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FAM Series UCITS ICAV
(an open-ended umbrella type Irish Collective Asset-management Vehicle registered in Ireland with registered number
C176753 established as an umbrella fund with segregated liability between its sub-funds and authorised pursuant to the
European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011
(as amended) and the Central Bank (Supervision and Enforcement) Act 2013 (Section 48(1)) (Undertakings for Collective
Investment in Transferable Securities) Regulations 2015 (as amended))
Annual Report and Audited Financial Statements
For the financial period from 8 March 2018 (date of
incorporation) to 31 December 2018
FAM Series UCITS ICAV
2
Table of contents
Directors and Other Information
3
Investment Manager’s Report 4 - 41
Depositary Report
42
Directors’ Report
43 - 44
Independent Auditor’s Report
45 - 47
Statement of Financial Position
48 - 59
Statement of Comprehensive Income
60 - 65
Statement of Changes in Net Assets Attributable to Holders of Redeemable
Participating Shares
66 - 71
Statement of Cashflows 72 - 77
Notes to the Financial Statements
78 - 249
Schedule of Investments 250 - 571
Portfolio Changes (Unaudited) 572 – 620
Unaudited Section 621
FAM Series UCITS ICAV
3
Directors and Other Information
Registered Office of the ICAV 6th
Floor, South Bank House
Barrow Street
Dublin 4
Ireland
Directors of the ICAV
Jim Firn (British resident)** (appointed on 8 March 2018)
Fabio Melisso (Irish resident)* (appointed on 8 March 2018)
Paolo Maggioni (Irish resident)* (appointed on 31 May 2018)
Manager Fineco Asset Management Designated Activity Company
One Custom House Plaza,
IFSC
Dublin 1
Ireland
Distributor and Promoter FinecoBank S.p.A.
Via Rivoluzione d’Ottobre 16,
Reggio Emilia
Italy
Administrator, Registrar and Transfer Agent BNP Paribas Fund Administration Services (Ireland) Limited
Trinity Point
10-11 Leinster Street South
Dublin 2
Ireland
Depositary BNP Paribas Securities Services, Dublin Branch
Trinity Point
10-11 Leinster Street South
Dublin 2
Ireland
Independent Auditors Deloitte Ireland LLP
Chartered Accountants and Statutory Audit Firm
Deloitte & Touche House
29 Earlsfort Terrace
Dublin 2
Ireland
Legal Advisers in Ireland Mason Hayes & Curran
South Bank House
Barrow Street
Dublin 4
Ireland
Secretary MHC Corporate Services Limited
6th
Floor, South Bank House
Barrow Street
Dublin 4
Ireland
ICAV Number C176753
* Non – executive Director
** Independent non – executive Director
FAM Series UCITS ICAV
4
Investment Manager’s Report
Fidelity Euro Bond FAM Fund (the “Sub-Fund”)
Description
The Sub-Fund aims to achieve a relatively high income with the possibility of capital growth through investing primarily
in Euro-denominated government bonds and investment grade corporate bonds. Returns are predominantly driven by
duration management, yield curve positioning, asset allocation, sector allocation and security selection. With the
corporate bond allocation, emphasis is put on bottom-up issuer selection and ensuring adequate diversity due to the
asymmetric nature of returns. The Sub-Fund may also invest up to 30% in Non-Euro-denominated debt securities. The
Sub-Fund’s comparative market index is the ICE BofAML Euro Large Cap Market Index. Typically the Sub-Fund
targets a gross alpha of around 100 basis points on a rolling three-year basis, and a maximum tracking error relative to
the market index used for comparative purposes of 200bps.
Comment
The Sub-Fund posted positive absolute returns but underperformed the index over the review period. The investor risk
sentiment remained subdued in 2018 following Italy’s budget crisis, Brexit uncertainty and trade tensions between the
US and China. From a sector standpoint, financials were hit the hardest, particularly UK and Italy-based banks.
Consequently, an overweight position in financials was the top detractor from returns, led by Lloyds. Conversely,
positive credit selection within insurance, such as Generali, a large Italian insurer was the top contributor to
performance. During the review period, the Sub-Fund also had exposure to high conviction credits and negative risk
sentiment contributed to its underperformance. On a positive note, short duration position in core European government
bonds added value. Furthermore, lack of exposure to Italian government securities boosted performance, after the
country’s GDP declined for the second consecutive quarter in the fourth quarter of 2018.
FIL Pensions Management
8 March 2019
FAM Series UCITS ICAV
5
Investment Manager’s Report (continued)
Fidelity Euro Short Term Bond FAM Fund (the “Sub-Fund”)
Description
The Sub-Fund invests primarily in a high quality portfolio of Euro-denominated government and investment grade
corporate bonds with duration in the range of 1-3 years and maturity below 5 years. Returns are predominantly driven by
duration management, yield curve positioning, asset allocation, sector allocation and security selection. In the corporate
bond allocation, emphasis is put on bottom-up issuer selection, ensuring adequate diversity due to the asymmetric nature
of returns. The Sub-Fund is flexible to invest up to 30% of the Sub-Fund in stocks outside the benchmark. Proprietary
fundamental research underpins all holdings. In the portfolio construction, the manager aims for a small number of high-
conviction bonds (15-50). The portfolio draws extensively on the bottom-up recommendations of Fidelity’s credit
analysts, supplemented by research and insights from our trading and quantitative research teams who advise on top-
down strategies. Overall, we believe this approach ensures strong risk-adjusted returns.
Comment
The Sub-Fund posted flat returns and underperformed the index over the review period. The investor risk sentiment
remained subdued in 2018 following Italy’s budget crisis, Brexit uncertainty and trade tensions between the US and
China. From a sector standpoint, financials were hit the hardest, particularly UK and Italy-based banks. Consequently,
an overweight position in financials was the top detractor from returns, led by Santander and Lloyds. Conversely,
positive credit selection within insurance, such as Generali, a large Italian insurer was the top contributor to
performance. During the review period, the Sub-Fund also had exposure to high conviction credits and negative risk
sentiment contributed to its underperformance. On a positive note, short duration position in core European government
bonds added value. Furthermore, lack of exposure to Italian government securities boosted performance, after the
country’s GDP declined for the second consecutive quarter in the fourth quarter of 2018.
FIL Pensions Management
8 March 2019
FAM Series UCITS ICAV
6
Investment Manager’s Report (continued)
Fidelity Global Dividend FAM Fund (the “Sub-Fund”)
Description
The Sub-Fund offers a combination of capital growth and an attractive yield of around 25% above the MSCI All
Countries World Index with relative low volatility versus the index and the peer group.
The Sub-Fund’s Investment Manager, Daniel Roberts, uses a bottom-up approach to invest in companies that offer a
healthy yield underpinned by a growing level of income, as well as the potential for capital growth. When considering
potential investment opportunities, he places a large emphasis on the sustainability of the dividend and whether the
current share price provides an adequate margin of safety. Daniel manages risk conservatively, focusing on companies
with predictable, consistent cash flows and simple understandable business models with little or no debt on their balance
sheet. By investing globally, the Sub-Fund is able to invest in the strongest income paying opportunities, irrespective of
where they are located.
Comment
The Sub-Fund outperformed the index during the period. The overweight stance in consumer staples and strong security
selection in the health care sector supported returns. At a stock level, consumer goods major Procter & Gamble was the
leading contributor to performance on account of its robust quarterly earnings, which beat analysts’ expectations. The
company reported its strongest quarterly sales in five years, helped by gains in the beauty and health care segments.
Professional publisher Wolters Kluwer also contributed to performance as it delivered organic growth that was slightly
ahead of market expectations. Roche was another notable contributor after the Swiss pharmaceuticals group was buoyed
by strong results from two drug trials including one that showed potential as a first-line cancer treatment. Elsewhere,
pharmaceuticals company Sanofi reported strong quarterly results, led by robust sales of its speciality care and vaccines
divisions. Conversely, the holding in Italy-based infrastructure operator Atlantia was negatively impacted after the
Genoa bridge collapse. The position was sold as political and litigation uncertainties are a substantial overhang on the
company.
