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Invesco Global Growth A

The world large-stock Morningstar Category split into three new groups based on investment style. This offering lands in the world large growth category. That’s appropriate, as it follows a growth-oriented strategy and its primary self-chosen benchmark is the MSCI All Country World Index Growth rather than the core MSCI ACWI, which it considers secondary. That said, the fund’s approach to growth investing is more restrained than those of many other funds in the new category. The managers belong to an Invesco international team that follows a doctrine they call EQV, with valuation being the “V,” and they take that aspect seriously. The fund’s most recent portfolio statistics put it nearly on the border with the blend portion of the Morningstar Style Box, while the average for the world large-growth average is much further into the growth area. Recently, that difference has benefited the fund’s relative ranking in the new category, as value and core have outperformed growth, but longer-term, the opposite is true.

This strategy has been proved on other offerings from the same team that focus exclusively on non-U.S. markets. This one hasn’t had the same level of success, partly owing to that once-deep U.S. underweighting, but also stock selection in that important market was subpar. Selection has improved recently, but the portion of that team focused on the big U.S. market remains just Amerman and two analysts.

The Fund’s Approach

The fund uses the same process that has provided solid long-term returns for a variety of Invesco international funds. It receives an Above Average Process rating. The managers look for sustainable earnings growth available at reasonable valuations and try to avoid companies with high debt levels. They put importance on the “quality” of earnings, looking for recurring revenue streams, strong cash flows, and solid operating margins. At one time, the managers of the fund’s U.S. portion used a different approach, but in mid-2013 the U.S. manager was incorporated into what had been the international team (which Invesco calls EQV, for earnings, quality, and valuation), so now the entire fund uses the EQV strategy. The valuation portion plays a significant role, leading this portfolio to be more moderate on the growth spectrum than most rivals in the new world large-growth category.

Before the U.S.-focused manager joined the EQV team, the fund heavily underweighted the U.S. side of the portfolio. That portion gradually increased; by March 31, 2021, it stood at 56%, close to the level of the MSCI ACWI Growth. The managers say they probably won’t allow such a large gap to recur, so that stock choices drive performance. Meanwhile, the fund’s small-cap weight rose after it absorbed a small-mid sibling in 2020. It now has a market cap around one third that of the index.

The Fund’s Portfolio

Matt Dennis and his comanagers took advantage of the early-2020 bear market to make many changes. Dennis and Ryan Amerman, who focuses on the U.S. side of this offering, say they added 19 new stocks to the portfolio in 2020’s first quarter, while selling 11. That’s a much higher level of activity than usual for this fund, as the managers prefer to hold on to stocks for longer periods of time, and since then activity has slowed down. Compared with its MSCI ACWI Growth benchmark, the fund has some noteworthy distinctions. Not surprisingly, given this fund’s moderate take on growth and attention to valuations, the tech-sector stake of 21% is about 10 percentage points lower than the indexes. But the managers do like a number of tech names, such as JD.com, which they say has become preferable to Alibaba BABA (though they still own the latter) because they see a greater potential for margin expansion, and Dropbox DBX, which they also added last year. Conversely, the fund’s stake in financial services is twice the index’s level, even though they are wary of big U.S. and European banks. Rather, they own investment-focused stocks such as LPL Financial LPLA in the U.S. and Fineco in Italy, along with payment-focused firms such as Visa V and PayPal PYPL. The managers say the portfolio’s substantial U.K. overweighting owes not to macro factors but to the appeal of a number of specific stocks.

