Taking Stock FUNDAMENTAL VALUE EQUITIES Q4 2018 Concentrating on long-term Value 04 FINDING VALUE In a difficult year for Materials stocks, fertiliser group Mosaic was a strong performer. For investors, does it continue to present attractive value credentials? 06 RESEARCH BRIEFING The market tilt towards ‘defensive’ sectors in recent times serves to highlight the value opportunities that are emerging in more cyclical sectors. 08 VALUE STRATEGIES Value Strategy updates, performance and portfolio characteristics. 02 THE BIG PICTURE We look at the patterns of market performance in 2018 and question why investors were drawn once more to stocks that are already expensively priced.
Transcript
Taking Stock
FUNDAMENTAL VALUE EQUITIES
Q4 2018
Concentrating on long-term Value
04 FINDING VALUEIn a difficult year for Materials stocks, fertiliser group Mosaic was a strong performer. For investors, does it continue to present attractive value credentials?
06 RESEARCH BRIEFINGThe market tilt towards ‘defensive’ sectors in recent times serves to highlight the value opportunities that are emerging in more cyclical sectors.
08 VALUE STRATEGIESValue Strategy updates, performance and portfolio characteristics.
02 THE BIG PICTUREWe look at the patterns of market performance in 2018 and question why investors were drawn once more to stocks that are already expensively priced.
2
Fundamental Value Equities Q4 2018
Following a turbulent year for financial markets, taking stock of where global equities travelled and how we as a team of value investors fared seems appropriate. Quite simply, 2018 was a year where the cheap and unloved became more unloved, the popular became more popular and many predictions of the future (across markets, economies and politics) foundered on the rocks of unusual occurrences.
Diverging FortunesAt the start of 2018, as illustrated in Figure 1, the US equity market was riding high; valuations were stretched amid investor optimism around the Trump tax cuts and the super-normal profitability of a group of (mostly) US technology companies. European markets were decidedly less popular by comparison, while Asian equities drifted toward decade-low valuation levels.
By year-end, the US had maintained its valuation premium despite the stock market’s worst December outcome since 1931. Europe is paying a high price for the lack of progress on Brexit, while rising populism has also unnerved investors. In Asia, concerns about the Chinese export growth engine mounted amid trade skirmishes with the potential to erupt into full-blown conflict. And in Emerging Markets, valuations showed once again how EM often seems to channel investors’ hopes and fears.
THE BIG PICTUREBrian Routledge Head of Portfolio Management
Moving beyond regions, a theme of rising inequality emerged across the various sectors and industries as a ‘winner takes all’ mentality appeared to take an even greater hold of investors’ perspectives about the future. Oliver McClure expands on this in greater detail on page 6.
Maybe it is different this time, but as students of stock market history, we can’t help but think that valuation will matter again.
Market Returns Driven by Expensive StocksThe richly-valued segments of the markets became even more so as investors concentrated on an ever-smaller cohort of growth stocks with supposedly unique attributes of high, enduring, and seemingly “priceless” returns. It is unusual for us to see non-holdings show up as large detractors/contributors to our relative performance, but we observed just that on several occasions in 2018 when FAANG-type1 stocks featured.
It is not particularly surprising that our relative performance struggled as the cheaper segments of the market that we favour continued to languish. Casting an eye across market returns for 2018 (Figure 2), the USA’s stellar performance and high index weight meant it dominated global index returns; at the end of 2018, the weight of US equities in the MSCI World Index was among the largest on record. Meanwhile, poor-performing European, Asian and regional value indexes became even cheaper. Similarly, the most expensive and popular sectors of a year ago entered 2019 having outperformed significantly.
Figure 1: Across the Regions — Enterprise Value/Invested Capital Since Dec 2007*
EV/IC Dec 2017 EV/IC Dec 2018 Regional EV/IC Range Since Dec 2007
Developed Markets
Emerging Markets
North America
Europe Eurozone Asia Pacific ex Japan
Japan South Korea Hong Kong0.0
3.0
2.5
1.5
2.0
1.0
0.5
Source: FactSet, MSCI, State Street Global Advisors.
