Strong resilience in a challenging environment

We would like to wish you a happy and healthy 2023 following an eventful year in 2022. The Strategic European Silver Stars Fund performed well in December (+1.95%), another month that proved tricky for markets with the benchmark ending down -2.62%. December saw little stock-specific news regarding our holdings, with markets driven more by broader themes.

KOMMENTAR DES FONDS
5 Jan 2023

We would like to wish you a happy and healthy 2023 following an eventful year in 2022. The Strategic European Silver Stars Fund performed well in December (+1.95%), another month that proved tricky for markets with the benchmark ending down -2.62%. December saw little stock-specific news regarding our holdings, with markets driven more by broader themes.

The largest contributors to the performance were: Ipsos (+0.68%), Bekaert (+0.56%) and Trigano (+0.44%), which are all uncoincidentally perceived as resilient businesses with strong backlogs that can face recessionary environments. The three largest detractors were: Just Eat Takeaway (-0.31%), RevolutionRace (-0.17%) and TeamViewer (-0.11%).

2022 was a tricky year to be an investor across many strategies as a number of relationships and trends that were considered as written in stone broke down, or even reversed e.g. the inverse correlation between government bonds and equities. Our highly selective and concentrated approach, however, resulted in a strong outperformance versus the benchmark in 2022, although it is always disappointing to finish the year down. The Fund posted a total net return of -7.82%, while the benchmark returned -20.71% (+12.89% relative outperformance).

Over the past three years, the Fund has returned +51.24% compared to -2.94% for the benchmark, highlighting once again, if needed, the strong benefits of active management through its ability to decorrelate returns from general market trends.

SESF Performance Table 12.2022

The European Small & Mid Cap space that we typically operate in was a particularly difficult area in 2022 with its largest annual underperformance versus its larger peers in more than two decades, pricing in the sum of all fears: major land war; inflation; energy shock; the rise of the populist right in Sweden and Italy; and political chaos in the UK, to name some of the most relevant.

The Fund’s substantial outperformance last year can be attributed to several factors:

  • Strong stock picking, specifically across the Fund’s biggest positions:
    – Ipsos, the Fund’s largest holding was up 44% in 2022;
    – Albioma, which was the third largest position as we entered 2022, was up +48% following the takeover by KKR announced in late April.
  • Strong stock selection avoiding exposure to very overheated segments of the market. For example companies with a significant misplaced focus on the growth rate of revenues and no focus on earnings.
  • Our prudence. The Fund held close to 30% cash at its peak in 2022, which is the highest level ever in the Fund.

The largest overall contributors for the Fund in 2022 were: Ipsos (+3.61%), Albioma (+3.18%) and Verallia (+1.77%). Out of the 29 names held over the 12 months, 11 contributed positively. This 38% hit ratio is a true testimony to our fundamental investment style during such a challenging year.

The largest detractors belong to the European Consumer Discretionary space, often coupled with consumption evolution post-COVID trends reversals: RevolutionRace (-2.83%), Groupe LDLC (-2.38%) and Byggmax (-1.97%).

The challenging environment resulted in changes to the portfolio with both new investments added as well as existing positions cut.

All four of the new investments contributed positively to the performance. Verallia, one of the new positions, was the third-largest contributor across the whole portfolio for the year:

  • Technogym and Verallia were initiated in the final days of February, post the Ukraine invasion, in a phase of the market where there was a complete absence of discrimination.
  • Mersen was initiated in October, after their Q3 report and second profit upgrade for 2022.
  • Exclusive Networks was initiated in December following a round of management meetings.

Two of the positions that were closed out were sold / tendered in the context of take-private transactions (Hunter Douglas and Albioma).

Two others (Somfy and Brembo), were sold during the first quarter of 2022 as we had concerns about how the new environment would impact the fundamentals of these businesses. This also helped to reduce the portfolio’s risk by raising the cash level.

Interestingly, Somfy received an offer from its controlling shareholder later in the year to take the company private, at a price of €143 per share, a 20.5% premium over the previous close at €118.6. The Fund sold the position in January in several tranches with an average price of €166.3 per share, substantially higher than the takeout price incorporating the premium.

Brembo was also sold in several tranches in Q1, at an average price of €11.72, which compares to a closing price of €10.45 at year-end.

The fate of 2023 is highly uncertain, it will depend on several factors: the trajectory of earnings; asset flows; and the peak of inflation and rates. As always, we will try to isolate the portfolio as much as possible from those macro elements on which we have little grip.

As demonstrated in the past three years, and even since the Fund’s inception in 2015, a strong decorrelation from market movements is possible, provided we manage to avoid penalising themes. For 2023, it appears to us that some themes are likely to be centre stage:

  • Increased geopolitical risks create needs for cybersecurity protection and deglobalisation / reshoring movements.
  • Climate change acknowledgement with multiple impacts to be felt on mobility and energy efficiency, on travelling experience and leisure activities.
  • Liquidity and refinancing needs: sound balance sheets and strong free cash flow are absolutely compulsory to become a consolidator at the right point of the M&A cycle.
  • Operational excellence to cope with recessionary fears through productivity gains, flexible cost basis, make or buy and automation decisions.
  • Continued development and penetration of eCommerce players versus traditional retail.

The Fund, we believe, is ideally positioned today through its existing holdings to benefit from these trends and manoeuvre in a continuously choppy environment, where selectivity, prudence and convictions might be even more important than in 2022.

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.

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


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 03/01/2023 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.

Edelweiss Flower

The Edelweiss flower.

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.