A rewarding quarter

After a torrid end to 2018, global equities recovered strongly in the first quarter. Despite continued macroeconomic and political uncertainty, developed and emerging markets both delivered solid returns, buoyed by a slowing of interest rate rises in the US where an easing of trade tensions and an end to the longest shutdown in government history also helped to ease investors’ nerves.

Against a backdrop of steadily declining volatility, SKAGEN also experienced a good start to 2019 with strong fund performance – more on that shortly – and a productive quarter of client activity. As always, we kicked off the year with our whistle-stop New Year Conference tour where we met over 1,000 people across three cities and enjoyed a number of thought-provoking presentations and discussions.

Our optimism for the year ahead was borne out as most major international stock markets started the year strongly, particularly those which underperformed in 2018. China delivered the best quarterly returns, boosted by government stimulus and improving US trade prospects, economic data and stock market liquidity. The opportunities for stock-pickers in China was the theme of my own presentation at the New Year conference and these tailwinds should continue to be supportive for Chinese companies and their shareholders.

Positive Returns

I am pleased to report that our six equity funds had a strong first quarter with all delivering positive absolute returns, most in double-digits, and half outperforming their respective benchmarks. SKAGEN Insight led the way in terms of both absolute and relative performance after a difficult 2018 for both the fund and the activists it shadows. Reassuringly, Insight’s performance recovery has been driven by solid company results across the portfolio. The fund still has much further to go and we remain excited about its potential, particularly as activists continue to drive positive corporate change around the world.

Strong company results also boosted our listed real estate fund SKAGEN m2, which ended the first quarter reaching an all-time high NAV and receiving the Lipper award for best real estate fund in the global equity category over three years. SKAGEN Focus also had a notable start to the year, delivering its best ever quarterly returns; the high conviction fund remains focused on exciting small and mid-cap companies, which make up around 60% of the portfolio.

Among our larger equity funds, SKAGEN Kon-Tiki delivered the best absolute and relative return despite emerging markets slightly lagging more developed ones over the period. Since the fund’s change of lead managers last year, the team has focused on strengthening idea generation and it is gratifying that two recent portfolio additions, Ping An and Wuliangye Yibin, contributed its best returns. SKAGEN Global performed solidly and had a busy period of portfolio activity as six companies left the fund, mainly on the back of strong performance, and were replaced by four new US holdings with attractive upside potential. Finally, SKAGEN Vekst also delivered decent absolute returns, boosted by strong performance in particular from its energy and commodity holdings.

Hunt for value

The quarter ended with several members of the investment team visiting  Japan, which was useful to gain a better understanding of our existing holdings based there and potential new opportunities (three Japanese companies have entered our portfolios in 2019). The bar is high for new holdings to join our funds but Japan offers some attractive possibilities, particularly for those with a thirst for value and a contrarian mind-set like SKAGEN. The country feels like it is undergoing exciting change on a number of fronts, but particularly in terms of corporate culture and governance; you can read more of my reflections here.

As we enter the second quarter, significant opportunities remain across all of SKAGEN’s funds. Company earnings have generally been solid and the outlook for most remains positive, despite the overhang of slowing economic data and continued political and monetary uncertainty. With developed (14.7x) and emerging (12.5x) markets both trading broadly in-line with their 10-year averages on a trailing P/E basis, valuations do not look over-stretched, particularly in our funds where the weighted average upside remains highly attractive.