2019 proved to be high-quality, despite the surprises

2019 was a good year for the Fund, finishing up +25.04% on an absolute basis, climbing +3.15% in December, and +7.87% in Q4. Since inception (5th May 2015) the Strategic European Smaller Companies Fund’s performance was +31.12% compared to +20.82% for the benchmark index, translating into a 10.3% outperformance for the period.

Monthly Fund Commentary
17 Jan 2020

2019 was a good year for the Fund, finishing up +25.04% on an absolute basis, climbing +3.15% in December, and +7.87% in Q4. Since inception (5th May 2015) the Strategic European Smaller Companies Fund’s performance was +31.12% compared to +20.82% for the benchmark index, translating into a 10.3% outperformance for the period.

2018 featured some of the best growth of the entire cycle for the real economy. However, that growth was met with a down year for the stock market and a complete absence of meaningful returns across the entire asset spectrum.

2019 brought many surprises: cyclicals staged a strong comeback and overtook defensives during the second half of the year, boosted by progress in the U.S.-China trade talks; in a complete reversal of 2018’s widespread losses, every sector was up; 2019 has also been the year of record negative-yielding debt and renewed monetary stimulus. Despite slower global growth, 2019 played out as one of the highest quality years in the history of financial markets.

The Investment Adviser believes that the “good news” that had driven markets has now been discounted and, at the start of the year, some European companies equity valuations (and even more so in the US) are looking quite full, with Central Banks’ policies unlikely to repeat the positive delta on multiples seen in 2019. The recovery in manufacturing lead indicators through H2 offered some hope that activity is strengthening, but it is unlikely that the improvement is coming in a straight line, which may limit CapEx spending and growth and pose some lingering risks to 2020 EPS forecasts for some companies.

The Strategic European Smaller Companies Fund’s positioning is currently with companies that are trading at levels where the Team feel that the valuations, based on their in-depth fundamental analysis, still leave significant upside. The focus remains on investing in well-managed, resilient companies with strong free cash flow generation. Albioma was the largest monthly contributor to the Fund’s performance in December, followed by Befesa and Conzetta.

Albioma rebounded sharply in December following a correction of the previous months price drop. During November the stock price was penalised, in spite of two positive brokers’ initiations, but this reversed its course accordingly during December.

Befesa performed very strongly over the second half of the year, increasing by over 40% from mid-August to end the year at 38.0. As mentioned, Befesa was the second strongest performer in December, although there was no specific news during the month. In November, the company announced that it had commenced construction of its new steel dust recycling plant in Xuchang, China. This is the companies’ second Chinese site, its first in Changzhou began construction in Spring 2019 with production expected to start in H2 2020. The company also announced in November that it had completed the upgrade of its Barcelona aluminium salt slag plant with higher efficiency furnaces.

Conzetta is a position that was initiated in November 2019. This is a diversified Switzerland based group of companies that has business units in: Sheet Metal Processing, Chemical Specialities and Sporting Goods. The company performed strongly in December on the back of an announcement that the company has decided to refocus on its Bystronic business unit – its global premium sheet metal processing business. This is Conzetta’s fastest growing and most profitable business (57% of revenues in 2018 and 90% of the groups operating profit) and as such, the company plans to divest all other businesses within a year, market conditions permitting. On 20th December Conzetta announced the divestment of Schmid Rhyner, the smallest division within Chemical Specialities, to Altana.

At the other end of the spectrum, Spie, Trigano and Akwel were the three main detractors with, it is worth noting, limited impact on the monthly performance. Together, the three positions only had a negative impact of 0.23% on the Fund’s gross performance. As such, there is little information to be reported.

At the end of November, the Investment Adviser initiated a new position in Beneteau. Groupe Beneteau is a worldwide market leader for boats, and also a European leader for leisure homes. The company is headquartered in France and has 12 brands in its boat division producing over 200 models covering everything from sailing to motorboating, monohulls and catamarans.

The Investment Adviser initiated the position following a meeting with its newly appointed CEO in June 2019. His mandate is pretty straight forward: improve profitability. A new strategic plan should be unveiled in April involving both short and medium-term actions, notably reducing headquarter and SG&A costs, improving factory productivity, streamlining the product portfolio and reducing CapEx.

The Investment Adviser believes that EBIT could double in the coming 3 to 5 years compared to operating profit reported in August 2019. The stock was trading at a highly depressed multiple of 8x EV/EBIT on even more depressed profitability metrics. Beneteau is a turnaround candidate with a sizeable margin of safety. There is a significant amount of low hanging fruit that could rapidly increase the operating margin from 6% to 8-9%. After that, more profound productivity and reorganization measures could help the company raise it towards more normalised levels of 10-12%, in line with industry standards.

 

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 07/01/2020 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.