September 2020 update

Portfolio commentary

The Fund returned -0.6% in AUD terms for the month, underperforming the benchmark by 1.0%.

The portfolio’s holding in Korea Investment Holdings (+25%) was a key positive contributor, as the IPO of online bank Kakao Bank is expected to proceed, which could see KIH’s 34% stake in the business worth up to half its own market capitalisation. Samsung Electronics rose on the back of a better earnings outlook for its handset division given recent US action banning semiconductor sales to Huawei (and the implications for its handset division). Xinyi Glass (+20%) also performed strongly, driven by rising float glass prices (a key product) in China. Insider buying of this stock also boosted sentiment.

The key detractor over the month was our zero weighting in Alibaba (+6%). As the largest stock in the index, its price moves can have a significant impact on relative performance. It outperformed the market following its Investor Day late in the month.

Wynn Macau (-12.5%) also detracted from performance as concern around the return of gamblers to its casinos weighed on the stock. The relaxing of travel restrictions to Macau has not yet resulted in a meaningful return of visitors. We don’t think demand has been permanently impaired but the recovery is likely to be drawn out.

State Bank of India (-10%) fell over the month, broadly in line with other Indian financials. The Indian economic recovery is ongoing post lockdowns imposed earlier in the year, however the ultimate size of non-performing loans within the banking sector remains a key unknown. SBI remains is a strong position both from a competitive and capital perspective to see through this current period of uncertainty.

Taiwan Semiconductor Manufacturing Company (TSMC) is one of our key portfolio holdings. It is the world’s leading independent semiconductor foundry, manufacturing integrated circuits on behalf of its customers. It maintains a dominant market position and enjoys a clear advantage over its competitors in terms of technology, cost and efficiency. The company continues to benefit from increasing semiconductor content within its traditional realm of communication, computer and consumer electronic devices, as well as new areas such as automobiles and the Internet of Things (IoT). The rise of 5G and high performance computing will act as a tailwind to ongoing growth in these areas in the coming years. Our positive thesis on the stock is predicated on them being able to exploit their competitive advantage associated with their market leading position (both market share and technology) and maintaining their disciplined approach to capital allocation. Combined with attractive valuations (including a net cash balance sheet), we believe it will continue to outperform the market over time.