FIL Pensions Management
20 February 2019
FAM Series UCITS ICAV
7
Investment Manager’s Report (continued)
Fidelity World FAM Fund (the “Sub-Fund”)
Description
The Sub-Fund is a diversified, high active money, global equity fund, designed to provide long term capital growth. The
investment manager, Jeremy Podger, uses a valuation-focussed approach to identify companies with potential for
meaningful share price appreciation. This can be because the valuation is too low, or because it fails to recognise the
future growth prospects of the company, or both. The PM invests in three specific types of
opportunities - change, firms that offer the potential for a fundamental shift in value, with catalysts linked to near term
restructuring, merger & acquisition, or spin-off activity; value, companies with the ability to deliver earnings growth in
excess of market expectations, potentially also leading to a re-rating; and franchise, firms with a dominant industry
position, strong growth, cash flow and pricing power. This allows for a stylistic balance that aims to deliver strong
relative returns across varied market environments.
Comment
The Sub-Fund underperformed the index during the period under review. Certain technology and energy stocks detracted
from returns while the defensive utilities and health care names added value. In the information technology (IT) space,
some economically sensitive positions such as the semiconductor equipment producer AMS declined due to worries
about iPhone demand. However, the outlook for the company remains positive on expanding customer base and
expected new contract wins (including VSCEL business with Apple). In energy, Marathon Petroleum and Baker Hughes
declined due to the downtrend in oil prices. However, Marathon Petroleum is expected to benefit from synergies from its
recent merger with Andeavor and a multi-year capital allocation strategy. Baker Hughes’ recent strong contract wins and
a robust share buyback programme support its outlook. On the positive side, US-based utility operator Exelon was the
leading contributor to returns. It continues to execute well and is expected to benefit from carbon subsidies and cost
optimisation. Investors also remained positive about Orsted’s ongoing asset base optimisation. The company is expected
to benefit from a fall in offshore costs and the consequent increase in market size. In health care, pharmaceutical major
Merck & Co is witnessing solid business momentum on the back of a strong competitive position in first-line lung
cancer and a robust pipeline led by its cancer drug Keytruda. Health insurer Cigna also added value. The company is on
course to have a market leading set of medical and pharmacy capabilities after the completion of its merger with Express
Scripts.
FIL Pensions Management
20 February 2019
FAM Series UCITS ICAV
8
Investment Manager’s Report (continued)
JP Morgan US Equity Value FAM Fund
U.S. Equity Market Review
The S&P 500 Index (S&P 500®) ended 2018 down -4.38% after a fourth quarter drawdown which saw a more prolonged
increase in market volatility. The forward P/E for the S&P 500® Index ended the year at 14.4x, falling pointedly below
its 25-year average of 16.1x. Only three of the eleven sectors ended the year in positive territory, namely Health Care,
Utilities, and Consumer Discretionary, which returned 6.47%, 4.11%, and 0.82%, respectively. The weakest performers
were the Energy sector, down -18.10%, and Materials, down -14.70%. Large cap stocks, as represented by the S&P
500®, greatly outperformed small cap stocks, which were down -11.01% as measured by the Russell 2000 Index
®.
Growth also outperformed Value, as the Russell 3000 Growth Index® was down -2.12% compared to the -8.58%
decrease in the Russell 3000 Value Index®.
The year started off with a short-lived uptick in volatility, partially driven by concerns over interest rate movements,
trade policy and the long-term implications of the Tax Cut and Jobs Act. Day-to-day price movements saw a significant
departure from 2017. In the first quarter of 2018, the S&P 500 saw six trading days of +/- 2% moves, compared to 2017
in which there were zero days with that level of price change. The overall economic environment was strong over the
course of the first half. Economic growth remained stable with first quarter real GDP up 2.8% y-o-y. Monthly data on
retail sales, homebuilding, durable goods and other economic indicators all came in at healthy figures. The second half
of the year started off strong as earnings growth was driven by record margins, with 80% of companies exceeding
earnings estimates and 62% beating revenue estimates for Q2. Robust corporate profits partially tempered the effects of
a flattening yield curve and trade uncertainty over the course of the third quarter. The last three months of the year,
however, witnessed a significant drawdown characterized by heightened volatility. However, yet another strong quarter
of earnings growth and still generally positive management commentary should potentially limit equity downside risk.
Economic indicators still continue to reign mainly positive, with the exception of the yield curve. While good signs such
as consumer and small business confidence remaining at high levels, wages rising across income levels, and December
same store retail sales being robust, we remain mindful of the pressure that rising rates, tariffs, and the partial
government shutdown could put on stocks.
Performance
The portfolio posted a negative return and marginally underperformed the benchmark during the fourth quarter.
Stock selection in the financials, communication services and information technology sectors detracted the most from
performance.
In the financials sector, our positions in AIG and Capital One Financial, as well as not owning Berkshire Hathaway
proved lacklustre. AIG had a disappointing quarter due to adverse prior year development and some weakness in life
and retirement and legacy. Given the combination of attractive valuations (at levels not seen since December 2007),
solid earnings growth, and what we view as underappreciated capital return potential, the financials sector represent the
greatest opportunity set in our view.
In the communication services sector, our exposure to Dish Network was the largest detractor, as investors have been
growing tired of waiting for the company to realize the value of their spectrum. Despite investor impatience, our thesis
remains intact, reflecting our confidence in Charlie Ergen’s ability to unlock value for shareholders. As we consider the
rollout of 5G, which requires more spectrum, these assets will be critical to a number of businesses. In our view, Charlie
will either build a network with a partner or sell these assets, which are both attractive options. Dish Network’s valuable
spectrum is not currently being reflected in the valuation.
FAM Series UCITS ICAV
9
Investment Manager’s Report (continued)
JP Morgan US Equity Value FAM Fund (continued)
Performance (continued)
Within the information technology sector, our position in CommScope detracted the most. CommScope sold off on
weak quarterly earnings and a guidance for 2019 which is disappointing. Additionally, the company announced the
acquisition of Arris International plc, a global leader in entertainment and communications solutions, a deal worth USD
7.4 billion in an all-cash transaction. While the deal itself has a lot of strategic merit, the terms of the deal (all-cash
transaction) are not attractive given the consequence on leverage.
On the other hand, stock selection in the energy, industrials and materials sectors added value for the quarter.
Given the decline in oil prices experienced in the fourth quarter, our conservative approach to the energy sector paid off,
as we avoided most of the worst performers in the sector.
In the industrials space, not owning General Electric helped performance as the company continues to work through the
growing pains of its business simplification transition.
In the materials space, Ball was a top performer on the heels of a strong quarterly earnings print, in which the company
reported earnings roughly in-line with the street’s lofty expectations, and beat on revenue. We continue to have a
favourable view of Ball given its scale in the industry, the lower cyclicality of its earnings pattern relative to basic
materials peers, and a disciplined management team.
On an individual stock basis, our position in AutoZone in the consumer discretionary sector was the largest positive
contributor.
Market Outlook (as at 31 January 2019)
We continue to focus on the fundamentals of the economy and of company earnings. Our core analysts’ estimate
currently projects 4% growth for 2019 S&P 500® earnings. While subject to revision, this forecast reflects our
expectations for continued, albeit modest, growth in the underlying economy and includes our best analysis of earnings
expectations during the year. The implications of trade and Fed policy will be integral to investor sentiment and will
likely contribute to volatility. While corporate fundamentals should continue to provide support for the equity
market, we are monitoring potential headwinds for US stocks that could heighten volatility.
J.P. Morgan Investment Management Inc.
26 February 2019
FAM Series UCITS ICAV
10
Investment Manager’s Report (continued)
M&G North American Value FAM Fund (“FAVF” or the “Sub-Fund”)
Review from inception (9 August 2018) to 31 December 2018.
The relatively calm financial markets of 2017 were followed in 2018 by a significant increase in market volatility. After
climbing to record highs in September, stock markets experienced a sharp reversal in the final months of 2018 as
concerns about trade tensions between the US and China, slowing global economic growth and higher US interest rates
sparked investor risk aversion. The market correction erased all the previous gains for the year (in US dollars) and
ensured 2018 was the worst year for US stocks since the financial crisis.
Given the concerns about the economic outlook, cyclical sectors including financials, industrials and material
experienced large declines. Energy stocks were notable laggards as oil prices declined amid worries about rising supplies
and weaker demand. In contrast, defensive areas such as consumer staples and healthcare were resilient with utilities the
only sector to post a positive return over the period.
After underperforming in the earlier part of the year, value as an investment style returned to favour during the review
period and outperformed the broader market.
Against this backdrop, the Sub-Fund generated a negative absolute return of -13.74% and lagged the S&P 500 Index
which declined 11.42% over the period.
Stock selection was the key driver of underperformance, notably in the energy, financial and industrial sectors.
