Hello and welcome to the Q2 update for Vanguard's active multi-asset range, the SustainableLife Fund range.
The range itself continues to deliver consistent, great performance, which each of the three funds now sitting firmly in their top IA quartile for performance against their peers.
My name is Perry Marsden.
Delighted to be joined by Madison McCall.
Madi, let's get straight to it.
Could you maybe talk us through Q2?
What are the main drivers of market performance? What are we seeing?
Absolutely, Perry.
So looking and thinking about this quarter, global stocks finished the quarter positively over the period.
But we did see global bonds down over that same period.
If we think about what's transpiring within the equity world, we can see that the US and emerging market were top performing regions.
Within fixed income, it was European investment grade and US treasuries that really led the way.
Thinking through the macro drivers over that period, centre stage continued to be inflation and interest rate expectations.
And then diving into the equity market specifically, we saw equities start the quarter down in April, but they rallied back in May and June, finishing strongly.
This was really led by that enthusiasm in artificial intelligence that we've touched on before.
It actually drove many equity indices to record highs over the period.
Within fixed income, thinking what transpired there, we saw modest gains in the bond market in both May and June and some central bank cutting action, of course, that we saw in the Central, European Central Bank and the Bank of Canada, important drivers in the fixed income market over that period.
If we think through kind of beyond these macro themes and what's driving performance at a sector level, a couple of themes I would note.
Firstly, technology.
We've discussed this, Andy and I have discussed this for the last several quarters, and we see technology continuing to lead in both developed markets and emerging markets over the period.
This is really led by names that you'll know like NVIDIA and TSMC.
If we think about some other sectors that did well, utilities is an interesting one that comes to mind.
Utilities was the second best performing sector in developed markets.
It was the third best performing sector in emerging markets.
This is really less to do with a rotation back into defensive sectors, it's more to do with utilities as a sector being a potential beneficiary of that artificial intelligence movement and enthusiasm and all the energy and electricity it takes for that to transpire.
Maybe flipping to the laggard side, what we see transpiring there.
This is really a continuation of the first quarter.
So in Q1 we talked about the real estate sector.
This sector continues to be down really driven on tight supply in that market and also those persistent interest rates staying high in a lot of developed markets.
And then lastly, I'd call out materials.
This sector also down over the second quarter.
Materials is a sector that we see tends to do, tends to be affected by what we see happening in the economy.
So when there's fears of recession or uncertainty, materials we tend to see show up in a negative way in that sector.
Thanks, Madi.
I think it's interesting what you say there about utilities.
It’s definitely something we've heard Nataliya mention through sort of Q1 this year about who's going to implement that technology, so really leading on from that. Exactly. Yeah.
Big themes the PMs are definitely watching out for.
If we move maybe to the fund now.
Any changes at a team level?
So no team changes to note.
I think just as a reminder, this fund is managed by Wellington.
We have Nataliya Kofman on the equity side, and we have Loren Moran on the fixed income side.
Within equities, Nataliya is really looking for resilient franchises with sustainable dividends that she can pick up at an attractive valuation due to some type of near-term uncertainty in the market that she can see.
Loren, on the fixed income side, she's focused on that income component.
She's looking for liquidity and really to be that really great ballast to the equity sleeve of the portfolio.
Of course, she's also looking for security selection as well within that fixed income sleeve.
If you're looking kind of across this fund range, just another reminder, there's three funds within this range to meet the differing risk preferences of clients.
So this is built the same way that our flagship passive LifeStrategy product is built with these different risk tolerances.
This is a balanced product of course.
So you have your equity component.
You have your fixed income component.
And that those sleeves are identical throughout the range so makes it really easy to understand what's happening across the range just by knowing one equity sleeve and one fixed income sleeve.
Yeah, we know a lot of financial planners that we work with, they like that linear progression throughout that risk range because of the same portfolio in the equity and the fixed income.
So, yes, it's well received, definitely. Exactly.
As an advisor, it's nice to only have one to have to perhaps know and that can service a number of clients.
