04 Sep Munro Global Growth Fund Monthly Report – August 2019
The Munro Global Growth Fund returned -0.6% for August, comprising a return of -1.4% from equities and +0.8% from currency. The MSCI AC World Index (AUD) returned -0.1% (-2.0% from equities and +1.9% from currency).
Global equity markets were again pressured by tariff concerns during August, with the developed markets of the US S&P (-1.8%) and the Eurostoxx 600 down (-1.6%) suffering considerably less than Asian markets of Hong Kong (-7.4%) and Japan (-3.8%). The Brexit situation in the UK also caused concern on the local market, with the UK FTSE 100 down 5.0% for the month.
Positive performance for the Fund was driven by a strong set of full year results from French spirits company Pernod Ricard, which was rewarded after beating analyst estimates despite acknowledging future macro related concerns. Our Spanish infrastructure holding Cellnex also contributed positively, along with US exchange CME Group. The key detractors for August came in the form of poor results from technology giant Cisco and US flavour and fragrance company IFF.
Increasing trade war rhetoric and domestic monetary policy pressure kept the Australian Dollar in its downward trend during August, with the currency falling 1.6% against the USD. Given our position of being approximately 50% unhedged, this caused the Fund to only benefit by 80bps compared to the fully unhedged index contribution of 189bps.
It appears increasingly unlikely that a US-China trade deal of any substance will occur before the US elections (November 2020). While central banks and policy makers are adjusting for this trade war continuation, we see a slow growth environment sustaining as businesses and consumers readjust. Despite these short-term headwinds, we remain constructive longer term. The ultra-low interest rate environment underlines the relative attractiveness of owning quality growth companies and we currently see little long-term risk to the underlying earnings growth of our investments. Consequently, the Fund has maintained its core holdings throughout the recent volatility choosing to use our hedging tools to mitigate the sudden bursts of volatility including deploying hedging around major tariff deadlines or meetings.
In terms of AUD positioning, the Fund is approximately 50% unhedged, which has meant it hasn’t picked up the full benefit of the falling Australian dollar (relative to an index). The temptation is to increasingly unhedge the AUD as interest rates fall. However, with the AUD having already depreciated considerably to 67 cents, there is a growing risk of capital loss for fully unhedged funds should the currency move back higher. The most likely catalyst for this would be Australia being seen as a safe haven trade as the US administration potentially intervenes to weaken the greenback.