Martin Currie Global Portfolio Trust — Lower rates should be beneficial for performance

MNP’s performance should improve now that there is an increased chance of a reduction in US interest rates and investor focus returns to company fundamentals. If there is a period of US economic weakness, MNP’s portfolio of high-quality reasonably priced growth companies should prove to be relatively resilient.

Recent inflation data points have been more benign, but the manager cautions that ‘we are not out of the woods yet’ as there are areas of sticky pricing. Also, some investors are expecting the US Federal Reserve to cut interest rates aggressively. If this does not happen, it is likely to lead to disappointment and stock market volatility. Central banks may take a more cautious stance towards looser monetary policy as it is difficult to extinguish inflation if it reignites.

The August Jackson Hole meeting showed a shift in focus by the Federal Reserve from inflation to growth, although the recent strong US GDP data could muddy the waters for investors expecting aggressive interest rate cuts. Consensus expectations are for 100bp lower interest rates by the end of 2024 from the three remaining Federal Open Market Committee meetings in September, November and December; however, Osmani is expecting a more moderate 25–50bp reduction in interest rates by year end.

If inflation data remain soft and interest rates start to come down, it should be beneficial for MNP’s performance given that its portfolio is made up of high-quality, long-duration assets. These stocks struggled when interest rate expectations repriced aggressively in 2022. In an easier monetary policy environment, there should be more of a focus on company fundamentals rather than on macroeconomic developments, which should favour successful stock-picking strategies.

Stock market volatility in the last few months has centred around the risk of a US recession; recently, a couple of the major sell-side firms have increased their probability of recession from 15% to 25% and from 20% to 35%. The manager suggests that there is a 35% to 40% probability of a US recession in the next 12 months, but his central scenario is an economic slowdown rather than a recession. Osmani considers that if the US economy does weaken, MNP’s investments in high-quality, high-return growth businesses should perform relatively well.

Shifting his attention to corporate earnings, the manager comments that the Q124 results season was very good, leading to a series of estimate upgrades across all geographies. However, he describes Q224 as less positive, with negative estimate revision trends in Asia and the UK, some estimate reductions in Europe, while in the US the earnings environment is not encouraging. Osmani notes that US large-cap technology company results are now more mixed and there have been other areas of disappointment. He cites US consumer stocks, which have not met consensus expectations, including lululemon, Nike and Starbucks. Luxury goods stocks such as Kering have struggled as US consumers caught a chill, European demand is lacklustre and Chinese consumers are absent.

At the end of July 2024, MNP’s portfolio had 31 holdings, with the top 10 making up 49.9%, which was a lower concentration compared with 54.1% 12 months earlier. The new holding in the top 10 list is Novo Nordisk, which entered the portfolio in May 2024, and whose weight-loss franchise has been very successful. At the end of July 2024, MNP’s portfolio had a high active share of 90.7% (0% is full index replication and 100% is no commonality).

Top position NVIDIA’s share price declined after the company’s recent earnings report. The manager thought that the results showed good growth, but the earnings beat versus consensus expectations was lower than in recent quarters, so there was some profit taking. Osmani considers that NVIDIA’s share price does need to consolidate after performing so strongly again this year. He believes the company is very well positioned to harness the AI opportunity, as the major capex being spent on developing AI by big technology companies provides NVIDIA with a large growth runway. While there were supply issues that weighed on the company’s margins during the launch of its integrated chip known as Blackwell, there is strong demand for this product, which combines a graphics processing unit with a central processing unit along with applications and networking tools.

Although the manager thinks there will be questions about whether there is ‘froth’ in the market for AI stocks, he believes companies benefiting from the growth in AI will be successful. He highlights portfolio companies ASML Holding and NVIDIA, and also a new holding in BE Semiconductor Industries, which is a leader in hybrid bonding technology that extends the now expired Moore’s law (doubling of transistor density every two years). A pullback in the company’s stock price following an earnings release provided an opportunity to initiate a position.

The position in Nike was sold following a profits warning, with problems including US consumer weakness, a lack of innovation and Chinese economic headwinds. Osmani considers that it will take a while to fix the innovation issue, and that Nike could fail to grow its business over the next 12 months. The proceeds from the sale of Nike were recycled into Moncler, which has delivered decent results despite a difficult operating environment, and L'Oréal, which is performing better than its peer Estée Lauder – this company entered the portfolio in 2023 following a profits warning but is now suffering from weak demand and excess inventory levels in China. Estée Lauder has downgraded earnings guidance, but a new CEO will be appointed, which may be a positive catalyst for improved share price performance.

It should be remembered that the trust’s geographic and sector allocations are a result of bottom-up stock selection. MNP’s portfolio by geography is shown in Exhibit 2. A direct year-on-year comparison is not possible due to a change in the way the data are presented; at the end of July 2023, the smaller country weightings were amalgamated as ‘other’. However, there are a few important observations: the US is by far the largest weighting in the MSCI AC World Index, 64.5% at the end of July 2024, meaning that MNP was underweight by 17.9pp, and during the prior 12 months the trust’s allocation to US stocks declined by 5.4pp. MNP has no allocation to Japan, which is the second largest weighting in the MSCI AC World Index (5.3%).

In the 12 months to the end of July 2024, the largest changes in MNP’s sector weightings were a 6.6pp higher allocation to healthcare and a 3.7pp lower weighting in consumer discretionary stocks. As a result, healthcare, which is the largest active bet, increased to an 18.2pp overweight position. MNP’s largest below-index weightings were communication services (-7.6pp) and financials (7.4pp). The trust has a zero allocation to four sectors, which combined made up 16.7% of the MSCI AC World Index at the end of July 2024.

With a market cap of around £230m, MNP is one of the smallest funds in the AIC Global sector, which is home to some of the UK’s largest investment trusts. Its NAV total returns are below average in the periods shown in Exhibit 5; however, longer-term performance is likely to have been negatively affected by a lack of gearing, which was the policy until November 2020. MNP also had a difficult period of performance between Q321 and Q422 when growth stocks struggled in an environment of rising interest rates.

At 6 September 2024, MNP had the second-narrowest discount in the AIC Global sector, which is unsurprising given the trust has a long-term zero-discount policy. The trust has an average ongoing charge (some of the much larger funds have a lower fee structure) and there is no performance fee. MNP has a lower-than-average level of gearing and, with a focus on capital growth, its dividend yield is lower than the sector average.

Commenting on MNP’s performance in recent months, Osmani says that only holding Microsoft and NVIDIA of the Magnificent Seven stocks, which make up c 20% of the MSCI AC World Index, has continued to be detrimental. The manager highlights the performance of all seven stocks in the first eight months of 2024: Alphabet (+18.3%), Amazon.com (+19.1%), Apple (+23.4%), Meta Platforms (+50.5%), Microsoft (+12.5%), NVIDIA (+147.8%) and Tesla (-13.8%).

Healthcare, which is MNP’s largest sector exposure, has also been a headwind to performance, with stocks including Sartorius Stedim and Veeva Systems. The manager says that these are high-conviction, attractively valued companies that faced difficult comparisons following the end of the global COVID-19 pandemic, but their businesses are now normalising. Other stocks that have struggled include those of consumer companies Kering, L'Oréal and Estée Lauder.

The trust’s cumulative upside/downside capture analysis over the last decade is shown in Exhibit 9. Its upside capture rate of 105% suggests that the fund is likely to outperform a rising global equity market by around 5%. MNP’s downside capture is much larger at 127%, implying that the fund is likely to underperform by more than 25% during periods of market weakness. The downside capture rate increased meaningfully during 2022, as rising interest rates hurt the performance of growth stocks.