* In our investment framework, the market rating of capital is measured as Enterprise Value divided by Invested Capital, or EV/IC. Enterprise Value is the market valuation of the firm’s capital, and includes the market value of equity, debt, pension liabilities, associate investments and minorities. Invested Capital is the measure of capital intensity of the firm, and represents the replacement value of all assets on the firm’s balance sheet, adjusted for working capital.
3State Street Global Advisors
Since we are positioned in the cheapest companies, which tend to be in the less expensive regions and sectors, their underperformance dragged on our relative return. Certainly we have also made mistakes at an individual stock level; that is a normal hazard of our style of concentrated value investing, but the performance penalty for mistakes was larger this time as markets were quick to punish even moderate disappointments.
Valuation: A Poor Year for Price to Book Figure 3 shows the spread of performance by quintiles of price-to-book (P/B) inside the MSCI World index. Our
Figure 2: How Markets and Sectors Performed in 2018 (Net, in USD terms)
-25 -20 -15 -10 -5 0
MSCI Germany
MSCI EMU
MSCI Europe Value
MSCI Europe
MSCI EM (Emerging Markets)
MSCI AC Asia ex JP
MSCI United Kingdom
MSCI AC Asia Pacific
MSCI Japan
MSCI Australia
MSCI World Index Value
MSCI AC World
MSCI World Index
MSCI Hong Kong
MSCI USA
Source: FactSet, MSCI, State Street Global Advisors.
portfolios sit firmly in the bottom quintile by valuation. In 2018, the cheapest quintile of stocks was the poorest performing, while the most expensive quintile drove most of the index-weighted returns. Is this unusual? In a long-term historic context, it is. The Fama French data on returns by P/B established that there is a return premium over time to lowly-valued market segments, but it’s not that unusual for cheap stocks to lag for extended periods.2 Our track record over time has bettered value indexes as our stock selection skill has overcome headwinds. But we were unable to do so in 2018. This echoes our experience of the other relative performance drawdowns over our tenure: 2014 and 2011. Our portfolios recovered well from those periods and we are confident that the stocks we own, and their valuations in early 2019, set up our portfolios well for the future.
We’ve often remarked that buying cheap, out-of-favour stocks on a long-term view is harder than it sounds. Ten years into this bull run, which has seen equity markets nearly triple from the 2009 lows, our portfolios are about as cheap as they have ever been, with P/B ratios of 1.0–1.5x (roughly a 40–50% discount to the market) and substantially lower financial leverage. In short, our work suggests that we own significantly undervalued portfolios of good quality businesses with strong balance sheets where earnings, and thus valuations, are temporarily depressed.1 FAANG — An acronym for five well-known technology stocks (Facebook, Apple, Amazon, Netflix, Google).
2 Eugene Fama and Kenneth French; Ken French Data Library.
The CompanyMosaic is the second-largest fertiliser company globally, with long-life, low-cost assets. Phosphate and potash are essential nutrients in the optimal development of plants and are required for root development, stem strength, crop maturity, and disease resistance.
Mosaic 2018 was a challenging year for most cyclical sectors, with Resources, Industrials and Banks all down in absolute terms by double-digit percentages. The Materials sector was down 19% (in USD) in 2018 with only 12 out of 129 names showing a positive return for the year. Mosaic was one of that select group of cyclical stocks that was up in absolute terms in 2018, recording a 13% gain. In terms of return on invested capital (ROIC), the company is expected to report 2018 numbers up by more than 150bps on a year-over-year basis; but at 5.4%, this remains well below what we would see as a normalised return of 10%.
The fertiliser industry is highly cyclical, requiring high levels of capital investment, and end demand is subject to the vagaries of weather and crop prices on a year-to-year basis. However, over time, demand should see structural growth of 2–3% per annum driven by demographics (population growth, urbanisation and increased calorific intake). On the supply side, access to low-cost potash and phosphate assets is severely restricted by geology (there are few large-scale, low-cost resources) and economics (current prices well below a level that would justify investment). As such, we would expect ROIC for the industry to bounce back, with better players such as Mosaic earning a premium to cost of capital.