The Fund’s Performance

This fund now lands in the new world large growth category. Because growth has outperformed value and core over most of the 10 years since Matt Dennis was named sole lead manager (until the past six months saw a reversal of that trend), and this fund is more moderate than most of its new peers, it has been at a disadvantage. Over the trailing 10-year period ended April 30, 2021, the 9.1% annualized return of its A shares lagged the world-large-growth category average by 2 percentage points and the MSCI ACWI Growth by 2.8 percentage points. It’s worth noting, however, that it essentially matched the return of the core MSCI ACWI over that time period, and beat the average of the new world-large-blend category by 0.8 points. (The fund’s portfolio currently lands barely on the growth side of the growth/blend border of the style box.) One hindrance has been the fund’s so-so performance in major downturns. It didn’t stand out in 2015’s third quarter, and its 13.5% loss in 2018 was more than 5 percentage points worse than the growth index and new growth category, From Jan. 21 through March 23, 2020 (the peak and trough of foreign indexes in that bear market), its return was again similar to the MSCI ACWI and the category norm.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Funds Funds

Lazard International Strategic Equity

Lead manager Mark Little, based in London, joined Lazard in 1997 and has run this fund since its October 2005 inception. The other three managers have all served this strategy since at least 2009, meaning the group has worked together extensively. Lazard’s large and experienced international and emerging-markets equity teams provide the managers with excellent support.

The team’s all-cap relative-value strategy allows the managers to pursue opportunities wherever they see fit. Ideas sometimes come from quantitative screens, though the managers and analysts often uncover ideas themselves through their own research. Two of the four comanagers have accounting backgrounds, allowing the team to conduct thorough analysis on the attractiveness of a company based on their preferences. They search for companies with an alluring combination of valuation and profitability, though the portfolio’s profitability metrics fell in line with those of the MSCI EAFE benchmark as of March 2021.

As with many all-cap mandates, the resulting portfolio’s characteristics vary, and the managers have navigated well without becoming too dependent on any type of stock. The portfolio’s average market cap nearly tripled to $30.8 billion from $11.8 billion since 2013 as small- and midcap opportunities faded and large-cap stocks surged (though that tally is still lower than its median peer and benchmark). The managers aren’t afraid of making bets on specific countries either: The March 2021 portfolio had an 8% allocation to each of Canada and Ireland, while the benchmark had less than 1%

The Fund’s Approach

A flexible and well-executed approach earns this strategy an Above Average Process rating. Like other Lazard strategies, this one uses a malleable relative-value strategy that ranges across the market-cap spectrum. The team searches for companies with an attractive combination of valuation and profitability, a balance that landed the March 2021 portfolio squarely in the large-blend section of the Morningstar Style Box. However, the strategy’s flexibility also allows the portfolio’s style to drift to where the managers see opportunity, and it sat in the large-growth category for several years prior to 2019.

Quantitative screens sometimes produce ideas, though the managers and Lazard’s deep analyst bench often find ideas through their own research. Two of the four comanagers have accounting backgrounds, allowing the team to conduct nuanced analysis on the attractiveness of a company to see if it aligns with their preferences. The management team works with the analysts on top-down analysis (like economic and political situations) to supplement its fundamental research as well. If the managers decide to invest, they usually replace an existing holding, resulting in a portfolio that consistently holds between 65 and 75 stocks.

The Fund’s Portfolio

While the portfolio invested 40% of its assets in mid-cap stocks in 2013, manager Michael Bennett notes that appealing small- and mid-cap stocks have been more difficult to find in recent years. As a result, the portfolio’s stake in mid-caps had fallen to 12% by March 2021 while positions in large- and giant-cap companies rose. The portfolio’s average market cap tripled to $35 billion from $11.8 billion over that time, though it’s still lower than its median foreign large-blend peer and MSCI EAFE benchmark. Despite the managers’ emphases on financial health and valuation, the portfolio’s profitability metrics fall in line with those of the benchmark and median peer while price metrics are marginally higher.

The portfolio’s style has drifted toward the large-blend category from large growth in recent years, though risk factor exposures have always tended to align closely with the core-oriented benchmark. The managers want stock selection to drive returns, but meaningful sector bets are common, such as the 5-percentage-point underweighting in tech and a similar-size overweighting in industrials in the March 2021 portfolio. Investors here should also expect meaningful country bets, such as the 13-percentage-point underweighting in Japanese stocks in March and 8-percentagepoint over-weightings to Canadian and Irish stocks that month.