Energy holdings Kosmos Energy, Hess and Rowan Companies detracted from relative performance as they suffered
significantly from the collapse in the oil price during the period.
FedEx was another leading detractor as the global logistics firm was hurt by concerns about a decline in global trade.
In financials, positions in financial services firm Citigroup and asset manager Affiliated Managers were a drag on
performance.
In information technology, IT services and solutions company DXC Technology and data storage firm Western Digital
were also notable detractors. Western Digital’s stock fell amid concerns about weaker prices for memory chips.
On a positive note, the Sub-Fund benefited from successful stock selection in the healthcare sector. As healthcare stocks
outperformed over the quarter, our holdings in Pfizer, Eli Lilly, Merck and Johnson & Johnson were among the largest
contributors.
Utility company Exelon and footwear retailer Foot Locker also added value as their share prices bucked the downward
trend and rose over the quarter.
In addition, not holding any shares in technology company Apple and e-commerce retailer Amazon.com was helpful as
the large index constituents suffered significant falls during the period.
Activity
In the turbulent market environment, we focused on identifying stocks that might have become mispriced. We started
new positions in pharmacy chain Walgreens Boots Alliance, pharmaceutical company Bristol Myers Squibb and oil
services provider Rowans.
In contrast, potato products firm Lamb Weston left the portfolio on valuation grounds after a period of share price gains.
The stakes in glass products manufacturer Corning and IT-related companies Conduent and Perspecta were also sold.
FAM Series UCITS ICAV
11
Investment Manager’s Report (continued)
M&G North American Value FAM Fund (“FAVF” or the “Sub-Fund”) (continued)
Outlook
Despite mounting signs of slowing global economic growth, we remain broadly positive on the outlook for the US
economy. After the steep decline in US stock markets in the final quarter of 2018, we are also optimistic about the
prospects of US stocks. However, we recognise that risks exist as the US economy is arguably closer to the end of the
cycle than the beginning. In terms of the earnings cycle, earnings estimates are starting to decline and there is evidence
that companies are experiencing margin pressure. In our view, this represents a challenge for companies on high
valuations where investors expect them to maintain their high margins. On a risk/reward basis, we believe that cheap
companies with low expectations represent a more appealing prospect.
Given the concerns about elevated valuations, declining earnings estimates and economic growth, we continue to focus
on the financial strength of companies we hold in the portfolio. We believe that with a combination of very cheap
valuations backed by strong balance sheets the Sub-Fund currently offers investors a very attractive opportunity.
M&G Investment Management Limited
21 February 2019
FAM Series UCITS ICAV
12
Investment Manager’s Report (continued)
Amundi Emerging Markets Bond FAM Fund
In 2018 and specifically Q4 Politics were an important decision driver for the portfolio. Brazil and Mexican election led
to the victory of populist leaders. Brazil rallied in Q4 as markets reacted positively to Bolsonaro’s election. In Mexico
we are underweight since we believe that the economic policies are uncertain, and have concerns especially after erratic
anti-business measures by the new President.
Although oil prices turned in the second half of 2018 our exposure to GCC countries bond remains in place. Second
structural tailwind, upcoming benchmark (in 2019) inclusion now provides a strong technical support and keeps us
constructive on the regional credit.
We closed the year with shorter than the benchmark portfolio duration and above benchmark YTM. We obtain this
profile with an average BB- credit rating.
We hold a constructive view on EM going into 2019 with the Fed expected to become less hawkish. While trade war
remains to be a risk, our base case is a relaxation of China-US trade tensions.
Amundi Ireland Limited
13 March 2019
FAM Series UCITS ICAV
13
Investment Manager’s Report (continued)
Amundi Euro Strategic Bond FAM Fund
During the lifetime of the portfolio, since August 2018, focus on the withdrawal of liquidity increased, and US policy
rates increased more than market expectations to start the year. Other central banks lagged the Fed, and market
expectations became more dovish for the ECB in particular as the growth differential between the US and the rest of the
world widened.
In the period signs of slowing growth and inflation coupled with low expectations of rate hikes from the ECB in 2019
resulted in German 10-year yields to fall -23bps. The spread between 10-year German Bunds and 10-year Italian BTPs
was quite volatile over the period due to uncertainty regarding Italy’s budget deficit stance and finished the year at
+250bps.
At the same time The European iTraxx Main credit index widened to 88bps - its widest level since June 2016. Similarly,
the High Yield Crossover Index widened to 356bps, also its widest level since March 2017. The Bloomberg Barclays
Euro Aggregate Corporate index underperformed the U.S. Aggregate Corporate index whilst the Global HY index
fell -4.77%, and the Euro High Yield index fell -3.62% in local currency terms.
Given the amount of negative headlines and challenging backdrop surrounding emerging markets, it is almost surprising
that annual total returns were down only 4.3%, 6.2% and 1.6% in hard currency, local currency and corporate debt,
respectively. The single biggest drags on the JPM EMBI index from country performance came from Argentina on the
hard currency side; and Turkey on the local currency side (JPM GBI-EM).
In currency markets, the US Dollar Index rose a modest +1.1% in Q4, as the US Dollar appreciated against most of the
major global currencies. EM currencies were mixed - overall the JP Morgan emerging markets Currency Index posted a
small gain of +0.08% over the period.
Despite significant market volatility and negative risk sentiment portfolio returns were only marginally down. Negative
contribution to returns came from our return seeking allocation to EM and European High Yield. Also some of FX
strategies; most notably a tactical short dollar potion put; proved unhelpful.
On the positive side, our FX hedges performed well as did our duration management. Over the period we moved from
net short to moderate long on the European side and kept stable long exposure on the US side.
In terms of positioning, our risk budget has oscillated as markets staged a small rally after the summer to lose momentum
afterwards. Given that our portfolio is seeking returns primarily in, today very low yielding, European space during the
market weakness the biggest allocation change was an increase of cash buffer and reduction of higher yielding credit.
Also, mid-November we moved to capital protection mode which saw us further adding hedges.
In terms of overall allocation, the Portfolio continues to hold exposures to credit markets, the majority invested in EM
and Euro HY securities, with a bias towards EM. Within these EM investments, the Portfolio favour Corporates over
Sovereign bonds. We favour EM over Euro HY on relative valuation grounds.
In terms of countries we favour Brazil and Russia. We also hold exposure to Greek Banks and Government Bonds on the
belief that these bonds will benefit on the successful exit from the bailout programme.
We continued to manage our exposure to interest rate sensitivity actively over the period. We ended December with a
close to zero duration exposure and a yield to maturity of c. 5.8%.
Amundi Ireland Limited
14 March 2019
FAM Series UCITS ICAV
14
Investment Manager’s Report (continued)
Amundi European Equity Value FAM Fund
The past six months has been a particularly volatile period for the European equity market in general - especially for the
more cyclical names. The final quarter of last year (October and December especially), saw a strong risk off move as
fears of a global economic recession, a full scale trade war between the US and China, and of course Brexit caused
nervousness amongst investors. However, these fears abated in early 2019 as more positive newsflow surrounding
progress in the trade negotiations with China and a potential delay in Brexit allowed the market to rally quite strongly.
Against this very volatile and challenging market environment which saw quite aggressive rotations, the portfolio
underperformed its benchmark, the MSCI Europe Value index - with most of the underperformance coming during Q4
(specifically during the months of October and December). In the wake of the sharp rotation out of cyclicals and into
defensive areas during this period, the more pro-cyclical bias of the portfolio was a clear headwind. As fundamental
value investors we find it a challenge to invest in very defensive areas of the market. Here, we struggle to find business
models which meet our margin of safety requirements - the key pillars of our investment philosophy. As always, our
focus is on the intrinsic value of businesses, and not simply on price driven valuations. As a result, the portfolio’s
performance is largely independent of the performance of the “Value” benchmark, which has worked against us in recent
weeks. However, in this volatility, we have remained true to our investment process and the pillars which support it.
During these periods of volatility, we anchor on our process and our assessment of intrinsic values. Market moves such
as this one, can see increased margins of safety which we tactically use to rebalance names. Here, we have reinvested
flows into those viable business models which have been caught up in the price weakness, such as BMW, Signify
(formally Philips Lighting), Continental and Randstad.
Turning to the specific performance drivers, our holding of international advertising company WPP detracted following
the release of weaker than forecast quarterly numbers and a resetting of FY guidance expectations. Within Industrials,
with the strong move out of cyclical names, our holdings such as St-Gobain gave back some performance. Turning to the
Energy names, the lower oil prices we experienced was a natural headwind for the energy names across the board. Of our
holdings, oil services company TechnipFMC underperformed after management provided some mixed guidance which
further weighed on sentiment towards the name.
