The markets continued their strong upward trend during the third quarter. The Fund was able to post a strong absolute return over the period although underperformed relative to the MSCI EAFE Index. Financials continued to drive this market, followed by Industrials and Materials.
As the Financial sector outperformed the rest of the market, some of our financial holdings benefitted from this rally and were the strongest performing stocks in the Fund. There are, in fact, a large number of financial stocks in the top ten active contributors list for the quarter. Stock selection was negatively affected due to our Japanese financial exposure and due to our lack of exposure to the lower quality stocks.
Over the third quarter, the Japanese market lagged the broader global indices. Investors were concerned that underlying pressures in the economy, such as deflation and unemployment, could tip the economy back into a recession. Furthermore, pre-election uncertainty also held the market back. Japanese mega banks, including Sumitomo Mitsui Financial, performed poorly. The main reason for this weakness across the sector was due to concerns over the possibility of capital raising in the shape of equity finance. Japanese real estate stocks also struggled during the quarter; especially in September as the sector followed the sell-off in mega banks down, with weak data on housing starts coming through into the market. We decided to reduce positions in Mitsui Fudosan in favour of initiating a position in Banco Santander, where we have greater conviction. We initiated in Australia & New Zealand Banking Group. The outlook for the Australian banking sector has improved with the resilient strength of the country’s economy while the valuation of the stock was attractive.
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