Portfolio Manager Commentary

Summary (PDF) Full Text (PDF)


The New Ireland Fund, Inc. Portfolio Manager Commentary Quarter Ending July 31, 2019

Performance Review

The New Ireland Fund Inc.'s (“Fund”) returns are summarized in the table below.

  Period to July 31, 2019

Benchmark* Return

IRL NAV Return

IRL NAV Return Relative to Benchmark

  Quarter

-4.64%

-7.37%

-2.73%

  6 months

+3.25%

+0.68%

-2.57%

  1 year

-11.17%

-16.21%

-5.04%

  3 years

+4.65%

-0.14%

-4.79%

  5 years

+4.97%

+2.32%

-2.65%

  Since inception

+6.91%

+6.87%

-0.04%


*Benchmark is the MSCI All Ireland Capped Index (“MSCI Ireland”) from August 1, 2015. Prior to July 31, 2015 the benchmark was the Irish Stock Exchange Index (“ISEQ”). Prior to July 31, 2011 it was the ISEQ ex Bank of Ireland.

Investment Overview

Portfolio
Performance wise the portfolio had a negative return for the quarter and was behind the benchmark. For the calendar YTD, we have seen a strong start to the year in absolute terms albeit the portfolio is trailing the benchmark. The Irish market experienced its most difficult year since the global financial crisis during 2018, bounced strongly during the first months of 2019, but again experienced difficulty over the most recent quarter with Ireland once again out of favour.

Top performers for the quarter saw a reversal from the previous quarter from cyclicals to more defensive companies - C&C Group, UDG Healthcare, Kerry Group and Green REIT. The underperformers were dominated by the banks and some economically sensitive names such as Grafton and Dalata Hotel Group. Malin was also weak with the beleaguered UK fund manager Neil Woodford being the largest shareholder and his holding seen as a negative on the shares.


  Quarter ending July 31, 2019 (MSCI Ireland -4.6%)

  Strongest portfolio returns

  Weakest portfolio returns

  C & C Group

+22.9%

  Bank of Ireland

-29.6%

  UDG Healthcare

+14.9%

  Malin Corporation

-29.1%

  Veolia Environmental

+12.8%

  Glanbia

-28.2%

  Smurfit Kappa Group

+8.4%

  AIB Group

-24.7%

  Kerry Group

+5.1%

  Grafton Group

-22.6%



  12 months ending July 31, 2019 (MSCI Ireland -11.2%)

  Strongest portfolio returns

  Weakest portfolio returns

  C & C Group

+17.6%

  Bank of Ireland

-46.9%

  Green REIT

+17.5%

  Hostelworld Group

-43.6%

  Veolia Environmental

+16.4%

  Glenveagh Properties

-41.7%

  Greencore Group

+16.2%

  Ryanair

-41.1%

  Kerry Group

+11.4%

  Cairn Homes

-40.9%



Irish Economic Review

In the latest available data, for Q1 2019, Ireland’s GDP grew by 6.3% relative to the same quarter of the previous year, while GNP rose by 4.8% over the same period. This reversed a decline seen in GNP in the previous quarter.

Retail Sales
Retail sales volume growth has been quite erratic in recent months, being as high as 5.1% (in year on year terms) in March but falling to just 0.1% by June. In our view it is likely that growth is slowly declining, as sentiment has been negatively affected by Brexit and uncertainty on global trade tensions. Consumer confidence has also declined considerably over the last few months.



Business confidence
The pattern of business confidence is somewhat similar to that of consumer confidence. The combination of global trade tensions and the increased likelihood of a disorderly Brexit appears to have had a significant adverse impact on business confidence, as the key Purchasing Managers Index fell below the neutral level of 50 for the first time in many years.

Labor Market
There continues to be a steady trend downwards in unemployment. The unemployment rate has declined and stands at 4.6% (also July data), down from a peak of 16.0%.

Credit Growth
Credit is growing modestly, after many years of declines. Mortgage lending grew by only 1.6% in the year to June 2019, while loans to the non-financial corporate sector grew by 4.9%. The overall pattern is that while growth remains strong, it is certainly not debt-fueled. Both the corporate and household sectors have very significantly reduced their debt, in absolute terms, since the peak of the last cycle in 2009.

Government Finances
The government is estimated to have achieved a small budget surplus in 2018, the first surplus since 2007, with a surplus of less than 0.1% of GDP. This represented a small, but significant, improvement from the modest deficit of 0.3% seen in 2017. Brexit-related uncertainties create considerable difficulties in forecasting the fiscal outcome in 2019 and 2020, but if a Brexit ‘crash’ is avoided, there should continue to be modest surpluses in the years ahead. All major credit rating agencies now rate Ireland in the “A” range.

