In January, the Strategic Europe Quality Fund returned 9.17%, outperforming the benchmark by 2.38%. The outperformance came from both sector allocation and stock selection, +148 bps and +89 bps respectively.
The underperformance of the Energy and Pharmaceutical sectors where we are generally underweight, more than offset the outperformance of the Financials sector. As a reminder, the reasons why we are structurally underweight or not invested in these sectors are the following:
- The complexity and opacity of a bank’s balance sheet lead us to avoid the sector. The margin of error on the implied equity value of such levered plays is just too significant.
- The valuation of big pharma depends to a large extent on their drug pipeline. As financiers, we humbly deem we lack a biologist’s expertise to be in a good position to ascribe a fair value to this portion of the business.
- The economic performance of oil companies is essentially dependent on the evolution of oil prices. This is an exogenous factor on which we have no visibility. This again, makes the valuation exercise too uncertain.
As stock pickers, we focus on sectors and stocks that we believe can be modelled with a sufficient level of confidence and a reasonable margin of safety.
The beginning of the year was characterised by a stabilisation of interest rates, with a rebound of quality stocks following a very difficult year in 2022. The market remains focused on the inflation outlook and the evolution of interest rates.
The Fed’s more balanced speech has reassured the market about the risk of further aggressive monetary tightening. We note the persistence of a very inverted yield curve in the US, a leading indicator of a possible recession.
While the fixed-income market is voting for a fairly sharp slowdown in growth, the equity market seems to think otherwise and is so far embracing a much softer scenario, judging by the strong performance of cyclical stocks in recent weeks. We will remain mindful of risks to earnings in the year ahead.
The top contributors to performance in January were LVMH, Schneider, ASML and Alten. The bottom performers for the month were found among the more defensive plays, such as Danaher and Symrise.
Alten reassured the market of its growth trajectory with organic growth of 15% in Q4, above market expectations. The company remains confident for 2023 with a growth target of over 7%. In view of these factors, the derating suffered by Alten in 2022 seems exaggerated to us. We remain positive about the stock.
ASML published good figures for Q4 and communicated a 2023 revenue growth guidance above consensus forecasts. ASML’s unique positioning in its market allows it to go through the semiconductor industry cycles without major hitches. Demand for its products far exceeds its production capacity.
Teleperformance has experienced a significant rebound since it was mired in an ESG controversy over its employees’ working conditions in November. The company has been very active and transparent about its human resources management; this has gone a long way to alleviate concerns about its work practices, which we believe are above industry standards.
We invested in Adidas at the time of the management change announcement, revealing the arrival of Bjorn Gulden, formerly of Puma, as head of the company. Bjorn Goulden’s track record as CEO is exceptional. Under his leadership, Pandora and then Puma, have experienced spectacular turnarounds.
We will probably have to be patient to reap the benefits of his work at Adidas, however, we deem this wait is worthwhile as the runway for improvement and the associated valuation upsides are significant.
As always, we invite investors and prospects to contact us should they wish to receive any additional information.
+44 1481 742380
The views and statements contained herein are those of Phileas Asset Management in their capacity as Investment Adviser to the Fund as of 09/02/2023 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.