Market concerns are still the same with peak inflation being a major topic, monetary tightening, Covid and geopolitical tensions. As a result, performance over the past few months has been difficult but there was a bit of reprieve during May with performance being flat after the retreat we experienced in April. MSCI World Index was up 0.14% while S&P 500 was up 0.18%. Value stocks outperformed growth stocks, with MSCI World Value up 2.2% and MSCI World Growth down 2.2%.
Earnings season has just ended, and overall company fundamentals are strong. However, more companies have been talking about increases in costs due to supply chain challenges which are expected to impact margins. In terms of the fund, the best performers of the portfolio were Nova Measuring Instruments (7.7%), Nextera (7.2%), and EPAM Systems (6%). While the worst performer was Amplifon (-14.1%), Global Medical Reit (-11.9%) and Arena Reit (-10.4%), the poor performance has nothing to do with company specific factors and is due due to the overall macros which are impacting the equity market.
Nova Measuring Instruments issued their Q1 2022 results and performed exceptionally well, beating market expectations. The company has also been experiencing supply chain challenges but have been able to navigate these issues better than their peers because of the preparations they took pre-pandemic to increase capacity and inventory; as a result, they’ve been able to meet demand. Management stated that constraints are mainly due to price increases in components, difficulties to get components, and shortages of suppliers.
They’ve seen revenue grow twice as high as the group average. Due to the high demand, they’ve invested in two manufacturing facilities which are opening later during the year. Q1 FY22 revenue up 59% y/y to $134m- this is their eighth consecutive quarter of revenue growth, operating income was up 88% to $39.7m and net income up 94% to $34m. Revenue growth was fueled by diversification into China, historically China makes up 25% of revenue contribution but this quarter it was more. Overall, management sees demand continuing into 2023 as they’ve already received orders for next year due to companies’ uncertainty regarding supply chains.
The software engineering company, EPAM Systems, also performed well during the month. The share price was negatively impacted beginning of the year because their largest delivery centers were in Ukraine, Belarus, and Russia, but the share price has slightly recovered its losses and is trading in a range currently. The company also released its Q1 2022 results as well and reported strong growth numbers, beating market expectations. Q1 revenue was up 50.1% to $1.17bn y/y, with organic revenue growth of 40.1%. Income from operations up 21% to $129.2m but net income fell by 18% to $89.7m. The company has been reallocating its resources from Ukraine and Russia and expanding its geographical footprint enabling it to take on larger clients as they add more talent and capabilities. Management spoke of long-term demand remaining strong, as EPAM is positioned well to benefit from the structural changes in the macroenvironment which require companies to digitally transform. EPAM expects Q2 revenue to grow by at least 29% and for income from operations to grow between 3- 5% y/y.
Equity exposure in the fund is still around 40% as we don’t want to take on undue risk as there is still uncertainty in the market. If earnings estimates are still too high, then there’s a possibility that we’ll see more of a decline in share prices due to the high valuations. As a result, the fund has tighter stop-losses on all stocks in the fund and have been intentional about cutting stocks which don’t have high conviction rates.