Global Equity 3Q 2021
(All MSCI index returns are shown net and in U.S. dollars unless otherwise noted.)
Global Markets (total return) performed as follows:
Sources: SS&C Advent, Bloomberg
Past performance is not indicative of future results. Aristotle Global Equity Composite returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Aristotle Capital Composite returns are preliminary pending final account reconciliation. Please see important disclosures at the end of this document.
Global equity markets fell during the third quarter, the MSCI ACWI Index’s first quarter of negative performance in over a year. Overall, the MSCI ACWI declined 1.05% during the period. Concurrently, the Bloomberg Global Aggregate Bond Index pulled back 0.88%. In terms of style, value stocks underperformed their growth counterparts during the quarter, with the MSCI ACWI Value Index lagging the MSCI ACWI Growth Index by 0.66%.
Regionally, Asia—despite Japan’s outperformance—and South America were the worst performers. On the other hand, Africa and North America, the only two regions to post positive returns, were the strongest. On a sector basis, seven of the eleven sectors within the MSCI ACWI Index posted losses, with Consumer Discretionary, Materials and Communication Services the worst performers. Meanwhile, Energy, Financials and Information Technology were the strongest sectors.
Similar to the first two quarters of the year, data regarding reported COVID-19 cases remained volatile across most major regions of the world. Conditions worsened during the quarter as Delta, a more contagious variant of the virus, spread globally, leading to as many as ~4,560,000 new reported weekly cases around the world. Furthermore, vaccine doses remain relatively scarce globally, particularly in developing countries, causing a deceleration in vaccination uptake rates.
As conditions remained uncertain, reactions were mixed, as a handful of countries such as New Zealand, Australia and Japan reinstituted strict lockdown measures, while countries like the U.S., South Korea and the U.K. maintained loose restrictions or even relaxed restrictions. On the monetary policy front, central bank decisions also varied, as the U.S. indicated that a tapering of its asset-purchase plan may soon be warranted and the Bank of Korea increased interest rates, while the European Central Bank raised its inflation target and China lowered reserve requirements for its banks. The volatile environment seems to have even affected political leadership positions, as Japanese Prime Minister Yoshihide Suga surprisingly chose not to seek re-election, and Fumio Kishida was elected to take his place.
Meanwhile, China continued to ramp up its regulatory crackdown on technology, data privacy and education, creating uncertainty amongst investors. Additionally, Evergrande, one of China’s largest real estate developers, shocked investors with its warning of cash flow issues and potential default on more than $300 billion in liabilities. Concerns about a ripple effect in the event the company were allowed to collapse captured the market’s attention at the end of the quarter.
In geopolitical news, the U.S. completed its withdrawal from Afghanistan, ending its 20-year presence in the country. This has created uncertainty for world governments regarding the future of the country and stability of the region.
Performance and Attribution Summary
For the third quarter of 2021, Aristotle Capital’s Global Equity Composite posted a total U.S. dollar return of 0.14% gross of fees (-0.03% net of fees), compared to the MSCI World Index, which returned -0.01%, and the MSCI ACWI Index, which returned -1.05%. Please refer to the table below for detailed performance.
From a sector perspective, the portfolio’s outperformance relative to the MSCI World Index can be attributed to security selection, while allocation effects had a negative, largely offsetting, impact. Security selection in Health Care, Energy and Consumer Discretionary contributed the most to the portfolio’s relative performance. Conversely, security selection in Industrials and Communication Services and an overweight in Materials detracted from relative return.
Regionally, allocation effects were responsible for the portfolio’s outperformance relative to the MSCI World Index, while security selection had a negative, largely offsetting, impact. Security selection in Europe and an overweight in Japan contributed the most to relative performance, while security selection in North America and Asia/Pacific ex-Japan detracted.
Past performance is not indicative of future results. Attribution results are based on sector returns, which are gross of investment advisory fees and include the reinvestment of all income. Please see important disclosures at the end of this document.
Contributors and Detractors for 3Q 2021
|Relative Contributors||Relative Detractors|
|Penske Automotive||Magna International|
Nemetschek, a European provider of software solutions for architectural and building construction projects, was the leading contributor for the quarter.
The company reported strong results, with both margins and revenue well above expectations. Correspondingly, management increased its guidance for full-year 2021. We believe margin improvement was due to its transition toward the more profitable licensing of its software, a catalyst we previously identified, in addition to COVID-related cost savings. Revenue growth was largely driven by its Design and Build segments as international cross-selling rose. Importantly, Bluebeam, its building collaboration software, achieved record levels of growth in new users. Nemetschek’s Build segment also benefited from the continued favorable environment for the construction sector. Furthermore, during its annual user event, the company announced new product features that it plans to release in the first half of 2022 that aim to increase office to field collaboration and connectivity – the fastest-growing area within construction software.
