Vector 2018 Semi-annual Review

18 Juli 2018

Dear investors,

After a disappointing first quarter, where rapid wage-growth and a looming trade-war had triggered panic selloffs, markets generally recovered well during the second quarter, which brought some reassuring earnings and macro-economic news.

In Euro-terms the MSCI All Countries Net Return ended the first half of the year 2.4% higher. Yet, there were some distinct regional differences. While US equities already did very well in local currency, their Euro-denominated returns (+5.5%) were further helped by a strengthening of the USD compared to most currencies over the first half of the year. As is often the case, emerging markets faltered (-2.4%) in the presence of this dollar strength. After a temporary ceasefire between the US and China, that was brokered mid-May, the rekindled threat of a trade-war towards the end of Q2 obviously did little to help investors sentiment. This caused the region to deepen its losses in June in particular. European companies also largely disappointed (-0.5%) as they were unable to convert the positive translation effect of a weakening domestic currency into higher valuations. After all, as foreign revenues are now repatriated at higher Euro-values profits should have increased.

Yet, regional differences aren’t the year’s biggest performance driver. While the value premium has been quite low this past decade, we have seen some exceptional divergence between value and growth stocks this year – with the latter outperforming the former about 7.02% over the first half of 2018. It is clear that, given the uncertain political climate, investors do not have much appetite for the (at times) distressed value companies and would gladly pay exuberant premia to own companies that have shown steady earnings growth in the past.

Vector funds have held their own this year. Despite our value and emerging market tilt Navigator still recorded a year-to-date gain of 0.36%. The Flexible allocation category is having a difficult year, with the category losing 1.43% on average over the year. Vector Flexible, which is down 0.56% year-to-date, ranks amongst the best third of funds in the category.

Best regards,

Thierry, Werner & Nils