee.

In a post-Covid world we see some attractive opportunities in various areas. Firstly, in infrastructure we think there will be an increased infrastructure spend on 5G Telephony, High Speed Railway, healthcare, and green and renewable energy, These form part of our Resource Scarcity megatrend.

On the healthcare infrastructure side, we think the spend will be channelled both in the private and the public health care space. We also think there will be increased spent on hygiene, both food and general hygiene. On the general hygiene side, it will be both household and professional premises.

Online education could also be an attractive potential future growth area. These opportunities form part of the Demographic Changes megatrend.

On the Future of Technology side, we think there's going to be increased investment in cloud computing and infrastructure, cyber security and online gaming will continue to be a very strong trend. Finally, we think this crisis could bring a speedup in investment in robotics and automation. This is an interesting one because on the one side it could push companies to be more profitable but at the same time, it could potentially put some pressure on some parts of the labour market.

All in all, we see many opportunities despite the uncertain world that we're facing and despite the various challenges that will be facing the market, notably, unusually low government bond yields across the world and lack of inflationary pressure, low growth for longer and uncertain recovery and geopolitical tensions are continued to bring volatility.

We believe that a long-term approach to investing is warranted, focusing on harnessing high-conviction, best ideas with an emphasis on companies with sustainable business models that can therefore withstand the current crisis - and potentially strengthen their market positioning in this unprecedented period.

Before we finish, and as a reminder, we manage Global, International, European and US Long-Term Unconstrained equities as part of our funds as well as Martin Currie Global Portfolio Trust. They are all currently 20 - 30 stock portfolios, focusing on high-conviction, best ideas coming out of our research process. If you want more information on anything that we've discussed, please visit our website. Thank you for listening. It's Zehrid Osmani, Head of Global Long-Term Unconstrained equities at Martin Currie.

1 Source: Bloomberg, 14 August 2020
2 Source: Statista, July 2010
* The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.