2022 proved to be a complicated year for our strategy, with value stocks offering a very strong outperformance. This deep rotation in favour of value stocks and away from quality was mainly triggered by the context of rising inflation and interest rates.
The Strategic Europe Quality Fund underperformed during the year with the main driver being our portfolio structure and the Fund’s overexposure to quality stocks penalising us to a large extent.
Quality stocks logically have higher than average valuation multiples (structurally higher than average growth prospects and lower cyclicality). Given their longer duration, these stocks suffer disproportionately during phases of rising interest rates.
The Fund’s performance was heavily impacted by the unprecedented depth of the rotation, particularly on growth stocks. Incidentally, our structural underweight to commodities and financials was a significant drag on relative performance.
Among the best contributions to performance in 2022 were the fine returns of Edenred, MTU, Spie and Publicis. The weakest performances came from S4 Capital, Puma, Teleperformance and Kingspan. We are no longer shareholders in the first two stocks (disappointment with S4 Capital’s operating performance and a change in management at Puma). However, we maintained our positions in Teleperformance and Kingspan.
As we begin 2023, we deem that the inherent quality valuation premium of the companies in our portfolio has been overly reduced. After a year mostly driven by macro considerations, this should pave the way for a market where companies’ performance is back in the driver’s seat.
In this context, our portfolio structure should allow us to benefit from the superior financial productivity and resilience of our companies. In December, stock selection was positive, although sector allocation was negative due to our underweight in financials.
We benefitted from the rebound of Teleperformance and the strong return of Spie. Spie’s positive performance over 2022 reflects the company’s improving fundamentals. Well positioned in markets benefitting from the energy transition, Spie should experience accelerating growth over the next few years while its valuation multiple remains reasonable.
Teleperformance’s share price has recovered from its sharp fall in November, which we believe was overdone given the lack of materiality on the ESG controversy that penalised the stock.
MTU is a fairly new position (October 2022). The stock’s performance in December was driven by the continued normalisation of air traffic. In this sense, China’s abandonment of the zero COVID policy is good news for air traffic, which should continue its post-pandemic catch-up in 2023.
Capgemini suffered from Accenture’s half-hearted publication, which showed a slight slowdown in order intake. This slightly less buoyant situation does not call into question the structural need for companies to carry on with their digital transition, a secular trend that is far from exhausted. With a PER of 16x and a free cash flow yield of 7%, Capgemini remains a compelling investment proposition in our view.
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 10/01/2023 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.