The third quarter has come to a close. In the category of global large-cap mixed equity, Gavekal, JOHCM and State Street offered the best-performing funds during these three months, as measured by the performance of funds with a classification for the Netherlands in this week’s Morningstar Top 5.
While initially relief and optimism about possibly waning inflation boosted sentiment in global equity markets, concerns about historically high inflation, tightening global monetary policy, recession fears, and the unpredictable course of the armed conflict in Ukraine took over. Volatility in the equity market increased and movements also became more extreme in the foreign exchange market.
For the MSCI World Index, a small plus remained when measured in euros, but that was mainly thanks to a strong dollar. Measured in dollars, the index lost ground for the third quarter in a row, which has not happened since 2008, recording a 25 percent loss year-to-date. Euro investors fared significantly better with a minus of 13.4 percent.
Record inflation
Record inflation worldwide continues to defy financial markets. High energy prices, rising labour costs, and bottlenecks in production chains are driving up prices of products and services. Russia’s decision to completely shut down the Nordstream 1 gas pipeline, in response to the agreement reached by the G7 countries to impose a price cap on purchases of Russian oil in an attempt to limit the Kremlin’s ability to finance the war against Ukraine, put further pressure on energy prices.
The advance of Ukrainian forces and successful recaptures of occupied territories led to stronger rhetoric from the Kremlin, a mobilisation of Russian forces, and the Russian annexation of four Ukrainian provinces, with which fears of further escalation of the conflict will continue to dictate stock market sentiment.
Dollar strength
To curb rising inflation, the US Federal Reserve raised policy rates in September for the third consecutive time by 75 basis points to a range of 3 to 3.25 percent. In doing so, central bank chairman Jay Powell signalled his intention to keep monetary policy tight in the fight against soaring inflation and not to rule out a recession in the world’s largest economy as a result of this policy. The US central bank’s interest rate hikes also increased the attractiveness of the US dollar, which gained as much as the euro in the third quarter. That has not been the case in almost 20 years.
Following the US central bank’s rate, ECB›s Christine Lagarde also raised the policy rate by 75 basis points in September, after an earlier 50-basis-point increase in July. With this, interest rates are no longer in negative territory and reached their highest level since 2011. Further increases were in prospect in an attempt to curb record inflation of 10 percent in the Eurozone. Inflation exceeded 10 percent in more than half of the 19 eurozone countries and exceeded 20 percent in three Baltic countries, a level the Netherlands is not far from at 17.1 percent.
Optimism vanished
It was not the only factor that worried investors and further weakened global economic growth. The hot summer was pleasant for holidaymakers and recreationists, but also caused extreme drought which lowered harvests and dried up waterways that frustrated shipping. Add to this the political turmoil caused by the departure of Boris Johnson and the remarkable start of his successor Liz Truss, the Italian drama surrounding the departure of Prime Minister Mario Draghi, and presidential elections in Brazil, and it is not surprising that the initial optimism vanished like snow in the sun.
Despite the increasing risk of recession, economically sensitive cyclical consumer stocks were the winners at the end of the third quarter, including Amazon, Starbucks and Tesla. On a year-on-year basis, however, the sector is still at a hefty 20 percent loss. The energy sector continued to perform well during erratic market conditions, gaining 5 percent, proving to be the only refuge for investors this year as witnessed by the 41 percent return achieved by the MSCI World/Energy index over the first three quarters. Losers last quarter were found in real estate and among communication service providers. Heavyweights in the latter sector such as Alphabet and Meta lost ground.
From a geographical and euro perspective, US equities performed relatively well, with a plus of just over 1 percent for the S&P 500 index. European equities continue to suffer from the yoke of the Russian invasion, losing over 4 percent in the past three months bringing the total loss for the region to over 17 percent as of end-September. Emerging markets remain under pressure, partly due to weakening Chinese economic growth. The CSI 300 Index had to give up 13.7 percent in the third quarter under pressure from the ailing real estate sector, while the Indian equity market was a bright spot in the region.
Gavekal Global Equities
The top five global equities, based on the performance of mutual funds in the Morningstar Equity Global Large-Cap Mixed category over the current year to the end of September, is led by Gavekal Global Equities which, although it suffered a loss of more than 3.5 percent in the third quarter, is still able to post a positive return of almost 2.7 percent over the past three quarters thanks to a handsome double-digit return in the first quarter. The fund is managed by Gavekal founder Louis-Vincent Gave with support from three analysts. The strategy combines different investment styles in the portfolio: structural growth, cyclical growth, defensive equities and contrarian positions. This results in a portfolio of 35-50 names, where the preference for the commodities and energy sectors played an important role in the outperformance in the current year.
JOHCM Global Opportunities
A marginal loss of 0.8 percent in the third quarter still leaves a positive return of almost 1 percent over the first nine months for JOHCM Global Opportunities. Fund managers Ben Leyland and Robert Lancastle identify long-term trends for which undervalued quality companies that can benefit from these trends are then selected. Absolute valuations are central to this process. The concentrated fund, which has around 40 positions, benefited from overweighting the health and energy sectors and underweighting consumer durables and technology companies. In the past quarter, Sempra Energy, Cameco and M&T Bank were the portfolio’s tastemakers.
State Street Managed Volatility Fund
In third place is the State Street Global ESG Screened Managed Volatility Equity Fund. This fund combines a focus on low-volatility stocks with a sustainability overlay. The conservative approach has protected the fund well in the current year, as has the strongly divergent sector allocation, with a hefty overweight in utilities, health care and defensive consumer staples. The top three positions in Waste Management, General Mills, and Arthur J. Gallagher all achieved positive returns of 9 percent or more over the past three months.
Top 5 global large-cap mixed equity funds, as per NL fund classification:
Top 5 global large-cap mixed equity funds, as per BE fund classification:
Jeffrey Schumacher is director of research at Morningstar. Morningstar analyses and rates mutual funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five investment funds or providers each week.