Morningstar - Q3 2020 - 22

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Dispatches

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TRENDS

The U.S. Can Mount a Solid Recovery
We expect U.S. GDP to fall 5.1% in 2020, but
before jumping to pessimistic conclusions,
investors should consider a much more important
issue: What is the recovery going to look like?
The economic policy response to the coronavirus
pandemic has been extremely impressive
so far in 2020, especially the United States'
historically large fiscal stimulus, which is already
increasing economic activity substantially.
The need to social distance will continue to
weigh heavily on some parts of the economy
(with the hardest-hit industries constituting about
5% of GDP) through the rest of 2020. However,
positive data about a vaccine's efficacy should
arrive in the second half of 2020, bolstering
consumer and business confidence and
promoting a broader economic recovery. Even
while social distancing highly affects some
industries, such as restaurants and hotels, we
think the rest of the economy can cope with

and 9.7% in Unilever ULVR:UK. According to
Morningstar data, the top 10 holdings in the trust
account for more than 80% of its total assets.
For investors, such a setup can play out
incredibly well while a manager is making the right
calls. LSE's share price has more than tripled,
to GBP 82.32 from GBP 24.52, over the past
five years, for example. Finsbury Growth & Income
Trust has delivered whopping annualized
returns of 14.6% over the past decade through
late June.
Open-end funds are subject to different rules than
investment trusts and are only allowed a
maximum of 10% of their assets in any single stock.
But many still take a concentrated approach.
The Gold-rated Morgan Stanley US Advantage fund,
for example, has 7.6% of assets in Shopify
SHOP, 6.8% in Amazon.com AMZN, and 6.3% in
ServiceNow NOW. The fund has achieved
annualized returns of 24.4% over three years.

22

Morningstar Q3 2020

the continuing pandemic. We expect broad
availability of a vaccine to erase the pandemic's
direct impact on the U.S. and global economies
by mid-2021.
The chart shows our forecast compared
with the U.S. Congressional Budget Office's
latest update and the consensus average
of forecasts gathered by The Wall Street Journal.
Compared with consensus and the CBO, we
expect just as severe a drop in second-quarter
U.S. GDP, but we're much more optimistic
on the rebound. We expect robust catch-up
growth in the years following 2020. We
think U.S. GDP will recover to fourth-quarter
2019 levels by the third quarter of 2021. By
2024, we think the U.S. GDP level will recover to
just 1% below our prepandemic expectation.
Preston Caldwell is a senior equity analyst with
Morningstar.

Darwall has managed the European Opportunities
Trust (formerly the Jupiter European
Opportunities Trust) since 2000, and his longterm track record remains strong. Over the
past 10 years, the trust has delivered annualized
returns of 14.3%, more than double
its benchmark.
Darwall first invested in Wirecard 13 years
ago, when shares were around EUR 9, increasing
his stake over time, and started to reduce
his position in November 2017, when shares
hit EUR 121. But concerns about Wirecard have
been circling for some time, with persistent
suggestions that some of the company's
reported revenue and profits were not reliable.
While Darwall reduced his holding in the firm from
around 15% of assets to 10%, he continued
to stick with the stock. Morningstar Direct data
shows that as of June 18, the trust was
the seventh-largest owner of the business,
with a 0.93% stake.

Morningstar's Optimistic GDP Forecast

Morningstar Forecast
CBO Forecast
Consensus Median

Real GDP (Index)
1.1

1.01
1.0
0.98
0.98
0.9

0.8
Q4 Q1
2019 2020

Q1
2021

Q4
2021

Sources: Morningstar, The Wall Street Journal, U.S. Congressional
Budget Office.

■

Core U.S. Electric Demand

■

Data Centers

Wirecard is not
the only
big bet in the portfolio.
■ Electric
Vehicles
■ Cannabis Cultivation
The trust's top 10 holdings account for
almost 80% of assets, including 10% in Experian
EXPN:GB, 9.9% in Novo Nordisk NOVO B:DK,
and 9.5% in RELX.
Morningstar analysts downgraded the European
Opportunities Trust from a Gold to Silver
rating in November. "In terms of risk within the
portfolio and relating to Wirecard itself," Miller
says, "we reflected our view at the last review by
downgrading the Process pillar from High to
Above Average."
Says Miller: "The move from a Gold to Silver
rating was also partly driven by Darwall's move
from Jupiter to running his own firm." The situation
again prompts the question of whether fund
managers who set up their own investment firms
can replicate the robust checks and balances
that are in place at the investment giants where
they cut their teeth. This issue was cast into the

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Morningstar - Q3 2020

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