The Fund’s Performance

This strategy performed poorly in early 2020’s pandemic-related sell-off. It lost 35.5% from Jan. 22 through March 23, worse than the MSCI EAFE benchmark’s 33.7% decline. Investments in several out-of-benchmark Canadian companies dragged on returns, such as National Bank of Canada and Suncor Energy, which respectively suffered as both interest rates and oil prices plummeted. The strategy’s positions in several air-travel stocks also hurt, such as Air France, Airbus, and Canadian manufacturer CAE Inc. CAE.

Over longer periods, however, performance has been more impressive. From its October 2005 inception through April 2021, the strategy’s institutional shares’ 7.1% annualized return outpaced its foreign large-blend Morningstar Category’s 5.0% and benchmark’s 5.2%. Furthermore, it outperformed without excess volatility, resulting in superior risk-adjusted metrics (such as the Sharpe ratio) over that time frame. The strategy typically wins by shielding capital in sell-offs, capturing only 92% of the index’s drawdowns since inception. It performed well in 2018, a challenging year for international equities, and during the 2007-09 global financial crisis, though as noted it failed to provide a meaningful cushion in early 2020. While it can outperform in bull markets, such as that of 2012-13, its performance in rallies tends to be middling.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Global stocks Shares

Xiaomi Produces Record Smartphone Sales and Gross Margins; FVE Raised to HKD 20.70

The smartphone gross margin of 12.9% was up 480 basis points on the previous corresponding period. Up until third-quarter 2020 Xiaomi’s smartphone gross margins averaged 7.5% and never rose above 9% in any quarter. Fourth quarter last year these margins increased to 10.5% and then jumped to 12.9% in the first quarter. The smartphone performance drove consolidated operating profit (less investment gains) up 161% with an 8% consolidated operating margin, much better than its previous best quarterly operating margin of 6.1% in second-quarter 2019. Huawei’s retreat seems to have lifted margins across the industry with Samsung’s smartphone business and Apple’s consolidated business also reporting their best operating profit margins since 2016. We lift our fair value estimate to HKD 20.70 from HKD 16.30 previously due mainly to increased gross margin forecasts in the smartphone business as well as increased smartphone revenue growth forecasts in 2021, with the lift in the value of Xiaomi’s investment portfolio over the quarter and a slightly stronger CNY also helping. Our no-moat rating is retained as we believe Xiaomi is predominantly an electronics hardware supplier with limited switching costs with its internet services business not yet well enough developed to assign a moat to. On our estimates Xiaomi currently trades on a 2021 price/earnings ratio of 31 times. Despite Xiaomi’s growing Internet of Things and lifestyle services business revenue giving it some differentiation from other consumer electronics peers, we believe this multiple is still above what could be reasonably justified.

Xiaomi’s smartphone segment had another strong quarter with Xiaomi’s total number of smartphones sold globally rising by 69% and smartphone revenue increasing by 70% from the previous year. Smartphone gross profit was up 170% with gross profit margin increasing to 12.9% from 8.1% in first-quarter 2020. Until the third quarter of 2020, the average smartphone gross margin for the previous 15 quarters had been 7.5% with a range of 3.3% to 9%. The margin then jumped to 10.5% in fourth-quarter 2020 and 12.9% in first-quarter 2021. Given Xiaomi generates around two thirds of its revenue from smartphone, its valuation is very sensitive to the smartphone gross margin assumption. If we double the smartphone gross margin assumption from 7.5% to (say) 15%, holding all other assumptions equal, Xiaomi’s valuation nearly doubles. Xiaomi pointed toward the shift in product mix toward higher end smartphones and reduced marketing and promotion spend given tightness in the semiconductor supply chain as the key drivers for the margin increase.

