August was a volatile month across most asset classes characterized by negative sentiment surrounding trade and a global growth slowdown. Further, the specter of recession in Europe, more Brexit shenanigans and a global manufacturing recession all fueled concerns and raised recession probabilities.
The VIX Index began the month at 16.12 and finished 17% higher at 18.98 with an intra-month high of 24.59. President Trump kicked things off early in the month, venting his frustration with lack of progress in bi-lateral talks by announcing additional tariffs on Chinese goods. China quickly retaliated directly with tariffs of its own and indirectly by letting the Yuan weaken considerably for several days, eventually breaking the 7 Yuan to 1 USD barrier. This sparked concern of currencies being used as the next battlefield in the trade war and sent gold and, initially bitcoin, soaring further. Gold, as represented by the GLD, was already up 9.8% YTD and added another 7.9% in August.
As further economic data lent credence to the slowdown theme and comments around trade turned nasty, bond markets rallied driving yields lower and inverting the yield curve across multiple maturities. During the month we witnessed over $17 trillion of bonds worldwide with negative yields, new all-time lows in yield for the 30-year Treasury of 1.94% and yields lower across the yield curve by 24 to 57 bps except for the shortest maturities (less than 1 year).
All of this warranted a pullback in equity markets worldwide. Interestingly, even though few of these concerns mentioned above were resolved, equity markets recovered substantially by month end all but ignoring issues that seemed intractable only a few weeks earlier. The S&P 500 Index was down over -4.0% earlier in the month but recovered to finish down -1.6% for the month, still retaining impressive gains of 18.3% for the year. Global markets did not fare any better – the MSCI EAFE Index (-2.6%), the MSCI ACWI ex-US (-3.1%) and MSCI Emerging Markets (-4.9%) were all down significantly and continue to trail most US indexes. From a style perspective, Growth (represented by the Russell 1000 Growth Index) continued its recent dominance over Value (represented by the Russell 1000 Value Index) by over 3.5% (-0.77% vs. -2.94%). YTD Growth has bested Value by almost 10%. Finally, with assumed slower global growth, commodities (aside from precious metals) were hit hard with oil and copper leading the decline, down -2.5% and -4.2%, respectively.
Despite the challenging macro-environment, the Validus Global Growth Composite outperformed the MSCI ACWI during the month and continues to substantially outperform YTD. Investors may recall that we took some gains in May and July significantly increasing our cash position.
Portfolio Characteristics 8/31/2019
Take-Two Interactive traded up during August following a positive earnings report. The company beat on revenue and earnings, driven by continued demand for their NBA 2K, Grand Theft Auto, and Red Dead Redemption II titles. Crown Castle International also delivered a positive earnings reporting an increase in leasing activity for its towers as cellular service providers begin to add capacity for their transition to 5G networks. Home Depot continued to perform well despite a mixed earnings report, missing on revenues but beating on earnings. Further, the company lowered its sales growth forecast while maintaining its earnings targets, partially driven by lower input costs such as lumber affecting margins. Costco also continued to outperform as one of a small group of retailers that have consistently delivered strong sales comps. Further, Costco launched its first store in China store to much fanfare and success as shoppers swarmed the store — this was seen as a positive indicating substantial pent-up demand. Boeing recovered during the month on speculation that the 737 Max could be approved for flight in the 4th quarter of the year.
On the negative side, CyberArk fell during the month along with other high growth tech companies despite reporting earnings that beat analysts’ estimates for revenue and earnings and raising its full year revenue guidance as it transitions towards a zero-trust architecture. Palo Alto Networks Inc. was lower in reaction to the resignation of the company’s Chief Marketing Officer. Quanta Services declined after missing analyst estimates for revenue and earnings in their earnings report and announcing that they were evaluating strategic options for their Latin American business after taking a charge on a project in Peru. Tencent fell in knee-jerk fashion as trade tensions between the U.S. and China escalated. Yet, the company’s customers are largely domestic, and the company saw revenue growth across all segments. Importantly, the company was able to release more video games titles as it enhanced its monitoring system for youth gamers. Morgan Stanley declined following the Federal Reserve Board’s decision to cut the Fed Funds rate. Validus exited the position during the month as drivers for financial services now were perceived to face a headwind from a low and possibly further declining interest rate environment.