Yeah, excellent.
If we, if we maybe turn our attention now to specifically the fund performance, what’s worked well throughout the quarter, what not so well?
Yes. So all three funds in the range, they underperformed their benchmark this period.
That is really driven by this narrowness in the US market.
So if we think about the fund construction, the fund is underweight the US market as a whole.
That's really because the portfolio managers have found really exciting long term opportunities that happen to fall outside of the US market.
I think more pointedly, when you think from a name perspective, what that means or what it looks like is there's names like NVIDIA that we've seen a lot about, Meta Amazon.
These names collectively are up over 300% in the last one year and they've done so well they've actually been coined, along with Microsoft, the Fab Four.
So this is kind of a play off of the Magnificent Seven, but I think, put another way, you know, this fund not holding three of the four Fab Four stocks, that's been that significant drag that we've seen in the near term that started to pull some longer term performance down as well.
Now, importantly, I think our portfolio managers, they're staying very long term.
They're very excited about those long term opportunities that they're finding beyond this rally.
And while painful in the near term, they think that creates great opportunity for themselves as long term investors.
Sticking on performance, we have a couple of performance slides that will showcase for anyone following along with our slide deck.
And you'll see here that on the 40-50 and 80-90 fund, these funds have beaten both the benchmark and their peer groups since inception.
When you look at our longer dated 60-70 portfolio, this portfolio, it's drawn down versus the benchmark just in the near term.
But when we look longer term, a three year rolling period, five year rolling period versus the peer group, the IA peer sector, that fund has almost exclusively been in the top quartile as well.
And you know, despite that headwind of, you know, quite low exposure to the Magnificent Seven, as they're calling it, you know, still delivering great results.
And, you know, a lot of financial planners that I've been working with and the team here, the feedback is it's a great diversification away from those names, away from that concentration risk as well.
Exactly. Yeah.
There's a lot of opportunity there if you have that pain tolerance and discipline, which our portfolio managers do.
Excellent.
Maybe slightly at a more granular level, could you run through some names that have, you know, contributed to the performance, that have maybe detracted from the performance? Yes, of course.
So I'll start with the contributor side, and one I would note is TSMC.
So they're a semiconductor manufacturing company.
They reported really strong profits and revenues in the first quarter of this year.
And of course they're also a natural beneficiary of this movement and artificial intelligence, the enthusiasm in the tech sector and AI related semiconductors of course.
Another contributor I would call out is AstraZeneca.
They're a pharmaceutical company also reporting really strong first quarter results.
They also released phase three trial results for a cancer treatment that showed promise when paired with chemotherapy, so positive news out of that company.
On the detractor side, one I would note is Intel.
They're a US based tech company.
Management lowered guidance over the quarter.
This is really due to a weaker sales market.
Last detractor I would note is Diageo.
They're a UK based spirits company.
One of their key competitors actually released results which showcased it that the spirits market as a whole may remain subdued looking forward.
They've also kind of seen some slumping in sales in some key markets, including the Caribbean and Latin America.
Thanks, Madi.
Any changes at a portfolio level?
At the portfolio level, a lot of consistency that you would have seen in past quarters.
Perhaps I'll start on the regional basis.
Really minimal changes here.
The portfolio is maintaining that overweight to the UK.
This is driven by AstraZeneca which we touched on as a contributor.
On the underweight side, it's that US exposure, which we also noted, really large US tech that's driving some of that underweight.
Maybe looking at the tech side again, or sorry, the sector side, a lot kind of change or a lot staying the same here.
The portfolio is overweight the financial side.
They're underweight tech like we spoke of.
That's both on software and hardware.
Really US tech driving that underweight.
On the name standpoint, top ten is going to look very similar to what we've talked about in past quarters.
Just a couple changes to note there.
Accenture, Unilever and Duke., they've re-entered the top ten, looking at the second quarter.
JPM, American Express and Merck, they've fallen out of the top ten this quarter.
Just a couple more things I would note in terms of initiations and trims.
