GMO’s quarterly performance update for the second quarter ended June 30, 2015.
GMO Global Focused Equity Strategy – Quarterly Attribution
The GMO Global Focused Equity Strategy fell 1.5% net of fees for the quarter. The fund’s reference benchmark, the MSCI All Country World index, rose 0.3%.
Negative contribution came from a selection of companies in the United States, particularly Michael Kors, KapStone, Tronox, and two airlines. Michael Kors disappointed the market with guidance for negative same-store sales and described 2016 as an investment year dedicated to international expansion and further development of its ecommerce platform. While its core market is competitive, the stock now trades at less than 1ox earnings and the company generates significant free cash flow. For KapStone Paper and Packaging, demand has been sluggish, giving rise to uncertainty about the pricing environment. However, production rates remain very high. The company recently closed a highly attractive acquisition in an industry that is still consolidating, and the stock trades at an appealing free cash flow yield. Chemical company Tronox’s pricing has fallen significantly as industry input costs have fallen, and demand hasn’t shown consistent signs of growing off of trough levels. The company trades at less than tangible book value, offers a 4% dividend yield, and recently completed a highly accretive soda ash acquisition. Finally, after significant stock appreciation over the last three years, the market has become nervous that American and United Airlines are losing capacity discipline and the record margins and returns will suffer imminent and material decline. The stocks now trade very cheaply, are generating and paying out significant cash flow, and are feeling the significant benefit of lower fuel costs.
Positive contributions came from holdings in Taylor Wimpey and Topps Tiles in the United Kingdom and Peugeot in France. U.K. house builders, including Taylor Wimpey, received a boost from the Conservative election victory (the party was perceived to have a far more favorable attitude toward the sector than the Labour Party, which accused the house builders of hoarding land). At the same time, the building companies continued to reap the benefit of a remarkably benign land market with smaller private builders remaining starved of capital and unable to bid up prices. The tile retailer Topps Tiles outperformed thanks to a strong set of interim results. The company continues to take market share in the U.K. and is likely to benefit from U.K. consumer confidence reaching its highest level in 15 years (according to GfK data). Our holding in Peugeot enjoyed a strong quarter. The French car maker’s (IEO revealed that volumes and pricing in Europe remained robust and that the company was ahead of schedule on its “Back in the Race” recovery plan. In tandem with some ambitious targets on Chinese sales, this triggered material earnings upgrades from some sell-side analysts.
GMO International Active EAFE Strategy – Quarterly Attribution
The GMO International Active EAFE Strategy gained 3.4% net of fees in the second quarter; the strategy was 2.8 percentage points ahead of the MSCI EAFE index, which rose 0.6%.
Country and currency allocation was slightly behind the benchmark. Our weight in Europe is lower than that of the benchmark, but we have an overweight position in the eurozone. In January we hedged the account such that the exposure of the portfolio to the euro was closer to that of the benchmark, and the hedge against the euro was negative in the quarter. This was mostly offset by an underweight position in the underperforming Australian market, which added to returns.
Stock selection beat the benchmark in the second quarter. Holdings in Europe, Japan, and Australia outperformed.
In Europe, performance was led by Peugeot and the UK. homebuilders we hold in the portfolio. In the case of Peugeot, the French car maker’s CEO revealed that volumes and pricing in Europe remained robust and that the company was ahead of schedule on its “Back in the Race” recovery plan. In tandem with some ambitious targets on Chinese sales, this triggered material earnings upgrades from some sell-side analysts. U.K. house builders received a boost from the Conservative election victory (the party was perceived to have a far more favorable attitude toward the sector than the Labour Party, which accused the sector of hoarding land). At the same time, the building companies continued to reap the benefit of a remarkably benign land market with smaller private builders remaining starved of capital and unable to bid up prices.
In Japan, our holdings in banks outperformed the market in the second quarter. A main driver of this trend is the increasing market expectation that banks will exit the cross-holdings with their corporate customers, which will allow investors to focus on a bank’s credit risk and no longer worry about the embedded equity market risk.
Asciano, an Australian port and rail company, received a buyout offer from Brookfield Infrastructure Partners of Canada. The stock traded up sharply as a result.
On the negative side, stock selection in emerging markets hurt returns, particularly holdings in Korea as Hyundai Motors reported disappointing sales numbers due to their aging model line-up.
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