We estimate that reduced competitive intensity from Huawei has probably also helped smartphone industry margins and there may also be some premium attached to 5G phones. In the first-quarter 2021, key competitor, Samsung, reported its highest quarterly smartphone operating margin since the second quarter of 2016. The first quarter also saw Apple reporting its highest quarterly company operating margin since first quarter of 2016.

Xiaomi admitted that gross margin expansion had not been its main focus nor does it expect it to be in the near future as it is quite rightly focused on increasing market share, particularly in the mid-high end phone segment. It expects future growth to come from increased penetration into the offline segment in China as it is currently expanding its store footprint with a target of around 10,000 stores by the end of 2021. We forecast Xiaomi to grow its smartphone revenue by 44% in 2021 and at an average of 18% per year thereafter out to 2025 and assume its smartphone gross profit margin increases from 11.0% in 2021 to 11.4% in 2025 having lifted these assumptions by around 200 basis points following this result.

Revenue from the Internet of Things and lifestyle products segment increased by 41% year over year in the first quarter after growing by 8.6% in 2020. We note that the prior period was negatively impacted by COVID-19. Gross margin increased to 14.5%, which was also a quarterly record. Management had previously indicated that it had proactively reduced the number of stocks keeping units in this division to focus more on those products that interworked with the smartphone ecosystem. The company indicated that global shipments of its smart TVs were down 4% to 2.6 million for the first quarter. Larger television competitor, TCL, reported global TV sales volumes up 33% for the first quarter with TV sales in China up 8.3% and non-China sales up 43%. We forecast that Xiaomi can grow its Internet of Things and lifestyle products revenue by an average of 15.1% per year out to 2025 with gross margins averaging 12.0%.

Revenue from internet services was below expectations, increasing by 11.4% year over year in the first quarter after growing at 20% in 2020. Monthly active users, or MAUs, of its Mi User Interface increased to 425 million at the end of March from 396 million at the end of December 2020 and were up 29% year on year. However, average revenue per user was down 13% to CNY 5.3 per month. Advertising revenue was strong growing by 20% to CNY 3.6 billion and making up 58% of total internet services revenue. This is mainly driven by smartphone sales with the improved mix of higher end smartphones helping Xiaomi to grow the preinstalled app revenue. The high percentage of advertising revenue and improved margins from the fintech business drove internet services gross margin to 68.4% for the quarter. We believe the dominance of advertising in this revenue stream speaks to the difficulties Xiaomi has faced in building non-hardware-related internet revenue streams. We forecast internet services revenue growth of 20% per year to 2025 noting that growth in first-quarter 2021, internet services revenue was slower because of the very high gaming revenue in first-quarter 2020 due to the pandemic.

Source: Morningstar

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Expert Insights Philosophy Technical Picks Trading Ideas & Charts

Orissa Minerals and Development Co. – Breaks Through Its Strong Long Time Resistance and is Ready for a Fresh Upside Move

Statistics chart on laptop display and trader analyzing the data

Daily Candlestick Chart

Source: Tradingview

Technical Rationale

  • The stock of Orissa Minerals and Development Co opened the day’s trading session strongly at INR ₹2789, after which the stock made a high of INR ₹2987. The stock also made a low of INR ₹2770 for the day.
  • The stock has been gaining continuously in back-to-back trading sessions with a substantial increase in the volume. The Volume of the stock for the day is 43.625K. The stock seems to be in a price and volume breakout. The stock has formed a strong bullish candle on the daily charts indicating a huge buying interest in the stock and a further upside for the stock.
  • As we can see, after a long consolidation phase the stock has strongly broken above the its long-time resistance at INR ₹2750. The stock now seems to be ready for fresh upside movement.
  • The stock with its successive bullish candle formation has completely covered the previous consolidation phase and also has broken above its 10 Day and 20 Day Moving Averages, indicating a further upside movement for the stock.
  • The MACD of the stock also indicates a bullish crossover for the stock. The Relative Strength of Index of the stock is currently valued at 69 which is on the higher side and it indicates that the stock is gradually moving towards its overbought zone. The length of the RSI is 14 periods. Altogether the stock still has some upside potential left which can last for 4-7 days.
  • General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