From 2015–2017, Mosaic and the wider industry endured significant pain as record grain harvests lowered grain prices, in turn impacting farmer profitability at the same time as new capacity (particularly in potash) came on stream. During this period, Mosaic has also hit by a number of company-specific operational problems which added to investor concern about the share price outlook. Finally, Mosaic management made a significant move to significantly strengthen its position in Brazil by acquiring fertiliser assets for a combination of cash and equity. The consequence of all this led to the share price more than halving from mid-2015 levels of $45 to $20, before recovering to $32 by the end of 2018.
Revenue, Operating Profit and Cashflow OutlookProduct price decreases, driven by increased supply as well as farmer profitability, cut deep into the industry cost curve. In response, Mosaic and its industry peers cut production by c10%, thus allowing inventories in the supply chain to run down. The result of this action is that the market for the nutrients bottomed at the start of 2018, and began to tighten up as the growing season in the northern hemisphere progressed. Post the bottoming of prices, our projection is for Mosaic revenue to increase from here as stock levels in the supply chain recover to normal levels while underlying demand continues to grow. This should flow through to operating profit as the cost base was addressed during the downturn (e.g. cost of potash down c$40/tonne) with margins recovering.
In addition, there are a number of Mosaic specifics which should potentially lead to a strong profit recovery from here.
• The acquisition of Vale Fertilisers at arguably the trough of the cycle was the sort of counter-cyclical investment that value investors like to see. Mosaic paid $2bn for enormously strategically attractive assets in a core agricultural geography where Vale had invested c$8bn in 2010/11.
• In phosphate, the company has being working to improve the value-add nature of its product mix, which is less evident at the trough of a cycle. With a recovery in commodity prices, the margins in these specialty micronutrients are likely to increase, which in turn should be positive for returns.
• In potash, Mosaic has been investing in building an alternative mine shaft at its large Esterhazy mine to eliminate a c $300m p.a. cost and take the largest mine in its portfolio from a mid-cost position to first quartile.
With the bulk of its capital commitments behind it, integration of the Vale acquisition progressing well, and the price outlook for its main commodities looking well supported, a substantial improvement in Mosaic cashflow seems likely to follow.
Invested CapitalWhile the most egregious destruction of capital in the so-called commodity supercycle took place elsewhere, Mosaic and the fertiliser industry were not entirely blameless — a large element of the 2015–2017 downturn was driven by the over-investment in previous years that brought new supply on stream. Some of this capacity remains to be absorbed, but the peak looks to be passed.
At the same time, given strong underlying demand for its products, the market is likely to need new capacity in phosphate and potash within the next five years. At current prices for both nutrients, we don’t believe returns are sufficiently attractive to justify investment. In fact, we believe the current replacement cost of Mosaic’s operations would be c $100/share versus today’s share price of $32.
SummaryMosaic currently trades below 1 times EV/IC (enterprise value to invested capital), at about one third of replacement cost with long-life, low-cost assets in vital commodities with strong structural growth and no alternatives. For value investors, such metrics make Mosaic attractive both in an absolute sense and relative to more economically-sensitive investments.
66
Fundamental Value Equities Q4 2018
Plus ça change… The advent of the new year has brought change to the Research Team at Fundamental Value Equities. I have stepped into the role of Head of Research following the retirement of Jeremy James. While naturally hopeful that the next six years prove less treacherous for value investors than the six years of Jeremy’s leadership, the team’s approach will sustain his relentless focus on maintaining a disciplined investment process. This has been critical to our continued success and underpins our confidence as we head into 2019.
As outlined in the opening section of Taking Stock, reviewing sector dynamics in 2018 and assessing the outlook for 2019 leaves one with a sense of “more of the same.” Indeed, over the period since the financial crisis, in many years we have found the sectors that started a year with elevated expectations, and therefore elevated valuations, often outperformed in that year. Figure 5 reflects the broad long-term trend of lagging cyclical sector valuations, while also showing that expensive sectors such as Healthcare and Technology ended 2018 close to the year's peak levels — even after a final quarter sell-off that particularly impacted many tech stocks.
The technology sector was the poster child for the ‘winner takes all’ trend that drove market momentum in 2018. At the start of last year, the sector was already expensive relative to the market and its own history, with the main driver of the sector’s performance being a large increase in earnings expectations. For many years, we have been dealing with a technology sector that has become more and more concentrated in a smaller and smaller number of companies. This concentration was further emphasised in 2018 as we saw just five companies account for over 50% of the change in the sector’s earnings expectations; so it’s too simplistic to say the sector merely reflects superior earnings prospects.