On the initiation front, Wellington initiated a position in Soc Gen, French financial services company.
Wellington thinks there's an attractive combination of low valuation and greater stability of earnings compared to other banks within this company.
They've trimmed a position in Mitsubishi Estate.
This is a Japanese real estate developer.
Wellington really just took some profits on the name.
Thought it was a good opportunity to take that and redeploy elsewhere.
On the fixed income side, the team is overweight utilities and also different parts of the insurance market.
They are neutral USD corporates, but they're underweight USD denominated sovereigns and also emerging markets just due to really tight valuations in that space.
Excellent.
And just to reiterate the philosophy in the fixed income sleeve again it's you know, investment grade isn't it?
It's all high quality and to offset that equity risk.
Yes, it’s high quality, really being that ballast to the equity sleeve, along with that selection but that's a principal kind of component in this balance product.
Excellent.
A lot of looking backwards, maybe looking forwards now.
What's the outlook look like from the fund managers?
Yeah.
So on the equity side, all eyes are on the US election right now and the outcome that will come later this year.
I think the team is very focused on volatility that could transpire as we get closer to that date and what the different regime could look like as that gets closer and that change transpires.
I think the team is also recognising the tough spot that central banks, especially in developed markets, are in trying to balance that dual mandate, really between full employment and also moderating inflation, which still remains pretty sticky in a lot of developed markets.
So watching how that will play out and trying to position the portfolio well for a variety of different outcomes.
Within fixed income, that team remains in a slightly pro cyclical stance.
They also echo the same concerns about geopolitical risk and uncertainty.
That's the principal risk they're looking to monitor.
if we maybe move to the sustainability element, you know, the four pillars of sustainability that we mentioned, where people that we work with, the third one being engagement, which is a very sharp tool in Wellington's toolbox, they believe when, you know, pushing the agenda forward, really turning the dial on sustainability.
How many have they had throughout the quarter with the companies? Yeah.
So Wellington has already had hundreds of engagements over the last two quarters, over 250 in the second quarter alone.
The slide that we’ll showcase here for watchers to look at is really showing 2023 full year engagements.
We can see that's over 1,100 engagements over the course of full year 2023.
As you mentioned, Perry, there's a number of topics being covered throughout those engagements.
A couple of key ones would be supply chain management, climate, resource allocation, these being top themes that the portfolio managers have been engaging on.
A good example, actually, too of a recent engagement that I write a little bit more about in the written commentary is Colgate.
So this is a name Wellington knows really well.
They've engaged with this company for years and have come up with a really strong relationship and almost thought partnership with Colgate.
The last engagement with this holding was in April of this year.
Wellington met not only with the board but also the new lead independent director at Colgate.
And they left that meeting with a couple better insights, including the pace of innovation at Colgate and how they're handling that versus competitors, their focus on reinvestment into the business and what segments that reinvestment really will be focused on, and also the ability of leadership to execute on some of that change as well.
That’s excellent.
And, you know, innovation’s been quite an important aspect of Colgate's progression, hasn't it, where, you know, the first inventor of the technology of recyclable toothpaste tubes is something we like to see.
Yes, exactly.
And and Wellington tries to understand that through their engagement and understand maybe what competitive edge that could give them and the company's development over time as well.
Excellent. Net Zero progress.
So first of those sustainability pillars that we mentioned, just before that, the third one being engagements, the first one Net Zero progress.
What percentage of the portfolio now has an SBTI target set and committed?
Yeah, so starting maybe with the 40-50 portfolio.
This portfolio has about 45% of the portfolio with science based targets set or committed.
When we get to the 60-70 portfolio, that number jumps to 50%.
And by the time you get to the 80-90 portfolio, that goes all the way up to 55% of the portfolio with science based targets set or committed.
Thanks very much, Madi.
I think that's a great time to bring it to a close.
Madi, thank you for your time.
If you have any further questions about anything we've spoken about today or perhaps something that wasn't mentioned, please do contact your Vanguard representative and we'd be happy to help.
Thanks very much.
