Perpetual Wholesale International Share (PER0050AU) Report & Performance

Portfolio changes in July were modest, with reductions to the weightings in the Consumer Staples sector and redeployment of those proceeds to the Financials sector.

U.S. Bancorp was a top contributor in the month, as the U.S. bank reported better than expected core results driven largely by lower expenses.

While core deposits were down, we still see U.S. Bancorp as one of the strong capital generating banks in the US that will accelerate in 2024 as synergies from its purchase of MUFG Union Bank. Overall, the company continues to grow its loan book and has relatively little exposure to Office Commercial Real Estate.

Baidu, Inc. Class A – performed strongly in the month of July with improved sentiment around Chinese equities. Further, Baidu was aided by softening government rhetoric around technology and technology related stocks along with positive sentiment around improving ad recovery.

Aker BP ASA – performed strongly in the month of July benefitting from a strong recovery in oil prices but far outpaced the overall energy sector as it reported positive earnings in the quarter and raised production guidance for the year. Over the prior year, Aker appears to have been unduly impacted by the decline in European gas prices even though it only represents only a small portion of their production. Aker continues to trade at a compelling valuation with the ability to grow the dividend.

Merck & Co. Inc. underperformed in the month of July. Performance was not driven by any particular news in the market but likely impacted by its recent acquisition of Prometheus which will have a negative impact on non-GAAP EPS. It is worth noting that post month end, Merck announced a second quarter top line beat and raised their full year top line guidance. Southwest Airlines Co. detracted from performance this quarter as the airline posted in-line Q2 results as other airlines beat estimates. The main driver of underperformance was that Southwest lowered its guidance for the third quarter as the domestic travel market is weakening, and margins are compressing as revenue per available seat mile is not keeping up with expenses. The key for Southwest going forward will be keeping capacity growth in-line with demand, successfully completing labor negotiations, and the overall macro picture for domestic airline travel.

Seven & I Holdings Co., Ltd. underperformed in the month as the company reported a slight miss versus consensus and guidance as the street’s expectations for higher fuel margins needed to be adjusted lower though the company had signaled this well in advance. The company maintained its full year guidance.

The Fund’s largest overweight positions include Air Products and Chemicals Inc, Oracle Corporation and Seven & I Holdings Co Ltd. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.

Vertiv Holdings Co. Class A contributed positively to relative performance during the quarter due to the bullish sentiment surrounding AI stocks. As a leading supplier of equipment and technology to data centres, the company stands to benefit from increased spending on digital infrastructure for expansion and upgrades. Company management continues to execute its strategy to improve margins, reversing the cost headwinds from the prior year, and delivering on operational improvements and greater free cash flow conversion. Backed by sustainable growth in their end markets, Vertiv continues to trade at an attractive valuation as they build a profitable backlog and remain well positioned for future earnings growth.

Lithia Motors, Inc. outperformed in the second quarter. It is becoming increasingly clear to investors that our view that the company’s current earnings are durable, rather than substantially inflated, as many have argued. That growing recognition, alongside increased optimism about the economy in general, is driving the beginnings of a re-rating in Lithia’s stock. We continue to see the shares as deeply undervalued and earnings should grow materially in 2024. Lithia currently trades at a forward P/E of 9x.

Northern Trust Corporation underperformed in sympathy with banks facing expectations of deposit outflows. While the top-line results matched expectations, EPS guidance was a little lower for the full year on continued deposit pressure. Pressure on custody revenue continued driven by market trends, but servicing and wealth management showed solid organic growth in the most recent quarter. Capital remains robust and the diversified businesses mix coupled with low credit exposure relative to other financials suggests the bank trades at too large a discount (12x forward price to earnings).

Aptiv PLC detracted from performance after margins fell short of estimates in their most recent quarterly release. However, full year guidance was reiterated, and the stock stands to benefit as auto manufacturers’ production normalizes and increasingly demand their solutions for electrical systems and autonomous vehicles. Aptiv provides integrated power management solutions, which as a whole use less power, adding to electric vehicle efficiency, and improving their range, a key selling point to the end consumer. Valuation remains attractive as cyclical headwinds abate and electric vehicle production increases.

During the month, we reduced our overweight to the Industrials sector by selling two stocks in the aerospace/defence industry. We also reduced our weighting to the Communication Services sector while increasing our weighting to the Utilities, Financials, and Consumer Discretionary sectors. We modestly increased our weighting to the Information Technology sector, though we altered our weighting within as we added to an existing holding and added a new name within the sector while modestly trimming two stocks that had performed well.

Among the top contributors in the month were Oracle Corporation and Vertiv Holdings Co. Class, both associated with the strong performance within the technology space. Vertiv is worth noting as the company clearly benefitted from the melt up in stocks associated with AI. Vertiv is a leader in cooling systems for data centres, particularly in liquid cooling systems, which will be in higher demand because of AI’s higher energy demands for computing. Aramark was a top contributor in May as the company announced strong operating results and raised full year guidance. The company continues to show acceleration in the business as EBIT grew faster than revenue and earnings per share grew faster than EBIT.