The market turmoil of the fourth quarter was particularly interesting from a sector perspective. The high-flying technology sector cracked on concerns over the outlook for smartphone demand and Apple’s share within that, particularly as it flagged slowing sales in China. That a relatively modest revision to expectations for one product could have such a large impact on the performance of the entire sector (representing 15% of the
RESEARCH BRIEFINGOliver McClure, Head of Research
Figure 5: Expensive Sectors Remain Expensive (EV/IC — Dec 2007 to Dec 2018)
EV/IC Dec 2017 EV/IC Dec 2018
0.0
3.5
2.5
3.0
1.5
2.0
1.0
0.5
Sector EV/IC Range since Dec 2017
Energy Utilities Financials Materials Industrials Communications Consumer Discretionary
Information Technology
Health Care Consumer Staples
EV/IC
Source: FactSet, MSCI, State Street Global Advisors.
7State Street Global Advisors
global equity indices) clearly illustrates the concentration risk that we have highlighted.
As we would have expected, our team’s technology holdings proved somewhat defensive in the fourth quarter shake-out. Unfortunately, this was largely offset by a steep sell-off in our other cyclical holdings on deteriorating macro expectations amid souring US-China trade relations and concerns over Brexit. In addition, the sharp oil price decline in Q4 erased virtually all the outperformance delivered by the energy sector in the first nine months of the year. As cyclicals sold off, investors dusted off their post-financial crisis playbook as bond proxies such as Real Estate and Utilities and defensive sectors such as Consumer Staples and Healthcare rallied.
…plus c'est la même chose… We find ourselves starting 2019 in familiar territory. As bottom-up value investors, we do not allocate according to sector; however, we have seen a greater number of value opportunities emerging in the Energy, Materials, and Financials sectors. This is amply illustrated in Figure 6, which shows the widening valuation gap between Cyclicals and Defensives. In simple terms, cyclical earnings appear cheap relative to defensive earnings. We’ve seen a number of instances of similar dislocations in the decade since the financial crisis and such periods have consistently provided us with opportunities to add value to our portfolios.
We continue to believe a set of robust and conservative assumptions that estimate the sustainable earnings power of a business is the most important element in determining the intrinsic value of that business. We believe that the future is inherently unpredictable and that the key to generating alpha is to take positions where the current valuation maximises the percentage of future outcomes that are profitable. This is the fundamental building block of our margin of safety. In addition, where the dispersion of future outcomes is wide, we seek to ensure that the company has the balance sheet and capital resources to see them through the possible delays or uncertainties in an earnings recovery.
Figure 6: The P/E Discount of Cyclicals versus Defensives** (Dec 2010–Dec 2018)
4
8
12
16
Dec2010
Apr2012
Aug2013
Dec2014
Apr2016
Aug2017
Dec2018
0
20
100
110
90
80
70
60
120
— Discount— Defensive— Cyclical
P/E %
Source: FactSet, MSCI, State Street Global Advisors.
** Defensive Sectors: Telecoms, Consumer Staples, Healthcare, and Utilities. Cyclical sectors: Consumer Discretionary, Financials, Industrials, and Materials.
