After the unprecedented Central banks’ tightening in 2022, which caused significant destruction of value in financial assets, investors benefitted from a strong start to the year with the EURO STOXX 600 up 6.67% in January and Equity and credit markets building on their Q4 rebounds.
The sharper-than-expected fall in inflation during December, coupled with the slowdown in the pace of wage growth, have bolstered hopes of less monetary tightening. Receding recession fears have helped to drive cross-asset relief rallies, and systematic strategies have continued to aggressively buy back shorts.
This bullish movement was particularly pronounced in Europe, explained by two main elements: the sharp fall in energy prices, and positive surprises in macroeconomic data. The China reopening theme was the other driving factor contributing to the positive sentiment in early 2023.
European equities, after being considered almost “un-investable” last year, seem to have become investable again. In late January, markets saw the first week of inflows into European funds and ETFs following total outflows of 8% since the war began almost a year ago. In a similar fashion, the Euro continued its steady rise against the Dollar in January, posting a fourth consecutive month of gains, closing at 1.0863.
In such an environment, the Strategic European Silver Stars Fund performed well, with a +4.15% return. On 3rd February, when writing this letter, some of the Fund’s positions have already enjoyed a stellar year-to-date performance: Nordic Paper is up 31%, Piovan 23% and Just Eat Takeaway 20% to name a few.
The largest contributors to the January performance were Just Eat Takeaway (+0.70%), Bekaert (+0.53%) and Befesa (+0.52%). Byggmax was the largest detractor during the month (-0.34%), followed by Akwel (-0.24%) and RevolutionRace (-0.06%).
January is usually a month with fewer company announcements. Just Eat Takeaway is an exception, releasing a trading update mid-month and reporting a material beat in terms of profitability for H2 22, hence 2022 as a whole. The company is already guiding for €225m in EBITDA for 2023, which compares to consensus expectations of €119m pre-release.
This outlook is quite conservative in our opinion, taking the current profitability into account (2x H2 22 translates into a run rate of €300m) as well as all the operational levers still coming in (more rational industry behaviours, US fee caps to be removed, order batching and algorithms improving, less marketing spend, less headcount etc).
Bekaert and Befesa benefitted from the cyclical rebound in the markets and from positive sell-side coverage after the companies attended several conferences in early January.
Byggmax was the unpleasant surprise that came on the last day of the month; the stock price dropped 16% on the day, despite reporting numbers fully in line with expectations. The reason for the drop was the Board’s decision not to pay a dividend for 2022, citing the uncertain market environment for bigger renovation projects, combined with many opportunities to make add-on acquisitions.
The uncertain environment cannot be the reason behind this decision, as a dividend payment would not have stretched the balance sheet in any way, with an immaterial impact on net debt / EBITDA, moving from 1.8x to 1.9x.
Our discussion with management confirmed that they have never seen so many M&A opportunities, mostly in founder-led businesses followed in the past 3-4 years; and sometimes at prices 50% lower compared to 12 months ago. We fully support this decision as substantial shareholder value can be created through capital deployment in add-on opportunities at the right time of the cycle.
This comment also applies to more than half of the Fund’s portfolio companies that sit on sizeable net cash positions at a time of rising interest rates, hefty salary inflation and uncertain economic developments.
In a similar manner, and in spite of the ‘everything everywhere’ rally in January, we continue to believe that the end of the “free money” era should return prices and valuations back to the centre of the investment process. This should strongly benefit active management strategies.
As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Download the latest factsheet.
Please do not hesitate to contact us or visit the Strategic European Silver Stars Fund Page.
+44 1481 742380
The views and statements contained herein, including those pertaining to contribution analysis, are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 03/02/2023 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.
Morningstar™ Ratings Disclaimer
The Strategic European Silver Stars Fund – A EUR share class has a Morningstar rating of 4 stars overall and 5 stars over 3 Years. Morningstar Rating™ as of 31/05/2022. Past performance may not be a reliable guide to future performance. Returns could be reduced, or losses incurred, due to currency fluctuations. The Strategic European Silver Stars Fund received a Morningstar 3 Globe Sustainability Award. Sustainability Rating as of 30/04/2022. Out of 789 Europe Equity Mid/Small Cap funds as of 30/04/2022. Based on 98.92% of AUM. Historical Sustainability Score as of 31/03/2022. Sustainalytics provides company-level analysis used in the calculation of Morningstar’s Historical Sustainability Score. Data is based on long positions only.
Did you know?
The Fund’s name – the Strategic European Silver Stars Fund – references the Alpine Edelweiss or ‘Silver Star’ flower, which traditionally grows in unforgiving conditions at very high altitudes. The small white flower is a symbol of bravery and perseverance for those able to seek it out and embodies the ESG beliefs of the manager.
The Edelweiss flower grows in very specific parts of the Alpine region where the localised conditions meet its exacting requirements, in a similar way to how the Fund’s investment team select their investments. The Alpine region also straddles the countries where many of the Fund’s investment ideas are sourced, with companies in France, Switzerland, Italy, Austria and Germany typically representing more than half of the portfolio.
“We have always prided ourselves on finding lesser-known investment ideas via a detailed fundamental research process, searching beyond the familiar paths and themes to build a differentiated portfolio that can thrive over the long term, surviving even the harshest market environments,” explains Bertrand Faure, Portfolio Manager of the Fund.