Amundi Ireland Limited
13 March 2019
FAM Series UCITS ICAV
15
Investment Manager’s Report (continued)
Blackrock Emerging Markets Bond Hard Currency FAM Fund (the “Sub-Fund”)
The Sub-Fund delivered positive active return in the first couple of months and negative active return in the final quarter.
Overall, active return was negative over the period.
In the month that the Sub-Fund was incepted, there emerged idiosyncratic sources of volatility in the market, owing to
the sudden depreciation in TRY (prior to inception) and ARS by circa 30%. The Sub-Fund’s overweight exposure to
Argentina through credit and off-benchmark FX detracted from performance. However, these losses were recovered in
September by overweight positions (Venezuela, Ecuador, South Africa) that benefitted from a recovering sovereign
market.
In the fourth quarter, the VIX rose as global equities came under pressure and U.S. government bond yields hit
multi-year highs. The murder of Saudi journalist Jamal Khashoggi at the Saudi consulate in Istanbul on 2 October and a
slump in WTI price by 38% over the quarter also tempered risk.
Underperformance in the fourth quarter mostly arose because of the sharp decrease in oil price, which negatively
impacted many oil-exporting economies within the index and Oman and Venezuelan quasi-sovereign oil company
PDVSA detracted from performance. Also, overweight exposure to Ukraine detracted from performance given
heightened tensions with Russia that led to the introduction of one-month martial law in several regions of Ukraine. The
Sub-Fund’s hedges did offset negative performance in part, as long exposure to US treasuries benefitted from the rally
on duration during December, whilst exposure to Japan was also contributory given the global risk-off environment.
Towards the end of the period, we began to reposition the portfolio ahead 2019, by introducing themes suited for
‘Slowdown’ and ‘Goldilocks’ market regimes. ‘Slowdilocks’ positioned the Sub-Fund for a global risk-off environment;
through long duration and low yielders. We also added to selective overweight exposures in high yielding names such as
Argentina and Ukraine that we viewed to have oversold and could benefit from a further signal of Fed pausing.
BlackRock Investment Management (UK) Limited
8 March 2019
FAM Series UCITS ICAV
16
Investment Manager’s Report (continued)
Blackrock Euro Bond FAM Fund
Spreads widened from August to December, during a risk-off period for markets. Benchmark Financial Corporate
spreads widening from 120bps to 165bps during the 5-month period.
Our positioning in financials contributed 0.4bps to active performance August to December 2018 as gains in September
were offset by losses in October (total portfolio performance for the period was -35.1bps). We were long risk in
financials throughout the period, specifically banking. We had a small overweight to the Insurance sector and a small
underweight to REITs.
Our overweight allocation to senior banks performed well in September, with Spanish and Italian names outperforming.
This trend was reversed in October, with the legal ruling on taxes affecting Spanish banks, and little progress was made
on budget talks between Italy and the European Commission.
A slightly long active position in Insurance added 1bp to alpha over the period. Our overweight to Munich Re performed
well, as the company announced that they were on track to meet profit targets despite losses from extreme weather
events.
BlackRock Investment Management (UK) Limited
8 March 2019
FAM Series UCITS ICAV
17
Investment Manager’s Report (continued)
Blackrock Euro Corporate Bond FAM Fund
Spreads widened from August to December, during a risk-off period for markets. Benchmark Financial Corporate
spreads widening from 125bps to 170bps during the 5-month period.
Our positioning in financials contributed 3.5bps to active performance August to December 2018 (total portfolio
performance -18.5bps). We were slightly long risk in financials throughout the period, specifically in Insurance and
Banking. We held our main underweight position in the sector in REITs.
Our overweight allocation to Banking detracted from performance over the period, with Spanish banks performing
particularly poorly. Volatility from Spanish banks was driven by the ruling, which has since been reversed, that Spanish
lenders would be on the hook for certain mortgage stamp taxes. An overweight to Goldman Sachs also detracted from
performance as the 1MDB scandal hit the headlines.
We held a small overweight to Insurance. Positive performance from this sector was driven by our bias towards
higher-quality bonds. Tier 1 insurance performed poorly, and higher-quality sub-sectors outperformed in the risk off
environment.
An underweight to the REIT sector contributed positively to alpha, as the sector as a whole underperformed the broader
Financials sector. Looking at individual names, an underweight to Unibail-Rodamco performed well as their plans to buy
Westfield surfaced in December.
BlackRock Investment Management (UK) Limited
8 March 2019
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Blackrock Euro Short Duration Bond FAM Fund
Spreads widened from August to December, during a risk-off period for markets. Benchmark Financial Corporate
spreads widening from 80bps to 110bps during the 5-month period.
Our positioning in financials detracted 9.6bps from alpha between August and December 2018 (total portfolio
performance -60.1bps). We were long risk in financials throughout the period, mostly within the banking sector.
Our main active position within Financials in the Sub-Fund was in Banking. Long active positions in both Danske Bank
and Goldman Sachs hurt performance as both companies made headline news on fraudulent activity. Italian banks were
the best performers within the sector, as Rome reached an agreement on the budget with the European Commission,
avoiding sanctions. Our small overweight position here contributed positively to alpha.
BlackRock Investment Management (UK) Limited
8 March 2019
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Investment Manager’s Report (continued)
M&G European Corporate Bond FAM Fund (the “Sub-Fund”)
Review from inception (28 August 2018) to 31 December 2018.
Performance commentary
Volatility returned to financial markets in 2018, as a result of a range of factors that included higher interest rates and
inflation, political uncertainty and global trade tensions.
The US Federal Reserve raised interest rates in September and December, making it a total of nine times US rates have
risen since the great financial crisis about a decade ago. In the UK, much uncertainty remained about the eventual terms
of the country’s Brexit deal with the European Union (EU). This contributed to times of adverse sentiment towards UK
bonds. Elsewhere, investors in Europe became concerned towards the end of the period about Italian proposals to
increase the country’s budget deficit. The plans, which met with opposition from the EU, were drafted after an anti-
establishment party gained a strong presence in Italy’s new coalition government. Also, the European Central Bank
ended its monthly bond buying programme at the end of the year.
Meanwhile, sentiment towards corporate bonds and international stock markets became increasingly affected by
concerns of a trade war developing between the US and China. In addition, during the latter months of the year, global
economic growth forecasts began to moderate, which contributed to some weaker confidence in the outlook for
corporate bonds and emerging markets.
These more challenging conditions led to losses across many parts of the bond market over the period. Sterling and
Euro-denominated investment grade corporate bonds generally suffered more than US dollar-denominated corporate
bonds, while high yield corporate bonds declined more notably.
The Sub-Fund’s performance was driven by its sizeable exposure to investment grade corporate bonds. However, the
Sub-Fund’s relative lack of sensitivity to changes in interest rates (known as ‘duration’) constrained performance.
Activity
During the course of the reporting period, we slightly adjusted the Sub-Fund’s duration, while keeping it short overall. It
ended the reporting period at around 0.8 years short.
We like financials and retained a significant exposure to this sector throughout the review period. We bought selected
short-dated bank bonds from lower down the capital structure which we believe provide a good trade-off in terms of the
potential risk and reward offered from names that we like, including Spain’s Santander.
We remain cautious about prospects for the UK economy and the impact of Brexit uncertainty and did not add
substantively to our UK holdings over the period.
We added some French government bonds in August, as we partially de-risked the portfolio. We will look for
opportunities to add some credit risk back as markets stabilise.
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Investment Manager’s Report (continued)
M&G European Corporate Bond FAM Fund (the “Sub-Fund”) (continued)
Outlook
In our view, global economic growth is likely to hold up in 2019, at least at a sufficient pace to be supportive of
corporate bond markets. Monetary policy works with a lag. We can see this in the labour market, where wages were
high in 2007-08 off the back of a strong global economy in 2005-06. There are clear signs that the US labour market is
now overheating, which will drive pay higher.
Recent European data have been disappointing, although economic growth is still expected at 1.6% this year and 1.5%
in 2020 (down from 1.9% in 2018). A lower oil price should benefit Eurozone consumers. However, European politics
remain challenging, despite Italy’s populist government heading off its latest challenge in December by agreeing to
drop its deficit target. After a difficult year for European corporate bond markets, prices look increasingly attractive.
