An update from the managers of the St.James’s Place Global and Global Managed funds

Dan O'Keefe of Artisan Partners , managers of the St.James’s Place Global and Global Managed funds updates us on the positioning of his fund and outlook. March 2020

Artisan Partners

• In my nearly 30-year investing career, I have been through a number of stock market routs.

This one ranks up there as one of the worst, if not for its depth (which remains as yet

undetermined), then certainly for its intensity. The market has sold off more quickly than ever

in history and I have never seen more days of double-digit or nearly double-digit declines in

such a short period of time. This makes sense as it’s probably the fastest drop-off in

economic activity that we have ever seen—one day everyone’s at work and the next day

everyone’s at home and all the restaurants are closed. The panic and fear are extreme with

emotion filling the void where information and analysis normally exist. Yet in every instance of

my career, periods of fear and panic have presented incredible bargains; I believe that this

one is no different. I have learned that when it feels really bad, it’s usually the best time to

allocate capital. It is painful and ugly right now, but our goal is to buy the long-term survivors

and compounders to position the portfolio for strong multi-year gains later.

• We must behave based on data, fact and information instead of emotion, which is not always

easy to do. We do not know when the COVID-19 pandemic will end and what the ultimate

economic damage will be, but we do have some insight. China was the first to suffer a

widespread outbreak. Its economy ground to a virtual standstill but is now starting to recover.

Our conversations with executives who manage businesses in China tell us that activity there

is bouncing back. We expect that the US and Europe—both currently at the front end of an

outbreak—will follow a similar, though not identical, pattern. We are in regular conversation

with doctors at hospitals in the US to follow the infection and death trends here at home.

Governments in the US and across Europe are in the process of launching unprecedented

monetary and fiscal stimulus to blunt the impact and hasten a rebound. The economy will

likely worsen and then it will recover. But we don’t know the details.

• It is this very uncertainty that is causing investors in many cases to price businesses as if

there will be no return to normal economic conditions. One must remember, the value of a

business is the present value of ALL future cashflows, not just those over the next few

months. It’s a simple analytical point, but a foundational one. We are being disciplined and

doing what we always do: focusing on understanding our businesses, examining balance

sheets and buying good businesses at what we believe to be cheap prices. We have been

relentlessly gathering information and reading earnings reports of as many companies as we

can to learn what other executives are seeing. We are also stress testing our basic

assumptions to understand a business’s ability to make it through this crisis (balance sheet

strength) and what the earnings power will be coming out on the other side (business quality).

In many cases, we are finding significant dislocations between price and value. We are not

saying today is the bottom—it can always get worse and price can always dislocate further

from value—but that doesn’t mean there isn’t already a large gap between price and value

today.

• We are excited about the current upside to fair value in the portfolio, which we estimate at

80% is the widest it has been since the financial crisis and among the widest I have ever seen

in my career. Cash is at the lowest level since inception at under 2%. We are finally seeing

value emerge in abundance in areas other than financials and 90% of our buying activity

reflects that. We have added new names to the portfolio and aggressively added to existing

names like Oracle, Cognizant, Dentsply Sirona, Booking, Google, Facebook, Heidelberg

Cement and BNYM where discounts have widened substantially. The price adjusted quality of

the portfolio is the highest it has been in many years. Companies with net cash on the

balance sheet comprise roughly half the portfolio, including Samsung, Facebook, Cognizant,

Google, Telefonica Brasil, Booking, Richemont, Expedia, Baidu, and Tesco. All the banks we

own are very well-capitalized with strong liquidity and funding structures, yet some are now

trading at levels not seen since the financial crisis, when investors thought they were going

under. In our view, that is not the case today.

• I have personally increased my investment in the US mutual funds we manage alongside

shareholders.

This material is not a recommendation, or intended to be relied upon as a forecast. The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.