Sony, maker of the PlayStation videogame console, was a primary contributor for the quarter.
Sony reported strong results, particularly in electronics and music, leading to an increase in management’s full-year guidance for operating income. Strength in electronics was driven by TV and camera sales, while success in music was attributed to the continued shift to streaming, a catalyst we previously identified. The company also hosted its annual PlayStation Showcase, where Sony further demonstrated its robust content pipeline with incoming titles such as Call of Duty: Vanguard, Grand Theft Auto V and Marvel’s Spider-Man 2. Additionally, Sony completed its acquisition of Crunchyroll, AT&T’s anime business that boasts over three million paying subscribers across 200 countries. The company also announced that Sony Pictures Networks India had entered merger discussions with India-based Zee Entertainment, a deal that would bring together two leading Indian media network platforms. Lastly, Sony continued to expand its gaming division by acquiring U.K. game developer Firesprite Games, an addition that is expected to bolster the company’s virtual reality (VR) software titles. We believe these actions will continue to enhance the company’s ability to monetize its vast intellectual property library across multiple segments, including entertainment, gaming, music and motion pictures.
Canada-based auto parts supplier Magna was the largest detractor for the quarter.
Following strong performance through the second quarter of 2021, shares declined as earnings came in slightly below expectations. Additionally, management lowered 2021 revenue and margin guidance due to sporadic shutdowns from the microchip shortage, as well as higher commodity prices and increased labor costs. We see this as a short-term headwind as supply chains eventually return to normal. Instead, we remain focused on the company being uniquely positioned to supply parts for an increasingly electrified and autonomous fleet of vehicles. This includes Magna’s specialty in lightening vehicles, a necessity for heavy electric cars, and its years of investment in self-driving technologies. Moreover, management remains optimistic, citing recent progress on the company’s ICON digital radar product, which is expected to launch in 2022. Magna and LG also closed a joint venture that Magna believes will strengthen its position in electric powertrains. Separately, Magna’s July announcement that it would acquire Veoneer, an auto safety business, fell through after quarter-end. This caused Veoneer to pay Magna a $110 million fee for terminating the merger agreement.
Twitter, the digital news platform, was one of the quarter’s largest detractors.
Shares declined during the quarter despite an improving advertising market and a largely positive earnings report, an improvement from its disappointing first quarter results. Twitter shared positive results, with double-digit revenue growth and 206 million average monetizable daily active users (mDAU) in the second quarter. More importantly, Twitter reported strong growth in advertising revenue, total ad engagements and cost per engagement (CPE), a testament to Twitter’s focus on optimizing its interface for user-friendly experiences and providing relevant content. Furthermore, the company remained proactive in expanding and enhancing the platform’s functionalities through the addition of products such as Communities, Super Follows and Twitter Blue, as well as improvements in Tip Jar, direct messaging and Twitter Spaces audio chat platform. We believe these efforts demonstrate Twitter’s continued product improvements and will further enhance its monetization efforts over the long term.
Recent Portfolio Activity
During the quarter, we did not exit any positions, but we added one new position: FirstCash.
Founded in 1988, Texas-based FirstCash operates 2,800+ pawn shops in 24 U.S. states and four Latin American countries: Mexico, Guatemala, Colombia and El Salvador. Its stores buy and sell pre-owned consumer merchandise, such as jewelry, electronics, tools, appliances, sporting goods and musical instruments. Like all traditional pawn shops, the company also provides small consumer loans secured by pledged personal property. With annual revenue of $1.5 billion and more than 16,000 employees, FirstCash is an international leader in a fragmented industry consisting primarily of mom-and-pop stores.
Pawnbrokers offer a convenient service to credit-constrained and/ or underbanked consumers by providing access to short-term cash loans. Unlike other providers of short-term loans (e.g., payday loans), however, pawn shops do not allow for the possibility of consumer debt spirals, nor do they utilize collection agents or have loans linked to bank accounts. If a customer is not able to repay the loan, FirstCash simply acquires the pledged property and the debt is extinguished. The company and industry are therefore differentiated in the small loan space due to their sustainable business practices and, in our opinion, face a lower risk of overregulation.
