While investors had to navigate periods of market volatility – particularly in the second half of the year as concerns over slowing global growth were heightened by rising trade tensions – those who remained calm were rewarded with the best annual returns for a decade.
Most international stock markets performed strongly while other asset classes such as gold, oil and real estate also generated solid returns. Developed market equities led the charge, propelled higher by US stocks as the S&P 500 hit a series of record highs and is now enjoying its longest and most profitable bull run in history. Emerging markets were hit hardest by America's spat with China with manufacturing-led countries and export-dependent companies particularly vulnerable to reduced global trade flows.
Support was provided by central banks which responded to the deteriorating economic outlook with looser monetary policy, including widespread interest rate cuts, and resilient consumer spending. Further help arrived in December with a 'phase one' trade agreement between the US and China to avert additional tariffs that the IMF predicted could already cost the global economy $700bn.
Expectations of continued earnings momentum – particularly for the US tech giants – combined with weak economic data, saw growth outperform value in 2019, in keeping with much of the last decade. While valuations looked cheap by historic standards at the start of the year, the MSCI AC World index historic P/E expanded over 2019 from 15.0x to 19.3x – in line with its 10-year average – and the question is whether corporate earnings can continue to support higher multiples.
Positive Absolute Returns
I am pleased to report that all our funds delivered positive absolute returns, mostly in double-digits. Against a challenging backdrop for value managers, we were particularly satisfied that SKAGEN Global and SKAGEN M2 also outperformed their respective benchmarks. SKAGEN Global achieved this for the second successive year – and by the largest margin since 2010 – with the fund buoyed by strong performance from its US holdings, particularly Microsoft and Mastercard. SKAGEN m2 went even further by generating record absolute and relative returns in 2019 to record a fourth consecutive year ahead of its benchmark. Impressive stock selection helped the property fund to navigate some difficult market segments and highlighted the attractive portfolio themes that harness structural real estate growth.
Our other equity funds fell short of their benchmarks. SKAGEN Kon-Tiki, SKAGEN Vekst and SKAGEN Focus were all hampered by their more value-focused portfolios – a headwind that may well change direction given the current valuation polarization and market factors supporting a long-awaited rotation. Kon-Tiki and Vekst were also impacted by some stock-level weakness, particularly in the energy sector, while Focus suffered for its US underweight. Finally, SKAGEN Insight again fell short despite many portfolio companies delivering strategic and operational improvements as 2019 proved to be another challenging year for the activists it shadows.
I am pleased to welcome back Jane Tvedt to the investment team following the insourcing of SKAGEN Tellus and SKAGEN Avkastning from the beginning of this year. Jane will continue to manage both fixed income funds and collaborate with the Storebrand team to benefit from their considerable expertise within macroanalysis and fixed income.
Events in the Middle East and Australia have dimmed the optimism of entering a new decade and offer a reminder of the geopolitical and environmental risks we all face, but as investors we remain cautiously optimistic for the period ahead. The global economy remains sound – a recession this year now looks unlikely – and is increasingly services-based in both developed and emerging markets, providing greater stability. However, with valuations stretched and vulnerable to any earnings setbacks, it would be unwise to expect a repeat of last year's absolute gains. Fortunately, monetary and fiscal policies remain supportive and we expect equities to continue their ascent in 2020.
We also anticipate our funds' relative performance to be boosted by any sustained value recovery. After being out of favour for much of the last decade and with a valuation gap currently as wide as the dot-com bubble, there were signs during the second half of 2019 that growth stocks and the large flows of passive capital that support them may be starting to run out of steam.
An easier prediction is that there will be even greater focus on sustainability in the years ahead and companies that fail to meet increasingly stricter environmental, social and governance standards will be punished by customers and investors. Meanwhile, the rewards for those that deliver solutions to society's challenges and achieve success in an ethical way will be great. You can read more about some of our recent ESG initiatives in our upcoming Sustainability Report.
Investment opportunities remain. Emerging markets, in particular, look attractive – both relative to developed markets and historic averages. Company cash flows and dividend payout ratios are rising while debt levels continue to fall and with the IMF predicting that the developing world will contribute 80 percent of Global GDP expansion in 2020, earnings growth may be easier to deliver. With pockets of value shallower and rarer in the current market environment, the benefits of our active approach within broad mandates should come to the fore.