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Global Franchise: A life in the year of 2020

While it was the single dominant theme impacting markets in 2020, the influence of COVID was felt in very different ways throughout the year.

Feb 12, 2021

10 minutes

Clyde Rossouw
While it was the single dominant theme impacting markets in 2020, the influence of COVID was felt in very different ways throughout the year.

2020 was an extraordinary year, with the global economy, society and markets all heavily impacted by COVID-19. At the start of the year few investors would have predicted the impact the coronavirus would have on markets; fewer still would have predicted at the market lows in March that global equities, as measured by the MSCI ACWI, would ultimately end the year up over 16% in US Dollars. In the rollercoaster 2020 markets, the Global Franchise Fund, after the deduction of fees, managed to keep pace with the index during the strong market rise throughout the year and ended the year up 15.3%, whilst the gross numbers marginally outperformed the index. This was the fourth consecutive calendar year of outperformance.

While it was the single dominant theme impacting markets in 2020, the influence of COVID was felt in very different ways throughout the year. This is shown by dividing the year into three distinct phases.

  • The first phase (Q1 2020) was the market drawdown following the initial shock and subsequent economic shutdown.
  • The second phase was the K-shaped recovery (Q2 & Q3 2020) when growth considerably outperformed value, as policy makers stepped in and the market became both more optimistic and more selective over who the COVID winners and losers would likely be.
  • The third phase (Q4 2020) was the rotation towards value and cyclical stocks, as positive vaccine news, reduced political uncertainty following the US election and expectations of further stimulus all contributed to a reflation trade that supported cheaper, more economically sensitive shares.

The performance of Global Franchise was broadly in line with expectations in each case: outperforming in the down market; participating in the up market; and lagging the market in the rotation. We show a summary of performance in 2020 in the chart overleaf and then look at each of these three periods in turn.

A year in three parts

Global Franchise performance in 2020

Global Franchise performance in 2020 graph

Past performance is not a reliable indicator of future results, losses may be made.

Source: Morningstar, as at 31 December 2020. Weekly performance, net of fees, A Acc share class (NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD.

Q1 Market drawdown

Global Franchise returned -13.0% versus -21.4% for the MSCI ACWI. The natural resilience of Global Franchise led to meaningful outperformance during the significant market drawdown experienced in Q1. The portfolio’s defensive consumer staples and health care holdings such as Roche and Nestlé contributed to outperformance. In addition, our positions in high quality structural growth companies less directly impacted by COVID (or indeed actual beneficiaries of COVID) also contributed to outperformance. Examples included Microsoft and Netease, which both benefited from the working-from-home environment, and Moody’s, which benefited from rising debt issuance as companies around the world sought to strengthen their cash positions.

Our travel exposed stocks, Booking Holdings and Amadeus, were the most significant detractors. Other quality cyclical positions also underperformed, for example St. James’s Place (given its exposure to market movements), Fox (as live sports events were cancelled and advertising revenues dried up), and Charles Schwab (as zero-bound rates and flat yield curves negatively impacted net interest income). We used the short-term volatility to take advantage of longer-term valuation opportunities and put some of the portfolio’s cash position to work through March and April following the market weakness. We added to stocks we believed to be oversold on a long-term view such as Booking Holdings and St. James’s Place, and initiated positions in two new high-quality stocks, Electronic Arts and Estee Lauder, at significantly more attractive entry points.

Q2-Q3 Growth-led K-shaped recovery

Global Franchise returned 21.4% versus 28.9% for the MSCI ACWI. During this 6-month period the market sought growth seemingly at any price (while at the same time continuing to punish value stocks), with additional monetary stimulus driving further re-ratings. Our purist quality focus steers us away from growth stocks where top line growth does not translate into actual Free Cash Flow growth or sustained levels of profitability, where balance sheets are stretched and where valuations are expensive. This can be seen in Global Franchise’s style exposure below, which demonstrates a strong bias to quality, but no significant bias to growth or value relative to the benchmark.

Global Franchise: three year time series from Style Analytics

Global Franchise: three year time series from Style Analytics graph

Source: Style Analytics, Ninety One, November 2020.