Regardless of how these situations develop, what we do as Investment Managers does not change. We look at where we
are in the interest rate cycle and the economic cycle, and we look at where we can find the most attractive opportunities
for the Sub-Fund from different sectors and individual issuers at any given stage.
M&G Investment Management Limited
22 February 2019
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Investment Manager’s Report (continued)
M&G Optimal Income FAM Fund (“FOPTI” or the “Sub-Fund”)
Review from inception (30 August 2018) to 31 December 2018.
Performance commentary
The latter stages of 2018 proved challenging for markets. In a tumultuous month for risk assets, US 30-year Treasuries
breached 3.25% in early October. Fears of higher rates and the effect of trade wars on economies and corporate profits
sent both stocks and bond prices lower. October brought evidence of a slowdown, particularly in Europe and Asia:
third-quarter GDP growth in the Eurozone came in below expectations, dragged down by Italy, while industrial output
in Japan dropped by 1.1% in September. Equity indices fell.
A 16% fall in the price of oil drove markets in November, hitting traditional risk assets as well as the currencies of
oil-exporting nations. The collapse in the oil price was triggered by a softening of US sanctions on Iran and forecasts of
weak demand. Credit markets were also negatively impacted by issuer-specific reasons. The IMF issued a new warning
of gloomy clouds ahead, just one month after cutting its global growth forecast. The economies of Japan, Germany,
Italy and Sweden all shrank in the third quarter of 2018.
The year ended with a cloudy global growth picture, plunging oil prices, a US rate hike and ongoing Brexit fears
combined to spook equity markets in December, sinking the S&P 500 Index by some 9%. The Federal Reserve (Fed)
cut its interest rate hike forecasts for 2019 from three to two. Meanwhile in the UK, attention was focused on the latest
developments in the Brexit saga - notably, the delay to the crucial parliamentary vote and Tory leadership challenge.
In these circumstances the Sub-Fund declined. Performance was mainly driven by its overweight spread duration, short
interest rate duration positioning in an environment of widening credit spreads. Our exposure to subordinated financials
and equities also detracted. However, our preference for US telecoms credits was beneficial (our exposure in this sector
is predominantly long-dated), as was our exposure to peripheral Eurozone debt (especially Italy), which we added in the
latter stages of the year.
Activity
During the latter months of 2018, we took Euro duration further into negative territory, ending the year at around
-1.0 years, while continuing to prefer deriving duration from US dollar, and to a lesser extent, sterling assets. We
preferred to derive duration from assets approaching the end of a bear market, than those yet to enter one. By the end of
2018, duration was derived: USD 2.3 years, GBP around 0.6 years and EUR -1.1 years, a total of almost 1.8 years.
There were no significant changes to our government bond exposure. We added some Italian BTPs in October after
valuations started to look attractive, particularly at the short end of the curve. In December, we slightly reduced
exposure to peripheral Eurozone government issuers, mainly by selling these Italian bonds after they performed very
strongly.
Within credit, we maintain our preference for investment grade credit over high yield and took advantage of dislocations
created by credit market weakness to increase credit risk in the Sub-Fund, focused around the longer-dated BBB area of
the market.
We bought some deeply discounted new issues in late 2018 and cut some positions in short-dated and higher-rated
securities (e.g.: asset-backed securities) that had done well in recent months.
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Investment Manager’s Report (continued)
M&G Optimal Income FAM Fund (“FOPTI” or the “Sub-Fund”) (continued)
Activity (continued)
We were active in relative value trades, swapping out of US dollar-denominated credit, which had outperformed, into
Sterling and Euro issues.
Our equity exposure stands at around 4.0%, with no changes of note made in recent months. We took the opportunity to
reduce positions in certain names that had done well in recent months, despite the equity market sell-off.
Outlook
In our view, monetary policy pursued by the core central banks over the past decade has worked and the world has
normalised. Unemployment levels in many developed economies have fallen significantly and inflation stands above
2%. The only piece of the jigsaw not to have yet returned to ‘normal’ are interest rates, although rates in the US are not
too far off.
It is well known that monetary policy works with a lag. We can see this in the labour market, where for example, wages
were high in 2007-08 off the back of a strong global economy in 2005-06. In the same way, despite sustained economic
improvement in recent years, it has taken time for wages to rise. However, there are clear signs that the US labour
market is now overheating, which will drive pay higher. Both the US and UK are services-dominated economies and as
a result, when wages rise, so does inflation.
While the UK is at a different stage in the cycle to the US from a monetary policy perspective due to Brexit, the two are
in a similar place from an economic standpoint.
While markets have been focused in recent months on the risk of recession, the reality coming from Main Street is that
there is no imminent sign of recession, and data releases continue to look relatively strong. In our view, Main Street is
right and Wall Street has been wrong. We believe that interest rates will still need to go higher, and this is reflected in
our positioning: we like taking credit risk (and so we are overweight credit spread duration), while we don’t like taking
interest rate risk (so we are short duration).
Regardless of how these situations develop, what we do as Fund managers does not change. We look at where we are in
the interest rate cycle and the economic cycle, and we look at where we can find the most attractive opportunities for the
Sub-Fund from different sectors and individual issuers at any given stage.
M&G Investment Management Limited
22 February 2019
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Investment Manager’s Report (continued)
Schroder Euro Bond FAM Fund (the “Sub-Fund”)
Performance
The portfolio posted negative total return and underperformed the benchmark during the fourth quarter of 2018. The
allocation to credit was the main cause of disappointing performance in Q4, as credit spreads widened substantially.
While we held an underweight position in European high yield, and initially in US high yield, this was insufficient to
offset the losses made through our exposure to investment grade credit. Meanwhile, the portfolio’s underweight duration
stance (duration is a measure of sensitivity to interest rates) detracted. This was most notable in the US, as yields fell.
Inflation strategies also detracted, due to our US exposure, given the significant fall in inflation expectations on the back
of falling oil prices towards the end of the period.
Strategy
Given the significant deterioration in market sentiment, we decided to reduce the Sub-Fund’s overall underweight
duration stance. We achieved this primarily by reducing overweight European duration and reducing underweight US
duration. However, given our conviction that the US Federal Reserve (Fed) would continue to focus on its growth and
inflation mandate, we rotated the focus of our short duration stance into the front end of the yield curve, given its greater
sensitivity to interest rates. We also closed our European inflation exposure, while reducing our position in the US.
While remaining cautious on credit beta, the significant re-pricing of risk gave us the opportunity to add exposure to US
and European credit (both investment grade and high yield) as risk premiums rose sharply and valuations became
attractive. We think that the basis of the recent poor performance in credit is an overly pessimistic view on the macro
outlook and while we expect growth to slow, we believe fears of an immediate end of the business cycle are currently
overblown. We removed our underweight US high yield position, in retrospect too early as spreads continued to widen,
but maintained our underweight position in European high yield throughout.
Elsewhere, we initiated an overweight position to Australia versus Canada. The premise being that the Canadian
economy should benefit from the continued strength of US activity, while the Australia is more vulnerable to China’s
economy.
Schroder Investment Management Limited
27 February 2019
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Investment Manager’s Report (continued)
JP Morgan European Equity FAM Fund
Europe 2018 Review
European equity markets struggled in 2018, and returns were negative for almost all countries and sectors. The index
overall fell by 10% in local currency terms, with the best-performing sectors Utilities and Pharma. Real Estate and
Financials were the worst performers. In country terms Norway was the best performer and Greece was the worst.
After a strong start to the year equities started to struggle as the blistering pace of GDP growth from 2017 started to
slow, and the slowdown was very protracted, even though the overall rate of growth for the year was above trend at
around or just under 2.0%. Central banks in the region retained a very accommodative policy and credit continued to
expand. Corporate earnings for the year grew by a mid-single digits, but investors remained very cagy as a series of
political events overshadowed sentiment. The new Italian government caused concerns as the populist coalition
threatened to cause a confrontation with the EU over budget policy, and Italian bond yields moved sharply higher,
although in the event the budget was adjusted to avoid breaching rules and spreads narrowed again. The UK continued to
negotiate its departure from the EU, but Prime Minister may struggled to get the deal she had agreed past the UK
Parliament, which increased the risk of a no-deal departure. More importantly internationally was President Trump’s
announcement of trade tariffs, which had a discernible effect on trade volumes and on corporate sentiment as companies
struggled to plan for the impact on global supply chains.
