Printed copies of reports from certain Fund Managers are circulated to Sub-Committee Members with this agenda. Remaining reports will be circulated as soon as possible.
Representatives of MFS will be attending the meeting for this item.
Minutes:
MFS reported on the performance of their Global Value Equity Fund for L B Bromley. MFS were represented for the item by their Investment Product Specialist Director and their Relationship Management Director.
Providing a 12 month performance overview to 31st March 2019, an executive summary showed performance over one year, three years, five years, and since inception (18th December 2013). Over three years, five years and since inception, gross performance has been in excess of 13% with net performance for the same periods over 12%. One-year performance was a little less at 11.35% gross and 10.87% net against an MSCI World Index (net div) of 11.98%. Detractors for the one-year performance review were stock selection in information technology, consumer staples and energy along with an overweight position to financials. Stock selection in industrials and materials contributed to performance. A subsequent slide highlighted performance results as of 31st March 2019, (gross and net of fees GBP), relative to the MSCI World Index (net div) covering: 2018/19 quarterly returns; annual returns for each year since 2016 (including 2019 year to date); and annualised returns for the periods of 1 year, 3 years, 5 years and since inception. An analysis was also presented of historic relative outperformance between July 2003 and March 2019 over rolling 10, 7, 5 and 3 year periods against the MSCI World Index (net div). MFS tended to outperform in falling markets. In terms of historical relative performance in diverse markets, the number of outperforming quarters exceeds the number of underperforming quarters between July 2003 and March 2019.
The MFS presentation also included content on their investment approach where an emphasis is placed on valuation and business durability to exploit market inefficiencies. Further reference was made to Global Value and Growth Valuations and performance drivers of sectors showing top contributors and top detractors. Another slide indicated certain big name stocks that MFS would not be inclined to invest in with data to show why this should be the case. An investment case study in this regard was provided on Apple where comments were made on what there is to admire about the company but also reasons why MFS feel it is necessary to be cautious. Specific performance drivers in stocks were also highlighted with the names of top contributors and top detractors provided. Additionally, an investment case study was provided on Diageo with key points highlighted focusing on the long term compounding power of the business. Companies such as IT consultancies were considered by MFS to be more durable.
Details were also provided of significant transactions by MFS from 1st April 2018 to 31st March 2019 comprising securities purchased and securities sold. A further investment case study was provided on Accenture with a subsequent slide showing sector weights relative to the MSCI World Index. This indicated the percentage of MFS investment per sector as at 31st March 2019 and the benchmark for each sector along with the percentage of underweight/ overweight exposure in each of the sectors and details of the largest holdings by MFS. This was followed by weightings of MFS investment by region and country including regions underweight/overweight. It was explained that U.S. companies had been successful through cost cutting and there are unsustainable high margins in the U.S.
A further slide covered Domicile and Revenue weightings by region with 20.5% of MFS Global Value Equity invested in emerging markets (by revenue). The final slide identified specific characteristics of the MFS Global Value Equity Portfolio along with a listing of the top ten company holdings by MFS. The remainder of the MFS presentation material related to ESG matters and an appendix covered: Portfolio Holdings; Historical Risk Appetite; Market Capitalisation (GBP); Composite Performance (GBP); Structure and Additional Information; Disclosure; and Composite Report (GBP).
In discussion, the Chairman highlighted a 2.2% holding in AON PLC and a brief explanation was given for the holding along with a brief outline of the company’s business model. Concerning technology stocks, the MFS position on crypto currencies was also outlined.
It was not known how the China/US trade war might end up. Not investing in Huawei could benefit Apple. MFS also referred to Brexit and re-negotiation of the North American Free Trade Agreement (NAFTA). There is a role for individual analysts and it is necessary to model for each company and to look through cycles and find companies that will navigate returns.
Responding to a question on Microsoft, MFS acknowledged that Microsoft had turned itself around; however, MFS explained that they try not to invest in a turn-around situation and Microsoft’s valuation is not deep. Many of their markets were also second e.g. Azure. MFS suggested Pfizer Inc as an example of a “front runner” company which is also cheap. MFS also indicated Fidelity International financing services as a further example and there are other technology companies. Although such companies are not particularly exciting, they are attractive to MFS.
In terms of risks to the portfolio in the current macro environment, the energy sector posed a risk as oil prices are high; energy companies buy property etc and when the oil price falls the companies continue to have loans.
MFS confirmed that they only invest in public companies. On battery technology, much investing by MFS is done through direct investments such as Tesla.
For future investments reports, a Member indicated that he would be pleased to see why MFS vote against matters. In response, MFS indicated as an example that they would be prepared to vote against where remuneration does not match performance. Voting against could also take place where there is little diversity on boards and where there is no alignment with shareholder value.
The Chairman thanked the MFS representatives for attending. Both the Chairman and Vice-Chairman felt that MFS had delivered an excellent presentation and the Chairman commented positively on the level of expertise conveyed in the presentation. Baillie Gifford and MFS were thought to balance out well in the Fund’s Global Equities allocation.