Material presented herein is for informational purposes only and should not be considered a recommendation to buy or sell any specific security or employ any investment strategy. You should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from Validus Growth Investors, LLC or any other investment professional
Different types of investments and/or investment strategies involve varying levels of risk, including loss of principal, and there can be no assurance that any specific investment or investment strategy will be suitable or profitable for a client’s or prospective client’s portfolio.
Portfolio composition is subject to change and may not represent current or future composition. Holdings do not represent all of the securities purchased, sold or recommended for advisory clients.
MSCI ACWI: The MSCI ACWI Index, a benchmark for the Validus Classic Global Growth strategy, is a free float‐adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes.
MSCI ACWI ex USA: The MSCI ACWI ex USA Index capture large and mid-cap representation across 22 of 23 developed markets (DM) countries (excluding the US) and 26 Emerging Markets (EM) countries. With 2,205 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.
MSCI EAFE: The MSCI EAFE Index is designed to represent the performance of large and mid0cap securities across 21 developed markets in Europe, Australasia and the Far East, excluding the U.S. and Canada. As of December 2018, it had more than 900 constituents and covered approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets: The MSCI Emerging Markets Index is designed to represent the performance of large and mid-cap securities in 26 Emerging Markets. As of December 2018, it had more than 1100 constituents and covered approximately 85% of the free float-adjusted market capitalization in each country.
Russell 1000 Growth: The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. The Index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics. The Russell 1000 Growth Index is an unmanaged index and has no management fees, no transaction costs, and no withholding taxes.
Russell 1000 Value: The Russell 1000 Value Index measures the performance of large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower expected growth values. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.
S&P 500: The S&P 500 Index is a gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
The historical performance results of the comparative index do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. Historical index performance results may be provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual client or prospective client in determining whether a specific portfolio meets, or continues to meet, his/her investment objective(s). It should not be assumed that account holdings will correspond directly to any comparative indexes.
Validus Global Growth Composite includes all actual, fee-paying discretionary taxable and tax-exempt portfolios that invest in the Validus Classic Global Growth strategy. The strategy seeks growth and capital appreciation by investing in 35 global equities with compelling growth stories and convincing positive buying behaviors while implementing stock-specific risk management tools. The benchmark for the Validus Classic Global Composite is the MSCI All Country World Index Net USD (ACWI). The composite was created on August 17, 2017 and the inception date is September 1, 2013. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI consists of 45 country indices comprising 24 developed and 21 emerging market country indices. In presentations shown prior to 10/31/2018, the composite was compared against the MSCI ACWI GR USD Index. The benchmark was changed to more accurately reflect the strategy of the composite. The minimum account size for this composite is $50,000.00. The list of firm composite descriptions is available upon request.
Annual Composite Performance Net is calculated net of transaction and management fee expenses. Performance is total return, meaning dividends, interest, and other earnings have been reinvested. Performance is calculated in US dollars. Composite dispersion represents the asset-weighted dispersion of portfolio returns. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.
Validus Investment Advisors is a registered investment advisor. Validus Investment Advisors (Validus), as the firm, is a separate part of Lucia Capital Group, and functions as a mid-sized advisory firm. Validus primarily manages a number of separately managed accounts (SMAs) across strategies ranging from US-specific strategies to international-only strategies.
Validus offers separate account investment management services to institutional clients, including public and private pension plans, endowments and foundations, and high net worth individuals. Validus also provides its model portfolio strategies, in a sub-advisor capacity to certain investment advisory programs, including Unified Managed Account (UMA) and wrap fee programs.
Validus Growth Investors (“VALIDUS”) claims compliance with the Global Investment Performance Standards (GIPS®) and has prepared and presented this report in compliance with the GIPS standards. Policies for valuing portfolios, calculating performance, and preparing compliant presentations are available upon request. VALIDUS has been independently verified for the periods 09/01/2013 – 12/31/2017. The verification report(s) is/are available upon request.