The fact that earnings continued to grow, despite the negative sentiment engendered by politics, meant that equity
valuations fell sharply during the year, and this leaves some support for 2019, given that earnings are expected to grow
this year as well. Relative to bonds and cash equities look especially attractive, but we will have to see if there is a
positive outcome to the UK’s exit process and to the trade tensions globally before trusting that sentiment will turn
decisively better.
Performance
Over the fourth quarter of 2018, the portfolio returned -12.49% versus the MSCI Europe benchmark which returned
-11.32%.
Detractors included stock selection in materials and financials, while contributors included stock selection in healthcare
and consumer staples.
At the stock level, an overweight position in German chemicals company, Covestro, was detrimental over the quarter.
Despite reporting third quarter results that were ahead of expectations and reiterating guidance for full year 2018, the
company then issued a surprise profit warning at the end of November citing intense competition, increased costs due to
the low water level in the Rhine River, and provisions.
An overweight position in the Finnish paper mill company, UPM-Kymmene, also detracted from returns. The firm
reported third quarter results that were below analyst expectations. In addition, pulp prices in China were facing
downward pressure and investors had grown concerned that this would lead European pulp producers to lower their
prices to remain competitive.
On the other hand, our underweight position in British American Tobacco (BAT), the cigarette and tobacco
manufacturing company, contributed positively to returns in the period. The company’s share price fell as the Food and
Drug Administration (FDA) announced a ban on menthol due to concerns that it encouraged underage smoking. This
hurt BAT significantly as US menthol cigarettes represent c. 22% of its overall operating profit.
Our overweight position in Ahold, the Dutch international retailer, was an additional contributor. The stock price
increased markedly after the firm’s Capital Markets Day in November, where they revealed ambitious online sales
targets, as well as placing an emphasis on growth, secured by margin stability. They also announced a one billion Euro
buyback program in order to achieve high single digit earnings per share growth in 2019.
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Investment Manager’s Report (continued)
JP Morgan European Equity FAM Fund (continued)
Outlook
A lot of the disappointing performance of financial assets in 2018 stemmed from concerns over decisions being taken at
the political level, of which the most obvious were President Trump’s trade measures, and concerns over Brexit (which is
in some ways also a potential impediment to trade). The late-2018 swoon in prices, though, made valuations a great deal
more attractive, and with another year of earnings growth in prospect, the Fed turning more dovish, and the Bank of
Japan and the People’s Bank of China still expanding their balance sheet it may well be that the market’s concerns over
growth are over-stated. Having said that, there are a series of political one-offs in Europe this year: the Brexit deadline is
29 March (although there are mechanisms to extend this), the European Parliamentary elections are due in May, and that
will trigger the formal dismissal of the current European Commission. Indeed there is a wholesale changing of the guard
in prospect, with the head of the Commission Jean-Claude Juncker, the head of the EU Council Donald Tusk, and the
head of the ECB Mario Draghi all due to be replaced later this year.
At a corporate level we are expecting a recovery in demand after the one-offs, such as the government shutdown in the
US, the emissions tests in the EU, the gilets jaunes protests in France, the abnormally low water levels in the Rhine
which interrupted supply chains, the stand-off over the Italian budget, and the general tensions over trade which have
harmed Chinese growth in particular, towards the end of 2018, and there are also signs of a recovery in credit. Our
process directs us into those areas of the market with attractive valuations supported by improving corporate newsflow
and we can still find plenty of these opportunities.
JPMorgan Asset Management (UK) Limited
21 February 2019
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Investment Manager’s Report (continued)
Robeco BP Global Premium Equities FAM Fund (the “Sub-Fund”)
Performance Commentary: Since Inception (31 October 2018) through 31 December 2018.
The MSCI World Index ended with its worst calendar year performance since the financial crisis. Most asset classes
ended the year lower due to a culmination of concerns that threaten to curb global growth. Despite an agreed halt to
tariffs, no lasting solution to the US/China trade impasse has yet materialized. In fact, tensions escalated with the arrest
of Huawei’s CFO. In early December, Chinese economic data showed weakening domestic and international demand
indicating that the trade conflict is already having an impact on the global economy. In Europe, the risk of a “hard
Brexit” has risen as Theresa may failed to gain significant support for the “Chequers plan”. Markets were further
exacerbated by the US government shutdown, rising US rates, and departures of senior officials in the Trump
administration.
The Robeco BP Global Premium Equities FAM Fund underperformed the MSCI World Index in the two-month period
from inception through 31 December 2018. In this difficult market environment, sources of relative strength came from
stock selection in the Communication Services and Information Technology sectors. The Sub-Fund’s telecom holdings
like Verizon Communications performed well due to their defensive nature, which contributed positively to relative
returns. In the entertainment industry, Twenty-First Century Fox appreciated in the period despite its Index peers being
down close to 10% on an aggregate basis. In Information Technology, the Sub-Fund benefitted from not holding Apple,
which declined over 28% in the period and is a significant weight in the MSCI World Index. However, these strengths
were offset by weakness in the Consumer Discretionary, Health Care, and Industrials sectors, where stock selection
detracted from performance. In Consumer Discretionary, multiline retailer Nordstrom dropped over 29%. Similarly,
restaurants and leisure holdings Stars Group and GVC Holdings were also down significantly amidst the market
correction. These three names detracted meaningfully from relative performance. In Health Care, the Sub-Fund’s
holdings Laboratory Corp of America and CVS Health both declined more than the overall market, weighing on returns.
Stock selection in the Industrials sector detracted from performance as the Sub-Fund’s selected holdings in Graftech
International, United Technologies and Air Lease Corp underperformed. Smaller-cap stocks like Graftech and Air Lease
trailed larger-cap stocks as investors sought defensive names. Our position in United Technologies tumbled after the
company said its long-awaited breakup plan could take two years to complete. Despite the short-term drop, we continue
to hold the name for its good momentum and attractive valuation.
Financials and Materials remain the most overweight sectors in the portfolio. The portfolio remains underweight the
REITs and Utilities sectors. Stocks in these sectors, which we believe are expensive, became even more expensive
during the fourth quarter as defensive sectors held up relatively well during the correction. While the overall sector
remains expensive, the portfolio’s Consumer Staples exposure increased as we were able to find attractive
free-cash-flow and improving momentum in certain names. These purchases were funded with proceeds from cyclical
stocks that appear cheap on 2018 earnings, but may be overearning in the peak of the cycle. The underlying rationale for
all portfolio’s exposures is the dislocation between valuations and company fundamentals.
Market leadership whipsawed over the past year, with expensive defensive stocks performing well during the fourth
quarter. Regardless of the difficult environment for value investing, we continue to apply the simple rules that work
within our time-tested stock selection process: investing in stocks with attractive valuations, strong business
fundamentals, and improving business momentum. Though results at the end of 2018 have disappointed, the cause has
not been a failure in execution of our investment approach. Our portfolio valuation and quality characteristics have
consistently been superior to the benchmark. Investors are undoubtedly preoccupied with a multitude of fears, but
beneath the surface we see the potential for a strong value cycle forming. While we cannot predict when the cycle will
turn in our favour, experience has shown that reversion favouring value investing is usually abrupt. As always, we will
continue to stick to our investment discipline.
Boston Partners Global Investors, Inc.
20 February 2019
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Investment Manager’s Report (continued)
Vontobel Global Equity FAM Fund (the “Sub-Fund”)
Portfolio News
For the period since its inception on 2 November 2018 through 31 December 2018, the Sub-Fund declined -3.64%
(gross) and -3.69% (net), outperforming its benchmark, the MSCI ACWI (Total Return Net Dividends), which declined
-10.57%.
Stocks that Helped Absolute Performance
ADR HDFC BK LTD ADR REPSTG 3 SHS
HDFC Bank is a high-quality Indian private sector bank that has been a cornerstone investment in the portfolio for many
years. The bank has delivered solid growth while maintaining high credit and underwriting standards. HDFC Bank has a
strong deposit franchise and powerful technology backbone that should allow it to grow at a slightly faster rate than the
industry.
TENCENT HLDGS LIMITED COMMON STOCK
Since March 2018, the Chinese regulator responsible for the approval of video-game monetization had not approved any
new games. In addition, the Chinese government has raised concerns regarding the effects of young children spending
too much time playing video games. The two developments have raised concerns in the investment community that the
Chinese government has been looking to significantly restrict the growth of the industry. Recently, regulators approved
a meaningful number of games, which brought a sense of relief that perhaps the industry could return back to a healthier
growth rate. Tencent Holdings is a major Internet platform in China with a strong presence in online gaming and instant
messaging, and is one of the country's largest web portals. The company has been successful in providing popular
services to attract new users and creating a network effect to maintain existing users. Online gaming is the largest
contributor to revenue, but Tencent also generates sales through fee-based social networks, advertising and e-commerce.
