Global High Conviction Strategy: March 2020 Quarterly Commentary


The quarter was dominated by fear associated with the Covid-19 pandemic which spread across the globe. A simultaneous collapse in oil prices spooked investors who feared that this fall signified a calamitous decline in economic activity. With so much debt having been loaded into the system as a ‘solution’ to the GFC, any fall in economic activity can lead to debt default which will reverberate via the banking system - again.

Despite calming words and liquidity injections by central banks, global markets typically fell by more than 20% during the quarter. Our value weighted benchmark of Global companies fell 16% in Australian dollar terms. The impact of falling equity markets was partially cushioned by the weakness in the Australian dollar. In US dollar terms the benchmark index fell by over 20%. The Indian market fell by 34.5% and we continue to avoid investing in that popular market because the companies fail to meet our standards for governance and quality. Our Global High Conviction strategy declined just over 10% in A$ terms.

With widespread social distancing and lockdowns imposed in response to the Covid-19 pandemic there will be considerable disruption to global economic activity and a short-term decline in corporate profits. This is a time for investors to be patient and to direct their thinking towards the long-term.

Short-term disruption to corporate profits will not have a significant impact on long-term equity market returns. We are likely to see some significant changes to individual and corporate behaviour, as well as (more) regulations. These will work to the benefit of some companies and to the detriment of others.

We anticipate the following to be enacted, adopted, or mooted. All may change the relative merits of stocks and countries. For more detail please see our latest post.

  1. Government interaction with, and intervention in, corporations
  2. Changes in individual behaviour
  3. Changes in company strategy

Governments and companies will be moving fast so please continue to check in for updates in the NEWS segment of our website.

During March we received an important reminder that dividends are an important component of returns with most of our companies in Japan trading ex-dividend towards the end of the month. Many of our companies in Japan maintain balance sheets with zero debt and strong balances of cash. The corporate sector in Japan has net cash balances in excess of USD 6 trillion and this conservative approach to business management is a positive. The UK and European listed banks have been directed by the regulator to cancel all dividends including those previously announced and due for payment in the next month. Dividend cancellation is very unlikely among the cash positive corporate sector in Japan. Investors are likely to have long memories when it comes to companies that did and didn’t maintain their dividends during this period.

We made one significant change to the portfolio during the quarter. We sold EBay and purchased CRH in the UK. CRH is a supplier of aggregates for building. This was poor timing with hindsight (which is a wonderful thing). However, if some of this fiscal boost now being created by governments worldwide to counter the shutdown of private activity, doesn’t result in much needed investment in public infrastructure, then politicians are truly inept.

We remain heavily invested in Japan and Asia comprising about 40% of the portfolio and half is in North American listed companies. We have a small exposure to Europe. Long-term returns will be generated by the ability of our companies to deliver growing profits and dividends and a consequent re-appraisal of their appropriate risk premium by other investors.

Our performance remains solid:

Periods ended 31 March 2020 3 Months 1 Year 3 Years 5 Years Inception
Portfolio* -10.35% +2.85% +7.44% +7.73% +15.39%
Benchmark^ -16.17% -4.69% +4.73% +4.88% +11.25%
Active +6.94% +7.91% +2.59% +2.71% +3.72%