Walter Scott holds firm in the teeth of the Covid storm

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As March’s stock-market slump gave way to a robust second-quarter recovery, Walter Scott’s¹ Long Term Global Equity team held steady with no major changes to its portfolio. The Long Term Global Equity Strategy has come through the crisis in good shape, and the team believes that its long-term focus stands to benefit in the months and years ahead.

In the second quarter of 2020, global equity markets staged a significant recovery from their first-quarter losses. This rebound came despite the ongoing impact of the Covid-19 crisis, as pandemic-containment measures sent the world’s economies reeling. Despite the pervasive economic negatives, investors took heart from the extraordinary monetary and fiscal stimulus measures being deployed by most governments to revive economic growth. An easing of lockdown measures also helped to boost investor sentiment.

The Walter Scott Long Term Global Equity Strategy outperformed its benchmark in the first six months of the year. As a result, the strategy has come through a traumatic period largely unscathed.²

In the second quarter, the Long Term Global Equity team made no major changes to the portfolio, with no new additions or disposals. This reflects the strategy’s ‘buy and hold’ philosophy and the team’s confidence in the portfolio’s current holdings.

For now, Walter Scott believes that the recovery in some areas of the market possibly rests on uncertain foundations. Many valuations now look potentially high relative to companies’ earnings prospects amid the economic havoc wreaked by the virus.

That’s why the team believes that it’s important to be positioned in companies that have both the financial strength and the adaptability to get through such trying times. “The equity environment could be ripe for renewed volatility”, the team says. “While there are efforts to get back to normality, we will have to wait and see as to what the ‘new norm’ will be for many countries.

What matters most, according to the team, is not the short-term ups and downs that companies experience in times of crisis, but how adaptable and resilient they will prove in the long term. A good example in the portfolio is Inditex, the global fashion retailer that owns the Zara chain. These are certainly tough times for bricks-and-mortar retailing but Inditex is using the difficult environment for physical retail to strengthen its business for the long term. To ensure it is well placed in an ‘omnichannel’ world, the company is weeding out its weaker stores – and by changing the balance between physical stores and online sales, it should achieve higher returns on capital, the team believes.

In the first quarter, Inditex saw a 50% year-on-year rise in its digital sales. And in contrast to many of its peers, the company has navigated the crisis well so far, honouring its supply contracts and keeping inventory under control. Indeed, its recent results showed that inventories had actually fallen 10% on the previous year at a time of very weak sales. Now that lockdowns are coming to an end, Inditex’s trading has been improving, and the majority of its stores are now open. So, while Inditex’s shares were weak in the second quarter, the Walter Scott team are confident that this resilience will be recognised by the market in time.

Cognizant Technology offers another example of how the Long Term Global Equity team looks through trying times to focus on long-term fundamentals. The company is a leading provider of information technology, consulting and business process services. Its management has had a lot to contend with recently. In April, it was subject to a cyber-attack, which encrypted and disabled some of its internal systems. This incident has now been contained, although there will be an impact on the company’s second-quarter revenues and margins. To compound matters, Cognizant has reported that revenues slowed somewhat in March as a consequence of the Covid-19 outbreak, reflecting the short-term disruption in service provision linked to rapid shifts to working from home.

But there’s a silver lining from the pandemic too. Cognizant’s management is confident that the coronavirus crisis will accelerate client demand for assistance with core modernisation (the process of updating IT applications and infrastructure), data modernisation, cloud adoption and other transitions to digital. The Covid-19 pandemic and the cyber-attack represent near-term hurdles, but they haven’t dampened the long-term trends from which the company is benefiting. Indeed, in the first quarter, the company had its highest level of bookings since 2017. So, despite the short-term disruption, the Long Term Global Equity team is increasingly confident about the company’s long-term prospects.

Ultimately, the team believes that the prevailing environment in the coming months and years will play to its stock-picking strengths. “Crises are an education,” they say. “They force economies, markets and companies to adjust. The shifting macroeconomic sands brought about by the current one emphasise our need as investors to focus on financially strong and innovative companies that can take advantage of long-term growth trends as well as weather the near-term challenges ahead.

Source: Lipper IM as at 30.06.2020. The representative portfolio adheres to the same investment approach as Walter Scott’s Long-Term Global Equity strategy. Performance calculated as total return, income reinvested, net of annual charges (including AMC of 0.75%), in GBP.

The impact of an initial charge (currently not applied) can be material on the performance of your investment. Further information is available on request.

¹Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

²Source: LIPPER as at 30 June 2020. Fund performance is calculated as Total Return,including ongoing charge, but excluding initial charge, net of performance fees (where applicable), income reinvested gross of tax, expressed in share class currency. The impact of the initial charge which may be up to 5% can be material on the performance of your investment.

Past performance is not a guide to future performance.

The value of investments can fall. Investors may not get back the amount invested.

Strategy risks

Objective/Performance Risk: There is no guarantee that the strategy will achieve its objectives. – Currency Risk: This strategy invests in international markets which means it is exposed to changes in currency rates which could affect the value of the strategy. – Geographic Concentration Risk: Where the strategy invests significantly in a single market, this may have a material impact on the value of the strategy. – Derivatives Risk: Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives,the strategy can lose significantly more than the amount it has invested in derivatives. – Emerging Markets Risk: Emerging Markets have additional risks due to less-developed market practices. – Counterparty Risk: The insolvency of any institutions providing services such as custody of assets or acting as a counterparty to derivatives or other contractual arrangements, may expose the strategy to financial loss. A complete description of risk factors is set out in the Prospectus in the section entitled “Risk Factors”.


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