Stocks that Hurt Absolute Performance
FRESENIUS SE&KGAA NPV
Fresenius's stock price fell after announcing preliminary fiscal-year 2019 guidance that was softer than expected. While
the core Kabi hospital products business continues to perform solidly, dialysis and German hospitals could be a drag on
results. We expect that investments in home dialysis and emerging markets should keep earnings roughly flat. In
addition, Helios (German hospitals) is experiencing greater-than-expected disruption ahead of regulatory changes to
nurse-staffing levels. However, the damage appears to be more self-inflicted than structural, and trends should stabilize
as the company fills currently elevated vacancies for doctors and nurses. Despite near-term softness, we believe
Fresenius remains attractive given its portfolio of leading businesses with steady and non-cyclical growth. Fresenius SE
is a diversified healthcare business, with industry-leading businesses in hospital products (generic injectables, clinical
nutrition, devices, infusion therapy), European hospitals, and dialysis products and services. The individual businesses
benefit from consolidated industry structures, barriers to entry, and steady and non-cyclical demand growth. We believe
Fresenius benefits from a durable and defensive earnings stream.
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Investment Manager’s Report (continued)
Vontobel Global Equity FAM Fund (the “Sub-Fund”) (continued)
AMAZON COM INC COM
The company’s share price was weak on aggressive profit-taking in companies that had performed well in 2018 and on
the de-rating of high-multiple stocks. Amazon is the leading player in ecommerce in North America, and has leading
positions in several markets in Europe, as well as India and Japan. Amazon was able to do this by offering very
competitive pricing, free shipping for Prime members, and convenience. Amazon also has the leading position globally
in Cloud services with AWS.
Market News & Outlook
Developed and emerging markets both started 2018 with strong returns in January. However, after a sell-off in early
February, volatility ensued and continued throughout 2018, as a host of geopolitical and macroeconomic risks,
stemming from different corners of the earth, impacted markets. Previously swept by momentum, markets are now
recognizing heightened risks. A number of factors weighed on international markets throughout 2018 and are
continuing into 2019, including the prospect of rising interest rates, uncertainty around Brexit, anti-establishment
parties gaining ground in Europe, volatile elections in emerging markets and the ongoing trade battle between China
and the United States. Heading into 2019, further interest rate hikes in the United States as well as the ECB dialing back
its quantitative easing buying program should continue to foster a return of a vast flow of savings from riskier assets
and areas such as emerging markets back into countries that have run very low interest rates over the past decade, such
as the United States and Europe.
As liquidity exits, risk pricing will notably increase and funding costs especially for weaker business models will rise.
This combination of increased uncertainty and less liquidity could make for a challenging market in 2019. Importantly,
long-term earnings outlook for our portfolio is solid. Additionally, international stocks are trading at a discount to the
15-year average and to the U.S. market. Therefore, despite the prevailing gloom-and-doom sentiment among investors,
we are starting 2019 on an optimistic note.
Vontobel Asset Management, Inc.
21 February 2019
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Investment Manager’s Report (continued)
DWS Euro Corporate Bonds FAM Fund (the “Sub-Fund”)
Comment
Credit tried to mount a Christmas recovery but the pronounced weakness in equity stopped the brief rally in Euro
Investment Grade (IG) and we ended the month 5Bps wider and 2018 67Bps wider versus government bonds. For Euro
IG 2018 was the weakest year since 2011 with spreads close to levels not seen since 2012. In total return Euro IG lost
1.14% and recorded its worst year since 2008, 2018 was only the 4 year where the market showed negative return.
The equity weakness in December was near historical: The Nikkei (-10.3%, YTD -10.4%) led the way followed closely
by the NASDAQ (-9.4%, YTD -2.8%). The S&P 500 (-9.0%, YTD -4.4%) suffered its worst month since February 2009
and worst December month since 1931. European Banks dropped -7.7% (YTD -25.2%) to cement their claim as the
worst performing asset in 2018. The DAX and STOXX 600 also dropped -6.2% (YTD -18.3%) and -5.4%
(YTD -10.3%) respectively which in fairness was a decent relative outperformance compared to US equities. Meanwhile
the Shanghai Comp was down -3.6% (YTD -22.7%) and MSCI emerging markets (EM) equities fell -2.8%
(YTD -14.8%). The causes of the strong fall in equity were multifold and too numerous to get into detail on all of them.
But the main market drivers were the Trump trade war, the failure by Prime Minister Theresa May to even bring a vote
on Brexit in the houses of Parliament and the riots in France. Connected to the trade war issue and a possibly more
important reason for the weakness was the fear of a global slowdown. China, Europe and America posted some weaker
than expected macroeconomic indicators and that in a month where the ECB announced the end to quantitative easing in
the Eurozone, after €2.5trl of purchasing and The Federal Reserve delivered a hawkish rate increase. The fear of slowing
growth was clearly reflected by the move in commodities during December: Oil fell 10.8% (YTD -24.8%) and the
broader commodity index dropped 6.6% (YTD -12.4%). The drop in oil was felt in credit as well especially in USD high
yield (HY) which widened 98Bp (Euro high yield was 35Bp wider). US HY energy was 115Bp wider on the month.
Considering the broad weakness across risky assets, Euro IG faired reasonably well in December and it was not all
doom and gloom. Italian credit spreads actually tightened 11Bps during the month as the populist coalition revised their
budget for 2019 to be more in line with EU regulations. The more EU friendly and conciliatory tone from the Italian
government led to the strong move in Italian names which has been a favourite underweight among market participants.
Italy is now on 6 month probation with the EU and no disciplinary actions will be taken before at least June. By
comparison, French names in the iBoxx index widened 8Bps, on the back of the yellow jacket riots and UK names
widened 12Bps on the back of the failed Brexit vote and the increasing risk of a hard Brexit. Also helping the
performance of the Euro IG market in December was the virtual lack of new issuance as several issuers chose to
postpone their bonds until January when market participants are typically more flush with cash. We only had €5Bn in
non-financials and a meagre €600mm in financials.
Performance
As previously mentioned the ICE BofAML Euro Corporate Index widened 5Bps versus government bonds and looking
across sectors, segments and regions, again everything is wider with the exception of Italy (see above).
In non-financials, worst performing sector was media where advertising agency WPP and media conglomerate
Bertelsmann pulled the sector down. Unsurprisingly, the sectors with considerable exposure to trade such as autos and
chemicals were among the worst performers, as were the retail sector on concerns of slowing growth. Strangely energy
was the best performing sector despite the double digit fall in oil prices. In general financials (+8Bp) outperformed
non-financials (-11Bp) on the back of less issuance and on a few single name stories such as profit warnings from the
likes of BASF and Fonterra and the abovementioned issues with trade and growth. Sub-Fund got through the volatile
month reasonably well losing 1bp versus the benchmark. Biggest loss came from energy, where especially one oil and
gas name took a dive, we also lost through the overweight (OW) in utilities where we were negatively affected through
the corporate hybrids. The 2 best performing nonfinancial sectors were telecommunications, where the large UW in
European names paid off and in healthcare where especially pharmaceuticals did well. Regionally we lost through the
UW in Italy, which was the best performing country in the index. In financials, the picture was more mixed as we
managed to gain from our UW in subordinated bonds but lost on several of the senior bonds particularly in banks.
DWS International GmbH
25 February 2019
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Investment Manager’s Report (continued)
Eurizon Flexible Equity Strategy FAM Fund (the “Sub-Fund”)
Since Sub-Fund’s inception date, we have expressed a preference for investing in high quality European and US
domiciled companies that, according to a thorough fundamental analysis, have a strong track record in consistently
distribute dividends to shareholders. As of 31 December, since inception performance has been -3.93% (gross of fess). In
November perspective returns for equity markets have been estimated to be significantly below their long-term average:
accordingly, equity exposure has been kept at the minimum level as per the investment policy. In December, most
risky-asset experienced significant stress, with equity markets selling-off on the back of higher volatility. At the end of
December, following this broad correction in global equity markets, the exposure to stocks has been marginally
increased. In terms of geographic allocation, we expressed a relative preference for European companies vis-à-vis US
ones. This reflected the higher expected returns offered by European markets compared to US, although the forecasted
return gap between the two regions narrowed in December. Exposure to non-EUR currencies has been systematically
hedged. Overall, portfolio turnover has been limited, as the companies’ ranking in terms of fundamental valuation on
saw limited changes.
