LOM Equity Growth Fund Managers Report August 2016

Download the PDF LOM Equity Growth Fund Managers Report August 2016
Mainly due to unexpected currency movements and an overweighting in healthcare sector stocks, the LOM Equity Growth Fund modestly underperformed its stated benchmark on a year-to-date basis. However, longer term performance remains intact on both an absolute and relative basis.

Equity markets had a rough start in early 2016, plunging with commodity prices as concerns over China’s economic slowdown and the late 2015 Fed rate hike came to a head. Since then, commodity prices have led global equity bourses higher, backed up by easy-money policies around the world. Our strategy has fully participated in the bounce. In just the past month the Equity Fund has increased in value by 4.08% and has also been gaining ground against its index. On a longer-term basis, the Fund has outperformed its sector peers on a net total return basis. For example, over the past five years, the LOM Equity Fund has returned a total of 22.50% versus 17.70% for the Bloomberg index of Global Equity Funds Domiciled in an Offshore Market (BBOFGLEQ on Bloomberg.)

Year-to-date through the end of the July, the Equity Growth Fund trailed its stated benchmark, the MSCI World Stock index, by 63 basis points (gross of fees and expenses), largely because of its long U.S. dollar weighting, an underweighting in the energy and basic material sectors and having lower exposure to the more defensive sectors including consumer staples and utilities. On the plus side, the portfolio was constructively underweight financials and overweight the technology sector, which has outperformed the benchmark by over 300 basis point year-to-date. Option strategies have worked well for us as the fund has realized about $81,000 in gains from selling equity options and presently holds an additional $30,000 plus in unrealized capital gains from these positions.

Healthcare remains the Fund’s largest over weight, with a 20.8% representation, versus 13.4% for the benchmark. While the healthcare group, as a whole, underperformed the MSCI World stock index (up 2.86% versus the benchmark up 4.45%), our stock selections were up 3.44%, showing outperformance against the sector benchmark. In fact, overall our stock selection added 0.28% to total relative portfolio attribution. Updating the performance analysis to August 8th, shows our stock selection process has added an additional 99 basis points to total return attribution for the Fund.

On a regional basis, the Equity Growth Portfolio has been positioned in many of the right places over the course of the year so far. Our largest overweight is to the U.S. where we continue to find good investments at reasonable valuations despite the broader averages hitting new highs. From a top-down vantage point, we continue to see America as the ‘cleanest dirty shirt in the hamper’ amongst the group of G-7 nations which are all struggling with languishing growth rates, difficult politics and challenging monetary policies. Through the end of the latest month, the U.S. has outperformed the MSCI World stock index by 269 basis points and our 18.9% overweight to America has added 71 basis points of positive relative attribution to the Fund’s investment return.

Much of the overweight to the U.S. has come from an underweighting of Europe where we are positioned approximately 12 percent below the benchmark (including options strategies). On a year-to-date basis, Europe has performed poorly, down 0.48% compared to a 4.45% increase in the MSCI Stock index through the end of July making our bet against the old world countries successful so far. Underweighting Europe has been quite profitable over the past few years, and we have also avoided the U.K., which of course was recently dealt a severe political blow by the economically disruptive Brexit vote. Our strategic underweighting of Europe has contributed a positive 18 basis points to relative attribution this year so far.

A fair portion of our non-U.S. holdings are hedged against the U.S. dollar where we continue to maintain a bullish stance. On a currency basis, we are 60% exposed to the greenback versus 25% for the benchmark. Our overweighting to the U.S. dollar which helped so much in 2015, has worked modestly to our disadvantage so far this year as the world’s largest reserve currency fell from extended levels late last year, giving up some ground to the euro but falling sharply against the Japanese yen where our hedge proved counterproductive. Our position in Japan has been troublesome on an absolute basis this year, and when added to our yen-hedged dollar play knocked approximately 121 basis points off of our relative attribution.

Going forward, we plan to maintain our U.S. dollar overweight. With the Fed looking to raise interest at least one time this year (most likely in December) while Europe and Japan plan to ease monetary policy further, we see the greenback being better bid through the end of the year. Japan, in particular, needs to do everything possible to stoke their beleaguered economy. The island country unfortunately possesses the poorest demographic profile of all the G-7 nations. Japan’s rapidly ageing population, massive government debt and protectionist policies with respect to trade and immigration leave few choices besides further debt monetization and currency debasing in order to stoke exports, the country’s last hope for economic progress.

In terms of sectors, we are retaining our overweight to healthcare but are also exploring additional positions in the financial services and energy industries where we are beginning to see some value. We continue to like the consumer discretionary sector but have become increasing selective. For example, retailers as a group remain challenged by the ‘Amazon-effect’ which is crimping sales and crushing margins on many of the traditional brick and mortar competitors. On the other hand we see select entities such as TJX Companies and Home Depot continuing to thrive despite the growth in the e-commerce channel. Hard goods, such as plywood and electric drills need to be distributed quickly and conveniently to consumers and contractors working on a job – which is not an attribute of the online channel. Likewise, companies such as TJX and Ross Stores are already providing e-commerce level product discounts while at the same time offering customers a unique ‘bargain hunting’ experience also not available through the internet.

The information contained in this article is for information purposes only, and represent the views of the author. It is not intended as specific investment or financial advice, or a recommendation or solicitation to buy or sell any security. Any investments or strategies listed in this article may not be suitable for all investors. Past performance is not indicative of future performance, and as with any investment, prices may fluctuate. It is recommended that advice is sought from a qualified investment professional prior to implementing any financial plan. LOM has made every effort to ensure that the contents herein have been compiled from sources believed reliable, however LOM does not warrant the accuracy, adequacy, timeliness, or completeness of this information expressly disclaims liability for errors or omissions in this information.