December update


Fund Commentary
29 Jan 2018


In December, NYMEX WTI CRUDE was up 5.26% to finish at $60.42. The US 10y treasury yield decreased 0.18% to finish the month at 2.4054, following the Fed’s decision to raise rates by 25bps, in a 7-2 vote. Additionally, the Fed confirmed it would step up the monthly pace of shrinking its balance sheet from $10bn to $20bn per month, beginning in January. During the month, the 2018 US economic growth forecast was revised up from initially +2.1% to 2.5%. 

The German 10y treasury yield increased by 16.31% to finish the month at 0.427%, whereas the Swiss 10y treasury yield decreased by 27.05% to close the month at -0.149%. The UK 10y gilt yield declined by 10.56%, finishing the month at 1.19% after the UK parliament altered a government bill, guaranteeing that MP’s get a “meaningful vote” on the final divorce deal at the end of Brexit negotiations in 2019. This move gives Parliament the power to veto the withdrawal treaty.

Throughout the month, Gold increased by 2.18% to finish at $1,302.80, with Silver increasing by 3.04% to close the month at $16.9375. In December, the Euro strengthened against both, the US$ and sterling, finishing at 1.2005 (up 0.85%) and 0.88809 (up 0.9%) respectively.


The Fund* returned 0.73% in December, underperforming its benchmark by 0.06%. Materials, Real Estate and Energy were the best performing sectors in the benchmark, whilst the worst performing were: Utilities, Information Technology and Industrials. The Fund’s top performing stocks were Liberty Global, Pandora and British American Tobacco, whereas the worst were Criteo, Livanova and Stroeer.

Overall, the Fund* finished the year +13.73% on an absolute basis, 3.49% ahead of its benchmark on a net of fees basis. In terms of alpha, the best performing sector was Information Technology, whilst Financials was the largest detractor to alpha, albeit small. Stock selection was strong over the year, with the largest contributing stocks being Wirecard, Sophos, Worldpay, Livanova and Wolters Kluwer. On the other end of the spectrum, Criteo, Pandora, Shire, Ahold Delhaize and Bayer were the largest detractors from the Fund’s performance.

Criteo is a French leader in the fast growing AdTech part of the online advertising market, which uses algorithms to predict users’ intent, thereby assisting in the purchasing and selling of advertising inventory. Importantly, the Company allows clients to see the RoI on their advertising expenditure, something increasingly sought after as companies reallocate their marketing budgets. Given its first mover advantage, the algorithm will only improve as the client’s data set grows. Throughout the year, the share price suffered significantly, largely following news that the latest version of Apple’s operating system will include a new default feature (intelligent tracking prevention (ITP)), which prevents certain websites from tracking users’ browsing activity. Criteo’s Management initially believed they had a workaround in place. Apple however subsequently closed this avenue as well. Currently, both companies are in talks to see if a mutually beneficial solution can be found. More information will be revealed as part of the February results. Importantly, Criteo still has a view to 78% of web usage. Therefore, their core business is still best-in-class and valuable to clients, reflected in an estimated average 20% earning’s growth rate p.a. for the next five years. Management have guided for flat top line growth for 2018 in absolute terms, this effectively being a reset. In the Investment Adviser’s view this is more than priced in, with the shares currently being very cheap, a problem that occurs in small cap stocks from time to time.


In December, the Fund gained 1.44%, outperforming its benchmark by 0.09%. Energy, Materials and Consumer Discretionary were the best performing sectors in the benchmark, whilst the worst performing were: Utilities, Healthcare and Information Technology. The Fund’s top performing stocks were British American Tobacco, Clorox and Reckitt Benckiser, whereas the worst were Criteo, Adobe and Altria.

The Fund returned +29.74 in 2017 on an absolute basis, +7.34% ahead of its benchmark. Consumer Staples and Information Technology contributed most to alpha, generating 5.11% and 4.87% respectively. Health Care was the largest detractor (-1.52%) throughout the year. Stock selection was strong for the period; Wirecard, Estée Lauder, Mastercard, Visa and Diageo were the best performing stocks, whereas Criteo was the main detractor for the year.


Global equities capped off a good year with strong gains in most markets. As widely anticipated, the Fed continued to press ahead slowly with normalisation and the U.S. tax reform bill was passed, which should be positive for corporate earnings. However, in the Investment Adviser’s opinion the U.S. cycle is mature and macro data mixed. Current saving and borrowing trends appear unsustainable. Going forward, the U.S. consumer is therefore unlikely to be as supportive of the U.S. economy. The weak dollar and rising oil price also act as headwinds in this respect. Meanwhile, corporate margins are coming under increasing pressure. The Fed might well be tightening at just the wrong time.

In addition, U.S. markets are at all time highs and continue to look increasingly expensive. The team continues to watch the situation closely and remains cautious.

On a relative basis, Europe currently appears to be the stronger region, at least in the short term. Unemployment reached its lowest level since January 2009 and economic data seems to be improving. Politically, Germany appears to be reaching an agreement on a coalition government, with Italy being the next one to watch when elections take place in early March. In the U.K., the Bank of England decided to raise interest rates. Inflation breached the BoE’s upper target of 3.1% in November. Brexit negotiations appear to be progressing, with recent news flow being more positive, and the sterling gradually strenghtening to pre Brexit levels.

According to the Investment Adviser, attention should be paid to a reduction in global monetary stimulus. Arguably, accommodative Central Bank policies have inflated global assets, it would therefore stand to reason that the inverse is true.

Whilst the portfolio does have an approximate 30% cyclical exposure (predominately through its I.T. holdings); the team sees no reason to move away from its defensive bias given the current economic backdrop.

The views and statements contained herein are those of Lofoten Asset Management in their capacity as Investment Adviser to the Fund as of 26/01/2018 and are based on internal research and modelling.