During February, the Strategic Europe Quality Fund returned -3.42% compared to -3.01% for the benchmark. The month began with a continued rotation into value, before the conflict in Ukraine caused a general market decline.
Stock selection and sector allocation were broadly neutral at +0.01% and -0.36% respectively. Our underweight in the Banking sector returned 85 bps, while our overweight in Consumer Discretionary cost us 47 bps in relative performance.
On the earnings front, the annual results of our companies have continued to be very satisfactory. Overall, in an input cost environment that is likely to remain tough, we maintain our focus on pricing power and take comfort in recent releases and outlooks from our companies (e.g. Nestlé, Schneider, Air Liquide, Michelin, Saint-Gobain) amid mixed signals from peers.
In the IT services segment, the digital transformation of large and medium-sized companies is driving growth at Capgemini, Sopra and Alten. Growth prospects remain good, the challenge being to recruit new engineers. Bureau Veritas has confirmed the structural acceleration of its growth. The group has skillfully positioned itself on solutions addressing the sustainability of its clients’ products and installations.
The rise in oil prices should be an additional driver for growth in oil & gas and renewable energy businesses. We initiated a new position in Edenred. This growth stock has suffered from the quality/value rotation since the beginning of the year and is now trading at very reasonable valuation levels (PE 2023 above 21x for structural organic growth of around 10%).
The war in Ukraine is blurring the macroeconomic outlook, increasing the equity risk premium, and triggering heightened volatility. The sharp rise in oil and commodity prices is likely to fuel inflation in the coming months, weighing on economic growth.
Few sectors will benefit from this type of environment. Taking a mid-term view, we feel that our energy transition investments are likely to see amplified tailwinds, the topic swiftly becoming a geopolitical priority in Europe on top of an environmental one.
Against this backdrop, the Fund’s positioning remains broadly unchanged, with a structural overweight to quality. We see significant potential to make up for lost ground in the growth pocket of the portfolio with stocks that have suffered from severe deratings.
Overall, as aggressive bets on cyclical growth / interest rate hikes are being withdrawn and the economic outlook is becoming more uncertain, we feel the Fund’s positioning on franchises with strong pricing power and resilient / structurally growing business models is vindicated.
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.
+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 10/03/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.