The Global Equity Concentrated Alpha strategy managed to stay ahead of the strongly rising market over the last few months, what were the changes you made to the portfolio and how did they contribute to this outperformance?
We either increased or maintained our biggest holdings in the 'long term winners' of this world, such as software companies and e-commerce retailers.
One of GCA's key characteristics is its strong downside protection. Indeed the strategy weathered the March sell-off relatively well thanks to our holdings in larger companies with stronger business models and more robust balance sheets that were less negatively impacted by the COVID-19 disruptions.
One of the most common questions we then faced was how the strategy would perform in a market recovery. Indeed global equity markets went on to post remarkably strong gains in Q2 despite a spell of volatility caused by fears of a potential second wave of infections.
We either increased or maintained our biggest holdings in the 'long term winners' of this world, such as software companies and e-commerce retailers that are well positioned for the shift from offline to online as well as payments companies that are well positioned for the shift from cash to cashless payments. We also reduced our exposures to pharmaceuticals and consumer staples by selling some names in these sectors which recovered relatively swiftly. We also added to our cyclicals exposure and selectively to value to capture the recovery while avoiding deep value names that have structurally challenged business models and weaker balance sheets.
Our positioning and trades worked well and contributed to the strategy outperforming the index in the second quarter. As an 'all-weather' global equity strategy with a focus on risk vs. reward, we seek to generate alpha independent of investment factors and market cycles.
GCA has a flexible investment approach. In the event of a second wave of infections this year, how will you adapt the portfolio to minimise downside risks?
We would adopt a more cautious selective stance going forward, favouring businesses with strong balance sheets, good free cash flow generation, pricing power and cost cutting abilities.
We think that it would be difficult to avoid a second wave of infections from happening especially given that many economies are entering or already in the reopening phase. The rolling nature of the virus outbreak globally means we would need to brace ourselves for a longer and bumpy normalisation process. However we are seeing good progress being made on the developments of a vaccine.
The pace of the overall recovery will be dependent on the decline in new cases, credible testing and tracing measures and vaccines or effective treatments. Forced savings during lockdown have also left consumers with money to spend, potentially further supporting the economic recovery.
Our investment philosophy is based on risk vs. reward where we aim to invest in stocks that offer good upside potential and limited downside risk. In the event of a second wave of infections this year, our investment strategy will remain largely unchanged given that the majority of the companies we own benefit from long term structural growth trends.
While our top performing stocks have enjoyed a boost from accelerated online trends due to COVID-19, we think that they will equally remain resilient amid uncertainty and will continue to perform well in the medium to long run. We would adopt a more cautious selective stance going forward, favouring businesses with strong balance sheets, good free cash flow generation, pricing power and cost cutting abilities.
After a strong recovery, markets are now approaching levels seen at the start of the year. With the decreased potential for market gains, where do you see opportunities for stock selection?
Central banks and governments around the world have provided significant levels of supportive measures to the economy through the lowering of interest rates and quantitative easing. This has in turn resulted in mispricing in markets, which active investors can take advantage of.
We think that volatility will remain in the near term, presenting us with inefficiencies to exploit and opportunities to find good risk vs. reward names. We seek profitable companies with valuation support in quality cyclicals, mainly the software (biggest cloud players), payments and semiconductor equipment sectors.
Additionally, we favour retail players with a growing online market share, health care equipment companies and selected pharmaceutical companies with unique growth drivers. We also selectively seek value opportunities in European insurance stocks (mainly P&C insurance), industrial and materials where valuation is supported.
We remain solidly anchored in our 3-circle approach of stock selection (fundamental, quantitative and qualitative), which remains the core driver of performance. Despite some swings in daily performance, we think that the companies we own will continue to perform well over the medium term.