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Stock selection helps navigate choppier waters

After a strong start to the year, the second quarter proved to be more testing for investors as equity markets were once again buffeted by macro headwinds. Rising US-China trade tensions and weakening economic data caused share prices to oscillate over the period but I am pleased to report that our funds successfully navigated the market turbulence and look well positioned for the second half of the year.

As in the first quarter, developed markets outperformed emerging ones but the differential was more pronounced as investors sought calm in assets perceived as less risky, particularly during May when the VIX index of market volatility rose above its historic average. Despite a truce in the trade war at the end of June, it would be unwise to expect a permanent ceasefire and business visibility and therefore confidence are likely to remain challenged.

Our holdings largely performed well during the quarter, providing support for our rigourous bottom-up investment approach. Companies’ resilience may well continue to be tested as they face late cycle economic pressures, although central banks should provide support with several signalling a willingness to cut interest rates and provide additional stimulus to help boost sluggish growth.

Stock-picking strength

Good stock selection meant our funds performed well over the quarter with most delivering meaningful absolute returns and beating their benchmarks. SKAGEN Global generated solid relative gains and is now ahead of its reference index year-to-date as well as over one and three years. The fund’s second quarter returns were boosted by strong performance from its two largest holdings, Intercontinental Exchange (ICE) and Microsoft, as US equities generally produced modest gains and lifted the S&P 500 to a record high.

SKAGEN Kon-Tiki also delivered absolute and relative gains, despite the headwinds blowing across emerging markets, particularly in Asia where good stock-picking helped to avoid the market losses in both China and Korea. It is pleasing that since Kon-Tiki’s team changes last summer, portfolio turnover has increased and the new investments have contributed positively to results. The relative performance has been healthy during both positive and negative markets this year as an improved risk management approach and focus on right-sizing positions have helped create a more robust portfolio with an attractive risk-reward proposition. SKAGEN Vekst also had a good quarter in both absolute and relative terms due to strong performance from some of its larger holdings, including top contributor Bonheur.

Among our smaller funds, SKAGEN m2 overcame the political turbulence surrounding our German and Hong-Kong holdings to beat its benchmark, largely driven by strong performance closer to home from its Scandinavian holdings. Meanwhile, SKAGEN Focus delivered positive absolute returns but relative performance was affected by its overweight exposure to a poorly performing Japanese equity market. We believe this will reverse as Japan’s valuation discount to the US, which is currently at record levels, starts to unwind and expect our attractive holdings to benefit from greater investor attention. Finally, SKAGEN Insight also underperformed as activist investors generally were challenged by the market jitters; the fund and its unit holders are still to be properly rewarded despite the good progress that continues to be made by portfolio companies.    

Risk and reward ahead

Despite the ongoing trade tensions and political posturing our funds continue to perform well; since entering the third quarter, Global, Vekst and M2 have all recorded all-time highs. With President Trump seeking re-election in 2020 it is possible that the US bull market – currently the longest running since the Great Depression – could be maintained but with valuations in many markets looking increasingly stretched, it would be prudent to anticipate a market correction at some stage.

Stock markets globally appear fragmented with quality growth companies trading at red-hot valuations but pockets of opportunity remain and it likely that a selective approach and focus on value will continue to be rewarded. By remaining disciplined and contrarian, our funds should be equally well-placed to withstand any future shocks and to capitalise on the opportunities they may offer. I hope you all have a good summer.

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