Sophie Careford: So, Eddie, 2024. It's been a very strong year for global equities and, particularly, growth versus value. We've seen growth outperform value by over 10% year to date. So, how has this market environment been for you as an equity income manager?
Eddie Cheng: Yes. You're right. For the first half of 2024, the market had continuously been driven by those AI-related mega-cap companies, which led to a strong outperformance, as you mentioned, from the growth sector, given the positive momentum and sentiment over the value sector. And in this environment, typically, it is a very challenging environment for the traditional equity income strategies because the need for higher income would drive those strategies to invest in the company or focus on the companies with a deeper value bias or value-oriented characteristics.
Sophie Careford: Okay, so we know that Global Equity Enhanced Income is an income fund. So, how has it fared in this kind of market environment?
Eddie Cheng: So, we took a very, very different approach. So, the fund actually adopts a much more diversified approach. We not only wanted to deliver an attractive level of income for our investors, but we also wanted to provide a competitive total return for the fund. In this case, we can also focus more on our stock selection, bottom-up process to generate alpha to the benefit of our investors. So, in the first six months of the year, the fund actually delivered more than 15% on a year-to-date basis on total return. And also, more importantly, we distributed 6% per annum of the income on an annualized basis. So, by comparison, the fund outperformed the benchmark, which is the MSCI ACWI, by more than 400 basis points for the first six months. And also, more importantly, that it delivered more than a 400 basis point higher income than the index itself.
Sophie Careford: Okay, so 400 basis points more in total return and 400 basis points more in yield. So, can you tell us a bit about what's been driving performance so far this year?
Eddie Cheng: Yeah. So, the GEEI Fund actually had quite a strong second quarter. So, we delivered around 130 basis points of outperformance just into the second quarter. And most important is that we have a positive contribution from both of our equity and options sleeves. There are a couple of interesting insights, I think, are worth sharing. First, from a total return perspective, we do see a strong contribution from our positioning in the technology sector. And this is mainly coming from our bottom-up stock selection alpha, despite we actually have a small underweight in the technology sector. So, this just shows the robustness of our bottom-up research process. But on the income side, the portfolio also benefitted from a better-than-expected special dividend we received from a Chinese automaker. So, this better-than-expected special dividend not only helped us to build some buffer for our future income distribution, but also helped us to reduce the risk of the potential upside given up from our option portfolio.
Sophie Careford: Okay, nice. So, we've seen really strong stock selection, this special dividend, which seems to have boosted yield. You must have seen some risks. It can't all be this good.
Eddie Cheng: Yes, you're right. We did. And I think the major risk that actually came just a couple of weeks earlier is from the French snap election. And it did have some shortened impact and negative impact on a couple of names that we hold in the portfolio. Specifically, a couple of French companies have a direct exposure. We do monitor the situation very, very closely, but we have gone through the whole assessment, especially for those French companies, in terms of their fundamentals. We still believe they have strong fundamentals per our assessment, but we also are ready to act if the situation changes and then, we can change the portfolio, if necessary.
Sophie Careford: Well, sounds like you've got that situation well handled, but I'm sure we're probably going to have a bit more volatility when it comes to elections for the rest of the year. But I want to perhaps look at market outlook for a moment. So, we know that fixed income and cash have been particularly attractive over the last year or so due to the interest rate and inflationary environment. How does an equity income strategy fare in this kind of environment? And what kind of role can it play in a portfolio?
Eddie Cheng: You're right. Both fixed income and cash have been very popular with a lot of income investors in the last two years, given the level of yield they can provide. But on the other hand, the market started to build a consensus around that we probably are not too far away from a global rate cutting cycle and that might have a direct impact in terms of the yield that those asset classes can offer. But on the other hand, if you look at equity income, it still remains a very attractive and diversified source of income. But most importantly, equity as an asset class is very important for investors to grow their capital, as well as to protect their real purchasing power over the long term, especially in this higher-for-longer type of environment. So, we do see equity continue to play a very, very crucial role in our investors’ portfolio.
Sophie Careford: Makes a lot of sense, Eddie. Well, thank you very much. I think it's been a great quarter and year-to-date so far. And I think we'll be back next quarter to see how the portfolio has been doing.
Eddie Cheng: Thank you, Sophie, and I look forward to another chat.
Sophie Careford: Thank you.
