Cyclical stocks rebound

In November, the Strategic Europe Quality Fund gained 3.30%. The Fund underperformed the benchmark due to a negative stock selection effect with declines in Teleperformance and Nexans (discussed in more detail below), in addition to being underweight in the most cyclical segment of the market, which benefited from the return of risk appetite.

Fund Commentary
12 Dec 2022

In November, the Strategic Europe Quality Fund gained 3.30%. The Fund underperformed the benchmark due to a negative stock selection effect with declines in Teleperformance and Nexans (discussed in more detail below), in addition to being underweight in the most cyclical segment of the market, which benefited from the return of risk appetite.

We believe it is premature to take significant exposure to cyclical as we are yet to see the recessionary effect of rate hikes and inflation on the economy. Earnings expectations for 2023 often seem too high for many companies that are highly geared to the economic cycle. November was also characterised by a major short squeeze.

Over the last ten years, the outperformance of the most shorted stocks has never been so strong, at around 20% over six weeks according to the Bank of America. Most of our positions, which are undoubtedly more consensual, did not benefit from this movement, and as a result, underperformed in the rebound. In line with our usual practice in this type of environment, we did not make any major adjustments to our portfolio as the fundamentals of our positions remain unchanged.

In the IT Services sector, Teleperformance lost 20% over the month in a rising market. The market’s reaction to a potential controversy over working conditions in the Colombian content moderation team seems, to us, to be widely exaggerated. In a transparent and comprehensive manner, we deem the company adequately tackled the issue.

The evidence is convincing and we have not identified any shortcomings in the company’s treatment of its employees. Moreover, the financial contribution of this activity is negligible (about 1% of sales). The stock’s reaction illustrates the growing importance of ESG-driven flows whenever controversies arise.

When confronted with those, our job is to analyse the financial and extra-financial issues in a rational way. In this case, our analysis led us to maintain our position in order to benefit from the expected recovery in performance as the dust settles. Stocks such as Capgemini and Wolters Kluwer underperformed in the market, but there are no specific reasons.

In the Consumer sector, we were penalised by the announcement that Puma’s CEO, Bjørn Gulden, was leaving for a competitor, Adidas. We cut our position in Puma and opened a small position in Adidas.

The strong rise in Adidas, in reaction to this announcement, seems justified by Bjørn Gulden’s excellent track record as head of Pandora and Puma. Adidas is coming out of a difficult period of market share loss, and the company needs to regain its product momentum. Bjørn Gulden is undoubtedly the right man to wake the sleeping beauty in the coming years.

In the Industry sector, Nexans’ decline over the month explains most of the underperformance. The main cause for the decline (-11%) is recommendation downgrades by some brokers on valuation and construction exposure considerations.

Our thesis on the company remains intact. Notwithstanding some short-term cyclical construction exposure, Nexans remains extremely well positioned to benefit from the secular rise in electrification and the overhaul of the energy infrastructure.

We invite investors and prospects to contact us should they wish to receive any additional information.

 

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

The views and statements contained herein are those of Phileas Asset Management in their capacity as Investment Adviser to the Fund as of 07/12/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.