“Brexit”
The decision of the UK electorate to leave the European Union may have significant ramifications for the Irish economy. The UK is very likely to leave the European Single Market and may also leave the Customs Union. This is the least welcome option for Ireland, as it means there may be customs controls and checks on the land border between the Republic of Ireland and Northern Ireland, and on sea crossings between the Republic and the UK, which may be disruptive to trade.

At the time of writing it is far from clear whether a last-minute agreement will be reached between the new UK government and the European Union, but in our judgement the probability of agreement NOT being reached is significantly higher than it was some months ago, which poses obvious risks to the outlook for the Irish economy.

Outlook:
For 2019, the Central Bank of Ireland is forecasting GDP growth of 4.4%, led by capital investment. However, forecasts are dependent on the outcome of the Brexit process, and while the Central Bank’s forecast is reasonable in a “benign Brexit” scenario, in our view growth will be materially lower if the UK leaves the EU in a disorderly fashion. In that scenario, we would tentatively forecast growth of no more than 3.5% but we caution that there is considerable uncertainty even around that lower forecast.

Global Market Outlook

After an extremely strong first calendar quarter, the second calendar quarter also finished in positive territory, thus confirming a strong first half of the year for global equity markets. In our second quarter outlook we highlighted that markets would be ‘desperately seeking reassurance’ on three fronts, namely –Geopolitics; Macro outlook and earnings outlook from companies. This is so true when it comes to Ireland with Brexit also thrown into this mix!

Three months on, sentiment remained volatile and markets remain uncertain on all three fronts. However, what has changed to support global markets is that the ‘markets friend’, namely central banks have returned to center stage and the dramatic reversal in monetary expectations around the globe has again proven supportive.

While our core expectation remains that a gradually reassuring outlook will support further market gains, we continue to monitor the various downside risks. From trade tensions to Brexit related wobbles to potential currency wars these may well inject renewed volatility over coming months.

Irish Market Outlook

The medium- and longer-term outlook remains very positive for both the Irish economy and stock-market. The next number of months will however be dominated by Brexit. Since the Brexit vote in June 2016, we have noted that this uncertainty will overhang Ireland and the sentiment and fears likely dominate fundamentals. This has proven to be the case and there will be no let up over coming months, not least with the risk of a no deal/hard exit becoming a materially higher risk. That said, the fundamentals underpinning Ireland of economic growth, earnings growth and company valuations, remain compelling to any investor with a medium to long term perspective.

We believe overall valuations are at fair value levels after 10 years of a bull market. The more cyclical sectors such as banks (where the portfolio remains underweight) are likely to remain unloved for some time although we note valuations are now back towards 2008/2009 crisis levels!

It is also crucial that we see signs of a stabilization of the European economy led by Germany and France, and we expect to see corporate leadership via increased M&A activity. Buybacks and higher dividends should also support stocks.

We continue to focus on the portfolio with a strong bottom up stock picking emphasis, always seeking superior growth at attractive valuations and not compromising on quality. We continue to build the portfolio in a balanced way and playing on many of the same themes at present, as we have over the last year. In fact, we have kept the faith in the existing themes with little change:

  • Attractive dividend income---Greencoat Renewables; Covanta; REITS.
  • Quality cyclicals---Ryanair; Kingspan.
  • Quality growth---Kerry Group; Uniphar Group
  • European recovery --- Saint Gobain. Veolia
  • Irish domestic economy recovery--- Applegreen; Dalata Hotel; Grafton Group, Glenveagh.
  • Idiosyncratic bottom up picks---Mincon; IPL Plastics; Amryt Pharma; Malin Corporation.

For the portfolio, we remain confident but also ever vigilant noting some near-term political events that may challenge our outlook.

IMPORTANT DISCLOSURES: The views expressed are those of KBI Global Investors (North America) Ltd (KBI) and should not be construed as investment advice. KBI does not represent that this information is accurate or complete and it should not be relied upon as such. Opinions expressed herein are subject to change without notice.

This material is provided for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase any security, product or service including the Fund, any group trust or other fund managed by KBI Global Investors (North America) Ltd., or any of its affiliates (collectively, “KBIGI”). The information contained herein does not set forth all of the risks associated with this Fund, and is qualified in its entirety by, and subject to, the information contained in other applicable disclosure documents relating to the Fund. Past performance is not a reliable guide to future performance and the value of investments may go down as well as up.

It should not be assumed that the future performance of any company identified in this document will equal its prior performance or that any future recommendation regarding the securities of any such company will be profitable. These stocks do not necessarily reflect current recommendations and are not selected based on profitability.