Some of the quality characteristics we have identified for FirstCash include:
- Attractive business fundamentals, with a market-leading position (more than two times the size of the next-largest competitor) in an industry with high barriers to entry;
- Diversified lending and retail model, enhanced by scale, has resulted in a resilient business with strong margins and cash flows;
- Loyal customer base, with ~75% of its loan business from recurring customers; and
- A strong balance sheet and a disciplined capital allocation strategy that allows for organic investments, selective acquisitions and returns of capital to shareholders (i.e., buybacks and dividends).
We believe FirstCash shares are priced below our estimate of the company’s intrinsic value based on our estimates of normalized earnings. More specifically, we think the company is well positioned to increase market share from store count expansion domestically and internationally.
Catalysts we have identified for FirstCash, which we believe will cause its stock price to appreciate over our three- to five-year investment horizon, include:
- Revenue growth from continued expansion in Latin American countries with attractive demographics and high per capita unbanked populations;
- Continued market share gains in the U.S. through small shop acquisitions, focusing on states with growing populations and stable regulation; and
- Shareholder-friendly deployment of FREE cash flow generation.
At Aristotle Capital, our work is focused on individual companies. Where broader issues such as central bank policy decisions, the pandemic and geopolitics are relevant, we take a long-term approach, attempting to minimize the distractions of what may be on others’ minds. While the headlines focus on short-term news, in our view, the fundamentals of a business are the most important determinants of its long-term stock price performance. Consequently, we believe the best way for an investment manager to consistently add value is to maintain a long-term perspective and focus on understanding a company’s key attributes and value drivers.
The opinions expressed herein are those of Aristotle Capital Management, LLC (Aristotle Capital) and are subject to change without notice. Past performance is not a guarantee or indicator of future results. This material is not financial advice or an offer to buy or sell any product. You should not assume that any of the securities transactions, sectors or holdings discussed in this report were or will be profitable, or that recommendations Aristotle Capital makes in the future will be profitable or equal the performance of the securities listed in this report. The portfolio characteristics shown relate to the Aristotle Global Equity strategy. Not every client’s account will have these characteristics. Aristotle Capital reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. There is no assurance that any securities discussed herein will remain in an account’s portfolio at the time you receive this report or that securities sold have not been repurchased. The securities discussed may not represent an account’s entire portfolio and, in the aggregate, may represent only a small percentage of an account’s portfolio holdings. The performance attribution presented is of a representative account from Aristotle Capital’s Global Equity Composite. The representative account is a discretionary client account which was chosen to most closely reflect the investment style of the strategy. The criteria used for representative account selection is based on the account’s period of time under management and its similarity of holdings in relation to the strategy. Recommendations made in the last 12 months are available upon request.
Returns are presented gross and net of investment advisory fees and include the reinvestment of all income. Gross returns will be reduced by fees and other expenses that may be incurred in the management of the account. For example, a 0.5% annual fee deducted quarterly (0.125%) from an account with a ten-year annualized growth rate of 5.0% will produce a net result of 4.4%. Actual performance results will vary from this example.
The MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 23 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization-weighted index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 27 emerging market country indexes: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates. The MSCI ACWI captures large and mid cap representation across 23 developed markets and 27 emerging markets countries. With approximately 3,000 constituents, the Index covers approximately 85% of the global investable equity opportunity set. The MSCI ACWI Growth Index captures large and mid cap securities exhibiting overall growth style characteristics across 23 developed markets countries and 27 emerging markets countries. The MSCI ACWI Value Index captures large and mid cap securities exhibiting overall value style characteristics across 23 developed markets countries and 27 emerging markets countries. The MSCI Europe Index captures large and mid cap representation across 15 developed markets countries in Europe. With more than 400 constituents, the Index covers approximately 85% of the free float-adjusted market capitalization across the European developed markets equity universe. The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With nearly 300 constituents, the Index covers approximately 85% of the free float-adjusted market capitalization in Japan. The S&P 500® Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices. The NYSE FAANG+ Index is an equal-dollar-weighted index designed to represent a segment of the Information Technology and Consumer Discretionary sectors consisting of highly traded growth stocks of technology and tech-enabled companies, such as Facebook, Apple, Amazon, Netflix and Alphabet’s Google. The Bloomberg Global Aggregate Bond Index is a flagship measure of global investment grade debt from 28 local currency markets. This multi-currency benchmark includes Treasury, government-related, corporate and securitized fixed rate bonds from both developed and emerging markets issuers. The Brent Crude Oil Index is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide. The volatility (beta) of the Composite may be greater or less than the benchmarks. It is not possible to invest directly in these indices.
Aristotle Capital Management, LLC is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Aristotle Capital, including our investment strategies, fees and objectives, can be found in our Form ADV Part 2, which is available upon request. ACM-2110-68