8
Fundamental Value Equities Q4 2018
VALUE STRATEGIESStrategy Holdings Range Benchmark Inception Date Page
Global Value Spotlight 30–40 MSCI World Index 1 January 2007 9International Value Spotlight 30–40 MSCI All Country (ex-United States) Index 1 February 2012 10Europe Value Spotlight 30–40 MSCI Europe Index 1 April 2009 11Eurozone Value Spotlight 30–40 MSCI EMU Index 1 January 2001 12Asia Pacific Value Spotlight 30–40 MSCI All Country Asia Pacific Index 1 June 2012 13US Value Spotlight 30–40 MSCI USA Index 1 June 2012 14Global Value 70–90 MSCI World Index 1 June 2001 15Global Ethical Value 70–90 MSCI World Index 1 May 2012 16
9State Street Global Advisors
CharacteristicsStrategy Benchmark MSCI World Index
Chemical Works of Gedeon Richter Plc 3.13 3.42 0.49
KT & G Corporation 3.20 0.01 0.44
Apple Inc.* -2.46 -29.95 0.44
Copa Holdings, S.A. Class A 3.17 -0.38 0.41
Bottom 5
Credit Suisse Group AG 2.43 -27.45 -0.36
Deutsche Bank AG 2.50 -30.23 -0.46
Affiliated Managers Group, Inc. 2.85 -28.60 -0.48
Hanesbrands Inc. 2.77 -31.58 -0.52
Vallourec SA 1.50 -68.38 -1.75
Global Value Spotlight StrategyAs of 31 December 2018
Performance Summary (USD)Q4 2018
(%)YTD 2018
(%)1 Year
(%)3 Years
(%)5 Years
(%)10 Years
(%)Since
31 Dec 2007 (%)Since Inception
01/01/2007 (%)
Global Value Spotlight — Gross -12.68 -13.80 -13.80 9.87 3.84 10.05 5.03 4.19
Global Value Spotlight — Net -12.84 -14.45 -14.45 8.84 2.85 9.01 4.04 3.21
MSCI World Index -13.42 -8.71 -8.71 6.30 4.56 9.67 3.70 4.14
MSCI World Value Index -11.25 -10.78 -10.78 5.48 2.98 8.24 2.52 2.59
Strategy Risk: Equity. For full risk discussion, please refer to page 17.
Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the Strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryIn a difficult final quarter of 2018, many of the world’s stock markets experienced steep declines. That the Global Value Spotlight Strategy outperformed the benchmark MSCI World Index may seem like scant consolation given the scale of losses in the three months against the backdrop of (the lack of) Brexit developments, Chinese growth slowdown fears and US political and trade turmoil, coupled with a normalising of interest rates from extremely low levels.
Despite headline valuation levels of global equity indices that do not appear particularly attractive, we believe there continue to be valuation anomalies that concentrated benchmark agnostic investors can exploit to generate excess returns.
Among individual stocks, the top contributor to relative performance was Chinese pork producer WH Group, which recovered some of the tariff-driven declines of prior quarters as the US delayed the implementation of new tariffs to facilitate trade talks. At the other end of the spectrum was Vallourec, which tumbled as it failed to arrest cash outflows with the consequent deterioration in the balance sheet prompting us to sell the holding.
Strategy Risk: Equity. For full risk discussion, please refer to page 17.Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the Strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryGeo-political and macro concerns dominated the latest quarter, with fears around the outlook for global trade, the EU-Italy stand-off, Brexit, weak Chinese data, and the synchronised withdrawal of liquidity by global central banks, resulting in a pronounced aversion to risk taking hold. Market underperformers were dominated by cyclical sectors with Energy, Information Technology, and Consumer Discretionary while defensives and bond proxies, Utilities, Real Estate, and Communication Services, outperformed. Developed markets underperformed emerging markets as the latter benefitted from the fall in US bond yields.
The strategy underperformed the benchmark in the quarter, with just two stocks accounting for the relative underperformance. One of those stocks was Aryzta as the food company’s heavily-discounted rights issue was not taken well by shareholders and there was a substantial flow of stock into the market.
From a more positive perspective, one of the stronger contributors to relative performance was Hungarian pharmaceutical company, Gedeon Richter, which stabilised after safety concerns emerged around one of its key drugs, Esmya, earlier in the year.
Performance Summary (USD)Q4 2018
(%)YTD 2018
(%)1 Year
(%)3 Years
(%)5 Years
(%)10 Years
(%)Since
31 Dec 2007 (%)Since Inception
01/02/12 (%)
International Value Spotlight — Gross -15.52 -18.66 -18.66 5.55 0.31 — — 5.84
International Value Spotlight — Net -15.68 -19.27 -19.27 4.76 -0.49 — — 4.99
MSCI ACWI ex USA Index -11.46 -14.20 -14.20 4.48 0.68 — — 3.92
MSCI ACWI ex USA Value Index -10.70 -13.97 -13.97 4.75 -0.38 — — 3.06
Strategy Risk: Equity. For full risk discussion, please refer to page 17.
Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the Strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryThe Europe Value Spotlight Strategy underperformed the benchmark MSCI Europe Index in the latest quarter as investor caution amid an uncertain geopolitical backdrop drove a market preference for sectors that are perceived to be more ‘defensive’ in nature, while the cheap cyclical companies that we favour generally lagged the broad market.
One of the bigger detractors on relative strategy performance was TechnipFMC. The provider of services to oil and gas projects saw its shares fall through the quarter against the backdrop of a steep decline in crude oil prices.
Among the better performers in the portfolio was Siemens Gamesa, the Spanish-based renewable energy company. The company highlighted order growth for onshore wind products in the latest quarter, which underpins the firm’s guidance for rise in revenue guidance from €9.1bn to €10–11bn in 2019.
Performance Summary (USD)Q4 2018
(%)YTD 2018
(%)1 Year
(%)3 Years
(%)5 Years
(%)10 Years
(%)Since
31 Dec 2007 (%)Since Inception
01/04/09 (%)
Europe Value Spotlight — Gross -17.99 -24.43 -24.43 0.76 -2.35 — — 8.04
Europe Value Spotlight — Net -18.30 -25.56 -25.56 -0.61 -3.64 — — 6.65
MSCI Europe Index -12.72 -14.86 -14.86 2.10 -0.61 — — 8.04
MSCI Europe Value Index -12.08 -15.88 -15.88 2.64 -1.96 — — 6.83
Publicis Groupe SA 2.34 -4.26 0.20Bottom 5Societe Generale S.A. Class A 2.41 -25.94 -0.29CNH Industrial NV 2.70 -25.37 -0.32Bank of Ireland Group Plc 2.85 -27.47 -0.39Imerys SA 2.20 -35.04 -0.52TechnipFMC Plc 3.21 -37.01 -0.78
Strategy Risk: Equity. For full risk discussion, please refer to page 17.
Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the Strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryThe Eurozone Value Spotlight Strategy underperformed its benchmark in a turbulent quarter for financial markets as trade war concerns, rising US rates and slowing Chinese growth took a toll on investor sentiment. The implications of a China slowdown are significant for some eurozone industries including autos, luxury goods and steel and other commodities.
Featuring among the top five contributors to relative performance was Italian utility Enel. Benefiting from a preference among investors for stocks with earnings that are considered to be less economically sensitive, the company’s share price was also bolstered by quarterly earnings that topped consensus market expectations.
However, the negatives outweighed the positives in the fourth quarter, with French mining group Imerys one of the bigger detractors. Although the company said it expected full-year net income to rise nearly 7%, it got caught up in the sell-off of European cyclicals.
PetroChina Company Limited Class H 3.17 -23.07 -0.41
Komatsu Ltd. 2.59 -29.08 -0.52
SoftBank Group Corp. 2.32 -34.07 -0.58
Catcher Technology Co., Ltd. 2.82 -33.48 -0.72
Strategy Risk: Equity. For full risk discussion, please refer to page 17.
Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the Strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryStock markets in the Asia Pacific region were caught up in the broad sell-off seen around the globe, although there was some divergence within the region. The Strategy outperformed the benchmark MSCI All Country Asia Pacific Index, although the return was still negative for the three months. That out-performance was mainly driven by consumer staples, materials and healthcare sectors, with the sectors that detracted most from performance being communications, real estate and energy.
The single biggest contributor to relative performance was WH Group, with the share price of the Chinese pork producer rebounding from prior weakness as the US decision to delay new tariffs on Chinese imports for three month to facilitate further trade talks bolstered confidence.
At the other end of the performance spectrum was Catcher Technology; shares in the Taiwan manufacturer of computer components and casings fell as the Apple supplier reported a year-on-year drop in November sales and as Apple issued a warning on iPhone sales amid slowing Chinese demand.
Performance Summary (USD)Q4 2018
(%)YTD 2018
(%)1 Year
(%)3 Years
(%)5 Years
(%)10 Years
(%)Since
31 Dec 2007 (%)Since Inception
01/06/12 (%)
Asia Pacific Value Spotlight — Gross -9.73 -10.12 -10.12 8.90 4.38 — — 7.63
Asia Pacific Value Spotlight — Net -9.76 -10.26 -10.26 8.68 4.00 — — 7.19
MSCI AC Asia Pacific Index -10.96 -13.52 -13.52 6.10 3.21 — — 6.68
MSCI AC Asia Pacific Value Index -9.88 -12.49 -12.49 5.14 2.29 — — 5.86
Strategy Risk: Equity. For full risk discussion, please refer to page 17.
Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryThe MSCI USA Index recorded a negative double-digit percentage return in the fourth quarter, overturning what had been a positive year-to-date return for the prior nine months. In a departure from year-to-date trends, US Index returns in the quarter were led lower by cyclical sectors, with defensive sectors typically outperforming. Despite the fourth quarter sell-off, growth stocks actually extended their outperformance over value stocks for 2018.
Strategy performance in the quarter was broadly in line with the benchmark index. Among the larger contributors to relative performance in the period was Panama-based airline Copa Holdings. Although the company reported a third-quarter drop in profit as higher fuel costs and weak South American currencies had a negative impact, those factors improved in the last three months of the year as oil prices tumbled and currency markets stabilised.
One of the stocks more negatively affecting performance was US clothing firm Hanesbrands. The company’s share price declined as third-quarter sales fell short of market expectations and as it took a $14 million charge related to the financial difficulties of department store group Sears.
Performance Summary (USD)Q4 2018
(%)YTD 2018
(%)1 Year
(%)3 Years
(%)5 Years
(%)10 Years
(%)Since
31 Dec 2007 (%)Since Inception
01/06/12 (%)
US Value Spotlight — Gross -13.73 -13.24 -13.24 6.40 3.05 — — 8.18
US Value Spotlight — Net -13.76 -13.37 -13.37 6.18 2.68 — — 7.73
MSCI USA Index -13.81 -5.04 -5.04 8.47 7.68 — — 11.90
MSCI USA Value Index -10.76 -7.96 -7.96 6.85 5.71 — — 10.44
Chemical Works of Gedeon Richter Plc 1.62 3.42 0.24
Amazon.com, Inc.* -1.79 -25.01 0.22
Bottom 5
ONO Pharmaceutical Co., Ltd. 1.18 -27.71 -0.18
Hanesbrands Inc. 1.07 -31.58 -0.23
TechnipFMC Plc 1.33 -37.01 -0.36
Vallourec SA 0.65 -68.38 -0.67
McDermott International, Inc. 0.55 -64.51 -0.76
Strategy Risk: Equity. For full risk discussion, please refer to page 17.
Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the Strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryThe Global Value Strategy marginally lagged the outcome of the benchmark MSCI World Index return in the quarter. While there is much to distract investors at the moment, we still maintain that these short-term issues do not detract from the long-term valuation potential of companies we own, even if their share prices have been negatively impacted of late. Interestingly, a couple of high-weight technology stocks in the benchmark that we don’t own featured as contributors to the strategy’s relative performance as richly valued tech-related stocks stumbled.
Among stocks we held in the quarter, Kansai Paints proved to be one of top contributors to relative performance. The Japanese decorative and industrial coatings group rebounded after dropping to a near three-year low in mid-November.
One of the bigger detractors from performance was TechnipFMC; the company provides services and fully integrated solutions to offshore and onshore oil and gas projects and its share price was hit by the sharp fall in the price of crude oil in the final quarter of 2018.
Performance Summary (USD)Q4 2018
(%)YTD 2018
(%)1 Year
(%)3 Years
(%)5 Years
(%)10 Years
(%)Since
31 Dec 2007 (%)Since Inception
01/06/01 (%)
Global Value — Gross -13.61 -16.53 -16.53 5.68 1.98 9.02 3.73 4.95
Global Value — Net -13.66 -16.74 -16.74 5.40 1.31 7.99 2.72 —
MSCI World Index -13.42 -8.71 -8.71 6.30 4.56 9.67 3.70 5.14
MSCI World Value Index -11.25 -10.78 -10.78 5.48 2.98 8.24 2.52 4.45
Strategy Risk: Equity. For full risk discussion, please refer to page 17.
