Active Quantitative Equity (AQE)

Fund Update – December 2021



Global equities rose +1.7% (AUD terms) in December 2021 to finish the year on a positive note. The market digested the Omicron variant news quickly and favourably as further evidence emerged that whilst it is more transmissible, it is less severe. The market also looked through the changing Fed guidance and their removal of “transitory” to describe short term inflation. The Fed accelerated the taper of Quantitative Easing (QE) and forecasted three rate hikes in 2022 (up significantly from even three months prior) and more in 2023. Despite these developments, the market and most economists expect that high short-term inflation will eventually converge with lower long-term inflation forecasts. However, real rates both in US and elsewhere remain firmly negative – with the mantra of “There is No Alternative” remaining in place and favourable for risk assets. The significant equity inflow and robust corporate earnings were key drivers of a strong year-end rally that more than offset the November selloff.

December was interesting and different to most of 2021 as the market was led stronger by Value and Lower Risk stocks. Whilst those stocks with high earnings expectations and expensive characteristics sold off, it is encouraging to see some unloved parts of the market start to pick up – together with Value, Quality and Lower Risk rallying together. Consumer Staples and Utilities – the worst performing sectors for 2021 – led the board in December and helped trim some of the relative underperformance to other sectors. Consumer Discretionary was the worst performing sector in December, as mega cap stocks such as Tesla and Amazon lagged.

Attribution:

The State Street Global Equity Fund outperformed the MSCI World ex Australia Index during December. Good stock picking within US Health Care, US Discretionary and US IT added the most value, while negative stock selection within US Financials detracted the most value. The dynamic currency hedging overlay also added value in December, with a weakening USD supporting the performance of our partial USD hedge.

Notable changes during the month:

During the month, we trimmed our Materials exposure by selling out of British steel maker Evraz on the back of falling analyst earnings expectations and falling sentiment. At the same time, we have marginally increased our allocation toward select Health Care Service names that are exhibiting superior (risk-adjusted) return expectations.