Interpreting the cycle

In March, the Strategic Europe Quality Fund returned -0.31%, compared to +0.84% for the MSCI Europe Index. Sector allocation was the cause of the underperformance, with stock selection neutral for the month.

KOMMENTAR DES FONDS
12 Apr 2022

In March, the Strategic Europe Quality Fund returned -0.31%, compared to +0.84% for the MSCI Europe Index. Sector allocation was the cause of the underperformance, with stock selection neutral for the month.

Our structural underweight to Healthcare and Energy (Oil) cost 78 bps, whilst our overweight to Consumer Discretionary caused a 53 bps drag on performance.

The top contributors to performance were EssilorLuxottica, Edenred, Capgemini and Air Liquide. The IT Services sector continues to benefit from buoyant structural trends, with the digital transformation of entire sectors of the economy being a long and inertial phenomenon benefitting well-positioned players such as Capgemini.

The characteristics of Edenred’s business model should enable the company to cope well within a macroeconomic environment marked by rising interest rates. Its highly negative working capital requirement allows it to invest its cash and benefit from a strong improvement in results when rates rise.

Air Liquide’s capital markets day was a useful reminder of how well the company is positioned to navigate the short term (resilient business model; strong pricing power) and benefit from numerous secular growth opportunities presented by the energy transition. The addressable market for industrial gas players in hard to abate industries (Refining; Chemical; Steel; Cement) is set to rise meaningfully in our view, providing a multi-year tailwind to Air Liquide.

On the negative side, S4Capital, Publicis and HelloFresh weighed on performance. We exited our position in S4Capital entirely. The company postponed the publication of its annual accounts without giving a new date and without explaining the reason for this postponement.

Given the uncertainty caused by this announcement, we have decided to include S4Capital in our list of potential controversies, which effectively excludes it from our investment universe, pending further explanation from the company.

While the market initially took on board the collateral risks of the war in Ukraine, the rebound from the 8th March low has erased the entire decline. The macroeconomic context remains uncertain, however, commodity and wage inflation weighs on the margin prospects of companies with weak pricing power. The recessionary impact of inflation is a parameter that prompts us to be cautious about the most cyclical part of our investment universe.

As always, we invite investors and prospective investors, to get in touch should you wish to discuss the positions held in the portfolio. Please do not hesitate to contact us for further information.

Adam TurbervilleAdam Turberville
Director
+44 1481 742380
a.turberville@ericsturdza.com

The views and statements contained herein are those of Phileas Asset Management in their capacity as Investment Adviser to the Fund as of 08/04/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.