July was another calm month for stock markets generally, which rose approximately 4% in Australian dollar terms. Two of the Orca Funds outperformed markets through the month, generally through lower risk positioning and exposure to opportunistic thematics, with the Orca Asia fund 3.0%¹ ahead and the Orca Global fund 1.6%¹ ahead of respective benchmarks. The Orca Disruption Fund faced some headwinds in technology stocks after very strong returns in June. The Orca Global Fund has now passed three years since launch, returning 52%¹ to investors (total return basis). The Fund has only exposed investors to 88% of market risk over that time, resulting in positive alpha (risk adjusted outperformance). We will continue to position the fund to limit potential downside to our investors, while participating in strong markets, as we’ve seen recently.
There were contrasting outcomes globally for health and the economy. The Delta variant led to fast COVID-19 outbreaks in most geographies, although with lower mortality rates due to growing vaccination rates. Where economies re-opened, consumer spending was strong, whether on domestic travel, shopping, or entertainment. Most companies have now reported their financial results for the May to June period, with many measures remarkably looking better than comparable periods in 2019. The resilient consumer is a result of government measures to support workers impacted by lockdown. Companies have consistently talked about elevated costs, particularly wages, petrol, raw inputs, and transport, and the problem is larger in the US. Every company has noted their concern over the spread of the Delta variant. Once again, you have contrasts in stock markets, very good profits being made, but also uncertainty. With strong profits coming through, there’s no reason for stock markets to fall away, but I think everyone understands the global economic recovery is likely to be uneven.
Asian stock markets have been eventful, with one of the Orca Asia Fund’s holdings in the eye of the storm. The lives of Chinese students are dominated by preparation for their University entrance exam. This has spawned an industry of private tutoring companies that augment school education with training for their exams. The Government has looked unfavourably at the increasing cost and time burden on Chinese families, and the proliferation of new entrants marketing the industry.
Effectively, the industry has been banned. This caused one of our holdings, market leader New Oriental Education, to fall 90%. Although this caused us a lot of worry, it actually drove strong outperformance for our Fund. The crackdown caused international investors to pull out of Chinese stocks, including many risky stocks which we have avoided. The market was concerned the Chinese government would expand their interventions into other sectors and major stocks could be impacted. Our more defensive positioning and lower Chinese exposure resulted in outperformance, despite the terrible performance of one holding. This is the benefit of diversification and risk control. Nonetheless, we have been analysing the decision and implications for future investing and are chastened by the experience.
Our Orca Global Fund also strongly outperformed the market, driven by the strong performance of Healthcare stocks and the underperformance of Japan. Pharmaceutical stocks have been lagging behind the broader market due to hospital shutdowns and US political concerns, but the sector has recovered with strong profits and falling political risk. Japan suffered from a slower economic recovery and further COVID-19 outbreaks last month. We have no Japanese investments, which make up 10% of the global market.
Sadly, we are in lockdown in Sydney. We are fortunate to be able to do our jobs together through the lockdown and appreciate that many others cannot. We hold our team meetings via video-link daily and find access to our investment companies very easy as the world has adapted to the circumstances. Companies have added more staff to deal with investor questions, and we are finding no impediment to running our strategy through lockdown.