LO Funds–Golden Age generated a return of -1.78% in April, underperforming its benchmark by 2.81ppt. The month can best be described in our view as a ‘perfect storm’ with violent reversals in many year-to-date trends. This led to positions being unwound in the market place, short covering, rotation among sectors and individual stock moves that were hard to explain. Many of the Fund’s holdings traded down despite reporting better-than-expected quarterly earnings. We are hopeful that some of these surprising movements will reverse in the weeks to come. Lonza (LONN VX), AIA Group (1299 HK) and Service Corp (SCI) were the top-three relative contributors to performance. Lonza’s mid-term guidance until 2018, and AIA and Service Corp’s quarterly earnings exceeded consensus expectations. Norwegian Cruise Line (NCLH), Actavis (ACT) and VCA Antech (WOOF) were the top-three relative detractors from performance.
Norwegian traded off as a result of a higher oil price but reported strong results subsequent to month-end. Actavis sold off for no good reason, in our view. We think it now looks very attractively valued, trading at a discount to the market despite having twice the earnings growth rate. VCA Antech’s organic revenue growth accelerated to beat consensus expectations, making its share price weakness difficult to understand.
From a sector perspective, rotation out of Health Care and Consumer Discretionary (in which we invest) into Information technology and Energy (where we have little and zero exposure, respectively) was the key reason for the month’s underperformance.
Market review
A weaker US dollar may be to blame for some of the sizeable moves in April as it pushed up oil prices and took deflation fears off the table. US first quarter GDP growth of 0.2% fell short of consensu sexpectations of 1.0%. This likely delayed the first Federal Reserverate hike from June to September if not later. That, in turn, led to the EUR strengthening by 4.6% from 1.07 to 1.12 against the USD.
As a result, European equity markets, especially export-dependent ones, sold off hard. The MSCI Europe index (MSER) declined 2.0% and the DAX index 4.3%. Anxiety levels over Greece rose again as the government is running out of money and is stalling over commitments to reform. WTI crude gained 25.3% from USD 47.60 to USD 59.63. An improving European economy sent 10-year German bund yields higher from 0.18% to 0.36%.
The reversal of many of these crowded ‘momentum’ trades – such as short EUR and overweight European equities – caused pain to many investors and distorted some individual stock prices. Many macro funds trade using exchange-traded funds (ETFs) where constituent stocks are sold (and bought) indiscriminately. Interestingly, the S&P500 index (SPX) appreciated 0.9%. The USmarket was only up 1.3% year-to-date at the end of April relative to MSCI Europe’s 16.0% gain. Therefore there may be more catching up to do.
Thematic insights
Some of April’s top contributors and detractors are worth highlighting. Lonza, a supplier to the Pharma & Biotech and Specialty Ingredients markets, appreciated 11.7% during the month in response to positive mid-term guidance to 2018. Core EBITDA is expected to approach CHF 1 billion in 2018, which corresponds to an RONOA of 20% vs. 14.3% in 2014. Service Corp, a funeral and cemetery operator, gained 6.3% – its first quarter EPS grew 13% year-on-year to USD 0.32 vs. consensus forecast of USD 0.28.Cash flow from operations increased 21% year-on-year.
Norwegian Cruise Line and VCA Antech declined 10.2% and 7.0%, respectively. Norwegian had no meaningful news during the month but came under pressure due to the bounce-back in the price of oil. Subsequent to month-end, the company reported first quarter EPS of USD0.27 vs. consensus of USD 0.23 and tweaked its full-year guidance higher. We expect fuel and foreign exchange headwinds to be offset by higher synergies from the acquisition of Prestige and lower interest expenses. The message was “trends are up” so the share price reaction was counter-intuitive.
VCA Antech announced strong first-quarter results. Animal Hospital same-store revenue growth was 5.3%, up from 4.4% in the fourth quarter of 2014. Laboratory internal revenue increased 6.1% – an improvement on 5.1% in the fourth quarter. The message was “trends are up” so the share price reaction was counter-intuitive.
Portfolio insights
Throughout the month, we cut European exposure by approximately 3% to 29%. We took profits in a number of exporters that have benefited from a weaker euro. How ever, we would stand to lose if the recent EUR/USD trend reversal were to continue. Cash increased by 2% to just over 4%.
By sector, Consumer Discretionary’s weighting decreased by approximately 3% while Health Care increased by a corresponding amount. The total number of positions fell from 66 to 64. NorwegianCruise Line (NCLH) replaced Cardinal Health (CAH) in the top 10.
Quarterly outlook
One consolation from April’s poor absolute and relative performance is that the portfolio now looks more attractively valued. Multiple stocks beat consensus earnings expectations in April only to trade down, which we found difficult to understand and, as such, we stuck with them.
It would not be surprising to us if the S&P500 continued to play catch-up with European equity markets. Some leading indicators are pointing to a bounce-back in US economic activity in the second quarter. The first quarter has been seasonally weak over the last six years. We also expect a decent European backdrop and are reasonably constructive in terms of outlook. April’s correction in a number of markets may have been a healthy pause.
Sincerely,
LO Funds–Golden Age team