Eurizon Capital SGR S.P.A.
6 March 2019
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Investment Manager’s Report (continued)
BlueBay Investment Grade Euro Aggregate Bond FAM (the “Sub-Fund”)
Market review
Firm economic growth led markets to start the year where they left off with credit spreads tightening and core
government bond yields rising, particularly in the US where markets continued to re-price US rate expectations to that
of the Federal Reserve’s own expectation for 2018. However, in February we saw the low point in spreads as the spike
in core bond yields and heavy new corporate issuance proved to be the catalyst for the start of wider spreads.
In Q2 we started to see stress amongst emerging markets as 10yr US Treasury yields breach 3% for the first time since
2013, particularly those most vulnerable to higher US rates and a strong US Dollar, made worse by the escalation of
trade wars.
Europe had been fairly sanguine till now, with events overseas dictating levels. That was until May when la League and
Five Star announced plans for a coalition and wanted Eurosceptic Savona as Finance Minister. The Italian market took
this very badly with 2yr government bond spreads widening by over 300bps before the coalition finally settled for a
more pro-European Giovanni Tria. However, Italy was never far from the headlines during the second half with worry
over the size of the budget deficit for 2019. There was speculation in early September of a sub 2% budget deficit, only to
be disappointed with a 2.4% deficit, which was subsequently revised down to 2.04%. This caused a fair amount of
volatility in the process, by way of example Italian 10yr spreads finished the year at 250bps over Bunds, peaked at
327bps, while the low was 113bps.
Growth concerns really came to the fore in the 4th quarter as forward guidance by corporate management spooked
equities and credit markets alike, citing weaker China sales, trade tariffs and rising costs. In addition we saw a marked
deterioration in the services in Europe as measured by the Markit Purchases Managers index which dropped to 51.2
from 54.7 implying more modest growth.
After an initial spike higher core German 10 year Bund yields finished the year lower at 0.24% having started at 0.43%.
Credit spreads where the weak component of the index, particularly corporate spreads which moved from 86bps to
152bps, while sovereign spreads moved 28bps higher to 78bps over the year.
Performance
November 2018
Performance on the month produced a positive return 0.05% vs the benchmark 0.46%.
We continue to believe the US market under prices the degree of monetary tightening in 2019 and as part of the
implementation we positioned the portfolio short US duration -0.7yrs via 3month Eurodollar contracts. In addition, we
favour Bunds +0.8yrs over a short in UK Gilts -1.1yrs. Overall, term structure detracted 17bps due to the short positions.
In sovereign credit, we continue to see value in Italy at the expense of Spain (underweight). However, following a
decent recovery from the wides in Italian spreads we did reduce the overweight in Italy by -0.3yrs to +0.4yrs long and
closed the underweight in Spain by +0.4yrs. In line with strategy elsewhere we are modestly overweight Slovakia and
Supranational exposure. Sovereign credit delivered +10bps excess return with Italy and Spain contributing the vast
majority.
In recent months the general view has been to scale back corporate exposure but with a bias to be overweight
subordinated financials and corporate hybrids. However, despite corporate beta adding 3bps, our over weights in issuers
such as Telecom Italia, VW, HSBC, Deutsche Bank and EDF were among the main detractors culminating in an
aggregate 36bps decline.
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Investment Manager’s Report (continued)
BlueBay Investment Grade Euro Aggregate Bond FAM (the “Sub-Fund”) (continued)
Performance (continued)
November 2018 (continued)
In currencies, we remain constructive on Scandinavian currencies (NOK, SEK) expecting their respective central banks
to raise rates well before the ECB. Elsewhere we are short GBP vs the Euro and USD on Brexit concerns and political
mess. Currencies added a modest 4bps.
December 2018
The benchmark delivered +64bps helped by lower core government bond yields and modestly tighter sovereign spreads
(-7bps), while corporate spreads were marginally wider (3bps) in sync with the weaker tone in equity markets. The Sub-
Fund delivered +32bps.
Bund yields were 5-10bps lower and US Treasury yields around 30bps lower across the curve, with Eurodollar futures
for end 2019 c.37bps lower. Given this fall in core yields, our short duration positioning in US rates was a key detractor.
Indeed, we added to the short US position mid-month with a view that the market was over-reacting to fears of a growth
slowdown. These fears had pushed front end US rates to price out virtually all probability of rate hikes for 2019, making
a short position look a compelling asymmetric opportunity. The Sub-Fund’s short UK duration position was also
negative although somewhat offset by the long in European duration. Overall, term structure positions detracted was the
main negative contributing factor to the underperformance.
Spanish spreads widened in October on the back of Italy weakness and while BTPs recovered those losses, Spain failed
to retrace all. In this context, Bonos appear cheap relatively speaking and Spain continues to deliver robust growth and
is a solid credit story. We therefore moved to a modest overweight in Spain 0.1yrs. Performance from sovereign credit
was mixed. Italian spreads were much tighter (40bps on 10yr) as they benefitted from a thawing in relations between
Brussels and Rome and that helped our overweight position, the other main overweight was Greece that saw spreads
wider by c20bps as market’s in part, caught wind of potential supply in the new year. Overall, sovereign credit was a
positive contributor with Italy delivering the vast majority, while the movement in Greek spreads was mostly offset by
the additional carry.
Subordinated bank debt was a weak sector within credit, although Italian names were positive, led by Intesa and
UniCredit in line with the sovereign’s improvement. In general exposure to corporate credit is close to benchmark on a
beta adjusted basis with a preference for high beta financials and hybrids at the expense of low beta.
BlueBay Asset Management LLP
22 February 2019
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Investment Manager’s Report (continued)
Janus Henderson Euro Corporate Bond FAM Fund (the “Sub-Fund”)
Manager Commentary
Review from inception (8 November 2018) to 31 December 2018.
The Sub-Fund underperformed the benchmark over the period under review.
The Sub-Fund’s overweight positioning to high yield was a principal detractor of performance given lower rated credit
delivered weak excess credit returns and underperformed investment grade over the period under review. On a sector
basis the Sub-Fund overweight exposure to real estate and security selection within the sector including overweights to
Globalworth, Demire and Adler hurt performance the most.
Positive performance came from the Sub-Fund overweight to AAA rated credit and security selection within this rating
segment. Whilst on a single name basis, the Sub-Fund underweight to Vodafone added to total returns as credit spreads
in the issuer widened on the back of an increase in the expectation of a ratings downgrade. Strong performance also
came from the Sub-Fund’s underweight to German pharmaceutical company Bayer, which continued to suffer as a result
of ongoing litigation issues.
Henderson Global Investors Limited
28 February 2019
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Investment Manager’s Report (continued)
Threadneedle Global Equities Income FAM Fund (the “Sub-Fund”)
Summary
The period between the Sub-Fund’s inception and the end of 2018 proved challenging for global equities. Concerns
around monetary policy and weak economic data releases in Asia were among the factors underlying the market sell-off.
However, later on, reports of a strong holiday season and indications of potential for progress in trade talks between the
US and China buoyed sentiment. Defensive sectors such as utilities held up well against this backdrop, while energy
lagged amid declining oil prices, related to concerns around rising inventories.
The Sub-Fund outperformed over the period, supported by both sector allocation and stock selection. Our industrials
holdings proved particularly lucrative sources of value, and our technology underweight benefited returns as investors
rotated away from low-dividend-paying growth stocks.
At the stock level, telecommunications companies Deutsche Telekom and HKT Trust fared well amid appetite for stable
sources of growth. Investors await the approval of the merger of T-Mobile US and Sprint, which would unlock value for
Deutsche Telekom shareholders. We are positive on Deutsche’s improving EBITDA in Germany, US customer base
additions, and believe that capex will remain manageable. Meanwhile, HKT is performing well in the mobile space, and
producing solid broadband subscriber gains. Chinese branded sportswear company Anta Sports also added value, amid
optimism around its expansion plans and signs of strong Chinese sportswear growth.
Relative gains were partly offset by detraction from British American Tobacco and Altria. Both were affected by a
tobacco stock downturn after the Food and Drug Administration proposed a menthol cigarette ban. Whilst this could
take years to materialise, investors immediately priced in the potential hit to affected companies. Both British American
Tobacco and Altria are expected to deliver mi