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Dividend Stocks

QBE Insurance – Investment outlook

Management has made good progress improving operational efficiency and strengthening the balance sheet, consolidating the group into a more focused and profitable business after a multidecade acquisition binge. Geographic diversification does little to help margins and returns when large insured events occur without warning and are largely out of management’s control. We expect higher interest rates to benefit in the medium-term, but the competitive landscape mean some of this upside is eroded through competition via premium rates.

  • QBE has failed to demonstrate the underwriting discipline and cost advantages needed to warrant an economic moat.
  • Leveraging scale, brand, and geographic reach, QBE enjoys solid market positions in the U.S., Europe, Australia, and New Zealand. Brand recognition and confidence claims will be paid are helpful in acquiring and retaining customers, but competitors have shown these are not insurmountable barriers.
  • We expect further recovery and an exit from poor performing regions or product lines to benefit the bottom line, but do not believe QBE is gaining the scale necessary to improve its competitive position.
  • Rising competition should erode market share from incumbents, such as QBE, regardless of the impact on short term profits and returns.
  • A higher incidence of large claims events from major catastrophes could reduce profitability such that
  • dividend cuts and potentially dilutive capital raisings are needed.
  • Changes to capital requirements or/and poor profitability could weaken the balance sheet, requiring dilutive capital raisings.
  • Lower investment returns due to very low interest rates may continue for longer than we expect.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Pendal Group – Investment outlook

We forecast FUM to grow 10% per year to about AUD 146 billion by fiscal 2025–exceeding management’s “50% growth by fiscal 2025” target–mainly driven by market returns of 7.5% per year. A key highlight was the persistence of Pendal’s improved performance since the COVID-19 selloff, which should help attract stronger inflows over the near term. With 71% of FUM in funds that have outperformed their benchmarks over a 3-year period (above the 3-year average of 66%), 52% of funds are now in the first and second quartiles (over a 1-year period).

Performance will be the primary driver of fund flows. While we also expect new money into Pendal’s new offerings– such as its Regnan ESG products–we don’t expect them to add meaningfully to FUM in the near term. Amid the proliferation of ESG funds and ETFs, we question if these new products will materially add to flow in the foreseeable future. Magellan’s Global Sustainable strategy has amassed just AUD 151 million in FUM after four years, while Trillium, Perpetual’s ESG manager, has circa AUD 6 billion in FUM after operating for 38 years.

Pendal could suffer further outflows, notably from the U.K./ European equities and Westpac mandates, but we see risk declining. We understand clients who withdrew their funds due to Brexit uncertainties tended to be non-U.K clients, and they currently make up less than 20% of Pendal’s U.K./ European equity mandates.

Elsewhere, the guided 8%-10% growth in fiscal 2021 fixed costs and a one-off spend of AUD 15-18 million from fiscal 2021-24 are largely strategic (focused on new products, marketing and technology), and in our view, are necessary to help Pendal grow FUM and revenue amid an increasingly competitive investment landscape. We assume Pendal will spend at the higher end of guidance, and forecast the costto- income ratio to average 64%–above the 3-year average of 60%–over the next three years and trend downwards thereafter.

Management has revised its dividend payout policy to 80%-95% of underlying profit after tax (which will replace cash NPAT as an underlying profit measure) starting fiscal 2021. We think this is a reasonable range, underpinned by the group’s low capital requirements, strong free cash flow and pristine balance sheet with no debt. We currently assume a payout ratio of 88%, which equates to a midcycle dividend yield of 6.5%.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Global stocks

Perpetual Ltd– Perpetual to Go Full Steam

While it benefits from Australia’s ageing demographics and the compulsory superannuation contribution levy, its core Australian equity funds are suffering from net outflows, owing to structural issues of industry superfunds managing more Australian equities in-house and investors increasing allocation to cheaper passive investments and global assets as well as poor short-term performance. Recent acquisitions of Barrow Hanley and Trillium improve the earnings outlook in its funds management business, and it should benefit from continued growth in its private and trust segments and improving markets.

