JPMorgan Brazil reported a total return on net assets for the six month period ended 31 October 2015 of -33.9%, whereas the benchmark, the MSCI 10/40 Index (in sterling terms) recorded -35.6% for the same period.
The manager’s report says the portfolio’s underweight in energy was a strong positive contributor, with the portfolio benefiting in particular from a decision not to hold Petrobras, which does not align with the preference for small and mid cap names with the potential to compound their book value over time. The underweight position in the materials sector detracted as pulp and paper manufacturers outperformed the market and the fund was hurt by a decision only to hold Suzano, and not to hold the better performing Klabin and Fibria Celulose in the pulp & paper subsector.
They were overweight financials during most of the period, where they saw attractive value opportunities, and here stock selection was positive for relative returns, although the sector as a whole shared in the market decline. Also exposure to financial stocks outside Brazil benefited performance, with positions in Mexican real estate group Vesta and Peruvian bank Credicorp adding to relative returns.
Stock selection in technology also worked well, with overweight positions in Linx, a provider of software to the retail sector, and Totvs, an enterprise software producer, boosting performance as earnings at both companies proved resilient in the challenging economic environment. Exposure to Globant, an IT services company based in Luxembourg but operating in Brazil and other Latin American markets, was also a positive contributor.
Stock selection detracted in the industrials sector, leading us to review the fund’s holdings, concentrating our positions in certain names and reducing our exposure to others. For example, they reduced exposure to Randon and increased a position in Weg, which they think is well-managed and benefiting from the capital investments it made in the boom years.
In the consumer staples sector, an underweight position in BRF was a significant detractor to relative performance as the food producer benefited from currency weakness and from a longer soft commodity cycle than we had expected. Protein prices have remained elevated, while raw feed material has been cheaper than in the past, providing a boost to margins. However, an overweight position in Raia Drogasil was positive for relative returns as the retail pharmacist delivered sustained earnings growth and margin expansion despite tough business conditions.
JPB : JPMorgan Brazil outperforms falling market