Source: SSGA, MSCI and FactSet as at 31 December 2018. Returns greater than one year are annualised. Returns represent past performance and are not a guarantee of future results. Index returns reflect all items of income and the reinvestment of dividends (net of withholding tax rates) and other income and are calculated in euros as stated. It is not possible to invest directly in an index. Strategy holdings, allocations and characteristics are as of the date indicated, are subject to change, and should not be relied upon as current thereafter. The Performance Summary shown is of a composite consisting of all discretionary accounts using this investment strategy. All returns reflect capital gains and losses, income, and the reinvestment of dividends. Performance is calculated in USD. The above information is considered supplemental to the GIPS presentation for this Composite, which was previously presented, or a GIPS presentation is also available upon request. The Top 10 Holdings, Characteristics, Sector Allocation, and Attributions are those of a representative account within the Composite, which is subject to change. The representative account was chosen because it has no material restrictions and fairly represents the investment style of the Strategy. The attribution holdings (Top 5, Bottom 5) identified do not represent all of the securities purchased, sold, or recommended for advisory clients. To receive a complete list of securities purchased, sold, or recommended for this account, their contributions to the Strategy’s overall performance during the time period cited, and the calculation methodology, please contact your SSGA Representative.
CommentaryThe Global Ethical Value Strategy outperformed the benchmark MSCI World in the final quarter, although the portfolio still recorded a negative return. Stock selection and regional exposure both contributed to relative performance in the period.
One of the largest individual contributors to relative return in Q4 was Irish nutrition company Glanbia. Shares in the consumer staple stock benefited from solid guidance from management on earnings as well as catching the tailwind lifting shares in the so-called defensive sectors.
Among the companies that presented a performance counterweight in the quarter was Imerys. The French-based mining group weakened as market sentiment towards European cyclicals deteriorated through the three months.
Performance Summary (USD)Q4 2018
(%)YTD 2018
(%)1 Year
(%)3 Years
(%)5 Years
(%)10 Years
(%)Since
31 Dec 2007 (%)Since Inception
01/05/12 (%)
Global Ethical Value Spotlight — Gross -13.03 -13.47 -13.47 7.65 2.97 — — 6.66
Global Ethical Value Spotlight — Net -13.16 -13.99 -13.99 7.01 2.35 — — 6.02
MSCI World Index -13.42 -8.71 -8.71 6.30 4.56 — — 7.92
MSCI World Value Index -11.25 -10.78 -10.78 5.48 2.98 — — 6.90
* Not held in Strategy.
17State Street Global Advisors
Important Risk Information:Companies with large market capitalisations go in and out of favour based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalisations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalisations.Investments in small-sized companies may involve greater risks than in those of larger, better known companies.Actively managed strategies do not seek to replicate the performance of a specified index. The Strategies are actively managed and may underperform their benchmarks. An investment in the Strategies is not appropriate for all investors and is not intended to be a complete investment programme. Investing in the Stratgies involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment. Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Past performance is not a guarantee of future results.Investing involves risk including the risk of loss of principal. All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. Investing in foreign domiciled securities may involve risk of capital loss from unfavourable fluctuation in currency values, withholding taxes, from differ-ences in generally accepted accounting principles or from economic or political instability in other nations. Investments in emerging or developing markets may be more volatile and less liquid than investing in developed markets and may involve expo-sure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more devel-oped countries. The value of investments can fall as well as rise. Past performance may not be a reliable guide to future performance. This document provides summary information regarding the Strategy. This document should be read in conjunction with the Strategy's Disclosure Document, which is available from SSGA. The Strategy Disclosure Document contains important information about the Strategy, including a description of a number of risks. Diversification does not ensure a profit or guarantee against loss.
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State Street Global Advisors Worldwide Entities
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Netherlands: State Street Global Advisors Netherlands, Apollo Building, 7th floor Herikerbergweg 29 1101 CN Amsterdam, Netherlands. T: 31 20 7181701. SSGA Netherlands is a branch office of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2.
Singapore: State Street Global Advisors Singapore Limited, 168, Robinson Road, #33-01 Capital Tower, Singapore 068912 (Company Reg. No: 200002719D, regulated by the Monetary Authority of Singapore). T: +65 6826 7555. F: +65 6826 7501.
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United Kingdom: State Street Global Advisors Limited. Authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 2509928. VAT No. 5776591 81. Registered office: 20 Churchill Place, Canary Wharf, London, E14 5HJ. T: 020 3395 6000. F: 020 3395 6350.
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