Key Investment Consideration

  • Its core investment segment is facing the structural issues of increasing allocations to passive investment styles and global assets, as well as industry superfunds managing more Australian equities in-house.
  • Its earnings are highly sensitive to equity market and macroeconomic conditions such as credit growth, and investor confidence, making it a high-beta stock.
  • Its funds under management and advice provide it with a recurring revenue stream and generate high returns on invested capital and strong free cash flows. It should also benefit from increases in the compulsory superannuation contribution.
  • Perpetual’s large scale of funds under management and advice provide it with recurring revenue streams and allow it to generate high returns on invested capital. Combined with relatively low maintenance capital requirements, it generates strong free cash flows allowing it to maintain a high dividend payout ratio.
  • Perpetual’s private segment is well positioned to take advantage of its heritage brand, as well as Australia’s aging demographic and growth in the high-net-wealth financial advisory sector. It also benefits from less regulatory scrutiny than advisors like the major Australian banks, AMP, and IOOF, which focus more
  • on the mass affluent.
  • Perpetual should benefit from the continuing growth in retirement FUM from the phased-in increase of the compulsory superannuation contribution levy from 9.5% to 12%.
  • Perpetual’s core investments segment is facing the structural issues of investors increasing allocations to passive investment styles and global assets, as well as industry superfunds managing more equities inhouse.
  • Its earnings are highly sensitive to equity market and macroeconomic conditions such as GDP and business and investor confidence, making it a high-beta stock.
  • Perpetual is not well positioned to take advantage of the likely increase in allocation of Australian investors
  • to passive investments.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Categories
Dividend Stocks

News Corp – Investment outlook

Against this negative backdrop, the fate of a legacy publisher depends on how it maintains audience in the ultracompetitive digital age, and whether it has the financial, as well as the editorial, resources to prevail in the longer term. With still-healthy free cash generation, a solid balance sheet, and ample journalistic resources, we believe News Corporation is well placed to tackle this monumental challenge. Furthermore, the strong balance sheet furnishes management with the ammunition to diversify away from the legacy publishing industry and explore investment opportunities in more structurally stable fields such as digital media assets. Recent efforts to simplify the group is also positive.

Key Investment Consideration

  • News Corporation is in the middle of transforming its legacy print publishing and pay TV business model to one that must compete in the ultracompetitive digital information environment.
  • News Corporation’s editorial resources and solid balance sheet place the company in good stead to maintain readership and stabilise advertising dollars against proliferating news alternatives for consumers.
  • In the meantime, News Corporation is diversifying into new businesses, such as digital real estate advertising in the U.S., while its online real estate classifieds operation enjoys dominance in Australia.
  • News Corporation’s strong financial position and stillsolid free cash generation separate the company from its struggling peers in the traditional print and publishing space.
  • The solid balance sheet provides management with critical flexibility, as it attempts to navigate the treacherous structural landscape and transition the company into the brave new world of digital media.
  • News Corporation also boasts a number of resilient online property classified assets in Australia and the U.S., ones that add to its cash flow profile and provide a template for the kind of businesses that management wishes to acquire as part of a diversification strategy.
  • The structural headwinds that have decimated the industry during the past decade may accelerate in the future, as technology and innovation provide consumers with even more choice in news and information.
  • Management’s efforts to change the legacy publishing model, charge for content in the digital arena, and convince advertisers of the value of its online audience may be overwhelmed by technological and behavioural forces beyond the company’s control.
  • The balance sheet may not be utilised in accretive fashion, with attractive assets that diversify News Corporation’s earnings likely to demand high valuation multiples.

 (Source: Morningstar)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.