Inhance Global Equity SRI Class Commentary
Portfolio Advisor: Vancity Investment Management
Ltd.
Fund Commentary - December 31, 2012
During 2012 Health Care, Consumer Discretionary and Industrials
were the primary positive contributing sectors, while Financials
and the Fund's cash position were performance detractors for 2012.
Biopharma companies Gilead Sciences Inc., CSL Ltd. and Novo Nordisk
AS continued to add value in Health Care, while Spanish clothing
retailer Inditex; German automotive firm BMW and U.S. home
improvement retailer, Home Depot Inc. were positive contributors
within the Consumer Discretionary sector. In the Industrials
segment, the Fund benefitted with strong contributions from U.K.
testing and certification firm Intertek Group PLC and German
logistics and delivery firm, Deutsche Postbank AG. The Fund's
underweight to Financials was selectively reduced in the latter
part of the year, but still had a negative impact as the sector
continued to rally, particularly European and large U.S. financials
that rebounded from low bases. The higher than normal allocation to
cash, as part of the Portfolio Sub-Advisor's defensive positioning,
was a modest drag on performance in the second half as markets
shrugged off "fiscal cliff" uncertainty following the U.S. election
and maintained a strong finish into year-end.
On a regional basis, the Fund's stock selection in Germany, the
U.K. and France contributed positively as did a decision to
overweight the U.S. and remain underweight Japan.
During the second half, positions were established in companies
expected to benefit from the U.S. housing recovery such as U.S.
real estate investment trust Weyerhaeuser Co., The Sherwin-Williams
Co., a leading paint and decorative coating firm, building
materials producer USG Corporation, homebuilder DR Horton and
Fortune Brands Home & Security Inc., a leader in kitchen &
bath cabinetry, plumbing and security systems. Additions to
Financials were made with the world's largest asset manager
BlackRock Inc.; Sweden's leading bank, Swedbank AB and German
reinsurance firm Munich Re. Profits were taken in the Health Care
sector and allocated to a position in Irish medical devices firm
Covidien PLC. The Portfolio Sub-Advisor diversified the Fund's
consumer exposure adding Dollar Tree, Inc., the largest single
price point retailer, organic and health food company Hain
Celestial Group Inc. and Panera Bread Co., a leading U.S.-based
fast casual restaurant. Continental Resources Inc. was added as
beneficiary of growing U.S. energy independence and rail transport
company, Union Pacific Corp., a barometer of U.S. economic
recovery. Funds for these additions were sourced from cash on hand
and the sale of L'Oreal, AngloGold Ashanti Ltd., Industrial
Commercial Bank of China, Praxair Inc., Republic Services Inc.,
Olam International Ltd., ICICI Bank Ltd. and Intercontinental
Exchange, Inc.. The Portfolio Sub-Advisor also eliminated a
position in JPMorgan Chase & Co. over governance concerns
regarding the company's alleged manipulation of LIBOR rates.
Recent Developments
Through the United Nations Principles for Responsible
Investment, the Portfolio Sub-Advisor participated in an engagement
on the United Nations Global Compact reporting initiative, a
leading initiative on corporate responsibility and sustainability.
Companies deemed to be leaders received letters of support from the
signatories, while laggards were encouraged to improve their
reporting on implementation or risk being de-listed as a Global
Compact signatory. In addition, the Portfolio Sub-Advisor
participated in a dialogue with other investors and EOG Resources
Inc. on company policies and best practices regarding hydraulic
fracturing disclosure.
A key turning point for global equity markets occurred in the
second half when both the U.S. and European central banks stepped
up with unconventional monetary policies that offered a backstop to
equities, significantly reducing the overhanging risk of market
contagion from the European sovereign debt crisis. Surprisingly,
resilient equity markets did suffer a pull back in November as
investors took profits amidst renewed concerns, following the U.S.
election, over the potential negative economic impact from the
impasse between President Obama and the U.S. Congress concerning
unresolved tax and spending issues termed the "fiscal cliff". The
Portfolio Sub-Advisor's position has always been that rationality
would prevail and that some tax resolution would ultimately be
worked out, as it was early in the new year. The Portfolio
Sub-Advisor maintains confidence that with a forthcoming, more
complete U.S. budget resolution, the U.S. economy is poised to
reaccelerate modestly on the back of renewed capital spending and
pent-up consumer demand for autos and housing. This, combined with
a rebound in China's economic growth rate, a modest uptick in
European growth and with Japan adopting more stimulative growth
policies, should create a more positive economic backdrop
throughout 2013. The Portfolio Sub-Advisor has historically
maintained limited exposure to Japanese equities but notes that the
new government's proposed policy changes may offer favourable
opportunities for longer term investment. Also, with central banks
maintaining low interest rates and fixed income returns not
compelling relative to equity yields, stocks, well-supported by
modest earnings expectations, attractive yields and reasonable
valuations should again be superior performers in 2013.
The Portfolio Sub-advisor maintains the view that being more
conservatively positioned, focusing on earnings predictability and
income will continue to be a prudent and rewarding strategy for
navigating the current market environment. It will closely monitor
for signs of economic acceleration and commodity price strength to
exploit potential new, attractive opportunities among more
economically-sensitive sectors.