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SKAGEN Global: Strong company reports in Q2

The global equity market delivered solid gains during the second quarter as the world economy exhibited clear signs of recovery. Commodity prices spiked amid supply disruptions that appeared to ease towards the end of the period. Brent oil rallied past USD 75 per barrel for the first time in more than two years.

SKAGEN Global outperformed its benchmark index MSCI AC World in the second quarter. The fund ended the quarter ahead of its benchmark as measured year-to-date as well as over 3-year and 5-year time periods.

The quarterly reports from our portfolio companies were once again strong with only a couple of exceptions and reflected favourable fundamentals combined with disciplined execution. Nike soared after growing its lucrative digital direct-to-consumer distribution channel beyond market expectations. In addition, Nike revealed new strategic targets for FY2025 that signal a significant runway for further improvements in the years ahead. Adobe also released impressive figures demonstrating that the company has used the pandemic to further cement its leading position in content creation and digital marketing solutions. Finally, our global luxury companies LVMH and Hermès sustained their positive intra-pandemic trajectories and both posted inspiring reports.

Attribution

The fund’s three best quarterly performers were Hermès, Intuit and MSCI. The French luxury goods company Hermès published broad volume-led growth across all product categories. US-based Intuit announced steady growth of its financial management software ecosystem and its Credit Karma acquisition seems to be tracking ahead of initial expectations. MSCI, a provider of mission-critical investment measurement and decision support tools, benefited from a favourable equity environment and proprietary product innovation.

The fund’s three largest quarterly detractors were MarketAxess, Abbott Laboratories and Verisk. The fixed-income trading platform MarketAxess faced tough year-over-year comparable growth figures, but shows diligent strategic execution towards its long-term vision. The medtech giant Abbott Laboratories retreated after warning that its previous guidance of COVID-19 testing revenue was too optimistic. We see this misjudgement as a fly in the ointment rather than a major setback and expect the company to resume its long history of conservative and dependable communication going forward. In the case of Verisk, a data analytics company, the financial performance of its two smaller divisions remained somewhat lacklustre.

Portfolio Activity

The fund did not enter or exit any positions during the second quarter. Our high-conviction portfolio consists of 30 positions that we continuously evaluate against our dynamic list of prospective investments. Note that the fund has not initiated any new positions during the first half of 2021.

We trimmed our position in the Danish freight-forwarder DSV after the stock rose by more than 200% from the bottom of the COVID-19 crash in March 2020. After this stellar recovery, DSV's risk-reward profile is less attractive but the long-term outlook remains favourable and the stock remains on our top-10 list. We used the weakness in Abbott Laboratories to top up the position size.

Focus on fundamentals

The speculative trading mania that has gripped certain corners of the stock market in recent months seemingly has begun to subside. Similarly, some of the highly cyclical stocks that rebounded sharply in the autumn and winter months (after plunging in the COVID-19 induced crash last year) have started to run out of steam with the market shifting its attention back to fundamentals. In our view, this is a logical development as the dust settles around the crippling pandemic that has driven wild swings in the stock market for an extended period.

We have previously commented on the danger of pursing a get-rich-quick trading approach because we believe that in the long run stock prices are intrinsically linked to - and thus ultimately determined by - fundamentals, not by myopic trading behaviour. However, the allure of quick riches is an ever-present risk due to the hardwired human psychology and social proof tendency that can influence otherwise rational minds. It is remarkable that even one of history's most brilliant thinkers, Sir Isaac Newton, fell victim to the desire of fast and easy wealth in the 1700s when he (re)joined the market hysteria later known as the South Sea bubble that eventually ended in tears.

Outlook

Over time fundamentals diffuse myopia. It is for this reason that SKAGEN Global as a long-term investor with a rigorous bottom-up stock-picking approach based on pragmatic value investing principles dedicates its research efforts to fundamental analysis rather than short-term trading schemes. We look for companies that are substantially undervalued when viewed through our multi-year prism. Moreover, we resist the temptation to wade into the arena of casino-style betting where stocks are merely tickers on a tape. Instead, we see stocks as concrete pieces of business in which we, and by extension the fund's clients, have a direct ownership stake. Our fund thus provides tangible exposure to a set of carefully selected businesses that we assess to have competitive positions, strong balance sheets and attractive valuations.

The outlook for the fund remains positive for long-term investors, though one should remember that investment performance rarely comes in a linear fashion and some volatility is a natural part of the journey.

L'historique des rendements ne constitue aucunement une garantie quant aux rendements futurs. Les rendements futurs dépendront, entre autres, de l'évolution des marchés, de la compétence des gérants du fonds, du profil de risque du fonds et des frais de gestion. Le rendement est susceptible de devenir négatif en cas de fluctuations défavorables sur les cours de valeurs.

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