Allianz SE detracted from performance in May despite reporting solid results for 1Q2023 and announcing a new €1.5 billion share repurchase program. Allianz was likely impacted not only by the negative sentiment about the Financials sector in the month but also by investors digesting the new insurance accounting change to IFRS 17. Aptiv PLC reported slightly disappointing results in the month, with revenue and earnings per share slightly ahead of expectation while margins were slightly behind consensus. Full year guidance was reiterated, though the market was likely expecting an upgrade as there has been some strength seen in auto production. We continue to have confidence in the long-term tailwinds associated with the company. Air Products and Chemicals, Inc. posted good results in the month, with organic sales growth, total sales, EBITDA, and earnings per share all higher. The company reported in line with consensus but raised the low end of the guidance range. Air Products did report a decline in the backlog, which likely pressured the stock in the month. We continue to see strong upside to free cash flow, and Air Products continues to be a positive contributor to decarbonization and should be a beneficiary of this movement across the industries it serves.

The Fund’s largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund.

Defence company Rheinmetall AG was top contributor in the month. Rheinmetall is benefitting from continued higher demand with the ongoing war in Ukraine. The stock has performed strongly since the time of purchase, but we believe further upside remains. As such, we continue to hold the security but took the opportunity in the month to take some profits in the stock along with our other defence holding, as noted below. Vertiv Holdings Co. Class A was a top contributor in February as Vertiv posted a record quarter in operating profits. Investor concerns about the impact of slowing cloud growth on data centre demand seem to have abated. Further, Vertiv has been able to improve its margins to historical averages, though we recognize that it may take several quarters of stable margins before investors feel comfortable that Vertiv can deliver.

Despite the strong performance, we continue to see a good risk/reward profile. Fidelity National Information Services, Inc./STRONG> was a top detractor in the month. The stock sold off after the company guided lower-than-expected earnings growth. We recognize that with a new management team the company wants to reset expectations, and we believe guidance is conservative. Further, the company announced it is planning to spin off the underperforming merchant segment. Finally, the company has announced additional cost savings over the next two years. As such, despite the stock’s challenging performance since our initial purchase, our bottom-up analysis and calls with management have given us confidence that the company offers not only a compelling valuation but a pathway for a re-rating in that value.

Air Products and Chemicals, Inc. underperformed in the month after announcing earnings below consensus. Earnings were at the bottom end of guidance as a result of macro weakness in Europe and COVID impacts in Asia. The company did maintain guidance for the year while also reporting merchant pricing up 19%, which highlights the company is overcoming inflationary pressure and getting additional pricing over higher inflationary costs.

The Fund’s largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Lithia Motors Inc. and Aptiv PLC, both in the auto space, were the top contributors in January after being the leading detractors in December.

The Automobile and Parts industry was the strongest performing in January, up nearly 31% in the month, with both stocks benefitting from this strong performance. With lower interest rates beginning to be expected for later in the year, lessening fear of a recession and lessening supply chain constraints were likely drivers to the more robust performance within this space. Both stocks continue to present a compelling risk/reward profile. After being among the top contributors in December, Merck & Co., Inc. underperformed in January along with another Health Care holding, Elevance Health Inc. Both stocks were challenged by the market rotation out of the Health Care sector after its stellar 2022 performance. Both companies continue to deliver excellent financial results, and we believe each still presents a strong risk/reward opportunity.

Allstate Corporation detracted from performance in the month as markets expected a challenging period for Allstate given December’s winter storm Elliot and continued challenges in its auto book. Allstate has continued to face challenges that we are monitoring, but we currently feel our investment thesis, though delayed, remains intact.

The Fund’s largest overweight positions include Merck & Co., Inc., Oracle Corporation, and Air Products and Chemicals, Inc. Conversely, the Fund’s largest underweight positions include Apple Inc., Microsoft Corporation, and Alphabet, Inc. Class A, all of which are not held in the Fund. Air Products and Chemicals, Inc. added to performance as the company posted another strong quarter of double-digit revenue and earnings growth. A new plant coming online in Asia helped volumes while pricing was strong globally, offsetting some of the recent cost inflation. Their backlog continues to grow and remains meaningfully higher than history, over US$21B now versus their entire company’s gross plant, property, and equipment of US$29B today. As the company executes on this backlog, distributable cash flow could more than double, and this embedded future growth remains underappreciated in shares today. Merck & Co., Inc. benefitted from the market’s tendency to favor more defensive sectors, as Health Care was one of the better-performing sectors in the quarter, with Merck doing better than peers. Strength in the quarter was not driven by any dramatic change in fundamentals, but rather by a steady progress on pipeline drugs and the earnings coming slightly ahead of expectations. The market also sensed a meaningful change in Merck’s commentary on M&A, now indicated as focused on collaborations and small tuck-in acquisitions rather than larger deals. We like this capital discipline. Despite the recent strong outperformance, we see the risk/reward profile sufficiently reasonable to continue owning the shares. Fidelity National Information Services, Inc. detracted from performance in the quarter as the company reported disappointing earnings in November driven by higher-than-expected costs, slowing revenue growth, and foreign exchange/interest expense headwinds from the stronger dollar and higher interest rates. Despite challenges for the stock price in the quarter, we remain positive on what we believe is a solid business following management change, board turnover, and an activist investor now helping drive shareholder value creation. The stock is compelling at approximately 10x forward price-to-earnings, a meaningful discount to where this business has historically traded. Medtronic Plc had two disappointments in the quarter, causing the stock to detract from performance. First, its 2nd renal denervation trial failed to hit the primary endpoint in the most recently conducted studies, thus creating a market controversy on the future revenues that can be expected from this blood pressure-reducing procedure. Additionally, the company announced results that missed on organic growth and guided lower top-line growth. Although disappointing, we believe the full renal denervation data combining all the trials is still compelling for a very prevalent condition in a difficult-to-treat population. We believe the company offers good long-term value within the Medical Devices group.