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Vector 2014 Annual Review

31 Dec 2014

While 2014 proved to be a good year for equity markets, increased concerns about global growth, deflation and falling oil prices caused a resurgence in volatility during the last quarter of the year, which has made the race to the finish a bumpier ride than some investors had hoped.

Since gloomy growth prospects were - and still are - particularly relevant for the Eurozone, it is no wonder that analysts’ initial estimates that the European stock markets would outperform their American counterparts in 2014, did not quite hit the mark.
 
Conversely, the opposite scenario took place as the MSCI USA’s performance of 28.3% (net return) dwarfed the returns on the MSCI Europe index, which had only gained 6.8% by yearend. While a considerable part of this divergence was due to the appreciation of the dollar relative to the euro, the return difference between both regions in local currencies remains significant.
 
Emerging markets (MSCI EM) recorded a return of 11.4%. Over the last 4 years, they have now underperformed the World Index (ACWI) with an average of more than 10% per year. This is quite a remarkable divergence indeed, one that has largely played against us in comparisons with other global equity funds.

Within the emerging markets group itself, there was also huge disparity last year, the main reason being the decline in oil prices, which acted as a double edged sword. On the one hand, it increased consumer spending and economic growth levels for net importers. On the other hand, companies that list in exporting countries - like Russia and Brazil - had an extremely difficult year, as these countries largely depend on elevated oil (and commodity) prices to keep their finances in check.
 
Beating the market in times where macro-economic news drives performance to such a large extent is a challenge for any stock picker, but one that the fund has faced quite successfully nonetheless. Vector Navigator had a satisfactory performance of 20.4% in 2014, outperforming the MSCI World NR index in EUR by 0.90% and the MSCI World All Countries NR in EUR by an even more robust 1.78%.
 
When comparing these results to other global equity funds in the same Morningstar Category, our outperformance increases to a solid 5.21%, ending the year in the top 13% of our peer group. This nice performance was not an isolated event. It was in fact the third year in a row in which the fund had a return of more than 20%. Consequently, over the last 3 and 5 years, Navigator finds itself in the top 2% and 3% performing funds in Europe. These outstanding results have not gone unnoticed, since the funds’ assets have more than tripled in three years’ time.
 
Vector Flexible in turn was up 13.75%, managing to outperform its Morningstar Category with 8.48%, and ending up with the top 6% performers in this category. We maintained our hedge against market downturns at last months’ 35%.
 
But of course past performance only tells part of the story. Ultimately, an investor should always question whether the large return differences between economic regions - rather than his fund managers’ stock picking ability - could have driven performance: was it not merely a streak of luck - resulting from overweighting, for instance, the United States?

We are quite confident that this is not the case, as we do not allow ourselves to take huge individual, sector or country bets. Moreover, the fund’s strategy is designed for consistency, and is not biased towards value, growth, quality or sentiment investment styles.
In summary, we are convinced that the regular fashion of our funds’ outperformance is not a mere coincidence and we are confident that the strategy will be able to keep on delivering high quality investment results in the years to come.