Quality has outperformed growth over the long term, but our approach inevitably lagged the significant growth and momentum trade that occurred over this 6-month period. Although some of our highest structural growth names like Moody’s, S&P Global, Intuit and ASML did well, the biggest impact to relative performance came from what we don’t own. A combination of the strong performance and large index weightings of Amazon, Apple and Tesla, meant that not owning those stocks detracted significantly from relative performance. In addition, the defensive names that had helped in Q1 lagged during the rebound, especially health care and consumer staples companies such as Roche, Johnson & Johnson and PMI.

Q4 Reflation trade and market rotation

Global Franchise returned 9.1% versus 14.7% for the MSCI ACWI. The final quarter of the year saw a significant rotation away from growth and momentum towards more cyclical and value stocks, notably in November, as positive vaccine news, potential further fiscal stimulus and reduced political uncertainty following the US election all contributed to ‘risk-on’ sentiment and a reflation trade. Economically sensitive/cyclical areas and especially direct COVID casualties recovered some of their lost ground as a result, with typically lower quality industries such as banks, energy, airlines and autos leading the market, contributing to Global Franchise’s underperformance. Within the portfolio, the main beneficiaries were Booking Holdings (on the assumption travel will pick up), Charles Schwab (on steepening yield curves and increased flows), ASML and Samsung Electronics (on an improving outlook in the semiconductor space), and St James’s Place (on a more favourable outlook for savings and markets). Counter to earlier in the year, not holding Amazon also helped relative performance over the quarter. However, in spite of a strong finish leading to outperformance (at a gross level) in December, Global Franchise’s quality defensive approach meant that overall it lagged the rotation and strong market rally over the quarter, particularly in November when global equities advanced over 12% in a single month. Defensive staples and health care holdings underperformed, such as Reckitt Benckiser, Nestlé and Roche. Our holdings in rating agencies Moody’s and S&P Global also underperformed, suffering from a slight de-rating in the rotation and weaker short-term forecasts for debt issuance in 2021 following the strong year experienced in 2020.

Looking forward

We remain comfortable with the balance and positioning of the portfolio. The swings in relative performance belie the smoother path of returns that Global Franchise delivered last year when compared to the index, and the attractive combination of resilience and high quality structural growth has again led to strong absolute returns and overall outperformance (at a gross level). The quality characteristics we seek remain attractive, as do relative valuations versus the wider market, and the companies we own have invested substantially to future-proof their business models, with significant exposure to key long-term trends such as data usage and digitalisation, ageing populations and health care, and nutrition and wellness. The portfolio is also very well positioned to contend with the growing threat of climate change, with a carbon footprint that is less than 10% of that emitted by the wider market.

The chart below of Global Franchise’s alpha cycle since inception, shows strong cumulative outperformance over time with short-term periods of relative weakness driven in part by stimulus induced reflation trades. These can be short-lived if driven more by sentiment than fundamentals and not supported by long-term sustainable growth. This has been the case on several occasions historically and current uncertainty again gives us reason for caution. ‘History doesn’t repeat itself, but it often rhymes’ – our Quality approach has a proven ability to outperform over the long term, and the current opportunity remains attractive in both absolute and relative terms.

Global Franchise alpha cycle: Long-term outperformance — with additional shorter term relative opportunities

Global Franchise alpha cycle: Long-term outperformance — with additional shorter term relative opportunities graph

Past performance is not a reliable indicator of future results, losses may be made.

  Calendar year performance (%) Annualised performance (%)
  2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 3 years 5 years 10 years Since inception1
Fund 7. 4 14.7 15.3 3.5 8.2 -0.1 23.8 -4.5 27. 0 15.3 11.8 11.6 10.6 7. 9
Index2 -5.9 16.1 22.8 4.2 -2.4 7. 9 24.0 -9.4 26.6 16.3 10.1 12.3 9.3 5.8

Past performance is not a reliable indicator of future results, losses may be made.

Source: Morningstar, 31 December 2020. All performance, unless otherwise stated is net of fees (A Acc share class, NAV based, including ongoing charges, excluding initial charges), gross income reinvested, in USD. The chart on the previous page shows the cumulative percentage difference of the performance of the Fund versus the index. The Fund is actively managed. Any index is shown for illustrative purposes only. The most recent month-end performance and positional data can be obtained on our website. Highest and lowest returns achieved during a Rolling 12 month period since inception: Feb-2010:54.4% and Feb-2009:-38.7%.
1 10 April 2007;
2 Index: MSCI AC World NDR (pre Oct-11, MSCI World NDR).
For further information on indices please see the Important information section.

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Authored by

Clyde Rossouw
Co-Head of Quality

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