The year 2020 has been one of complexity. Eleven months in and the markets continue to surprise, with a significant rebound following the previous month’s decline. We are pleased to report that the Strategic European Silver Stars Fund successfully navigated these unpredictable markets returning +16.55% in November, the highest monthly return since inception.
We will detail the main contributors below as per usual, however, we also believe that it is important to address the bigger picture. As we approach 2021, investors should be asking where they expect to find returns next year. It is our view that the winners of 2021 will not be the same companies that we have benefitted from so strongly in 2020. The Fund’s investment process, consistently utilised since inception, equips us superbly to take advantage of the significant opportunities that we expect to see again next year.
The EuroStoxx 600 declined 5.53% in the last week of October on concerns about the impact of further lockdowns across Europe. In complete contrast, November saw markets rally by 13.84% fuelled by announcements of multiple potential coronavirus vaccines, combined with the result of the US election. The +13.84% performance nearly surpassed the previous monthly record from April 2009 (+14.27%) in the aftermath of the global financial crisis. This gain enabled the benchmark to mitigate a significant proportion of its 2020 losses, taking the YTD return to -4.46% at the end of November.
The value and cyclical sectors that saw some of the highest losses in Q1 have produced some of the largest gains in November, whilst many of the stocks that have benefitted from the lockdowns and produced brilliant results for the last six months, have been under pressure in November.
The Fund’s strong November performance takes the year to date return to +21.42%, outperforming the benchmark by +25.88%. We have not become experts at macroeconomics, masters of epidemiology, nor have we started visiting casinos. The Fund continues to operate in exactly the same way it always has; investing in companies for the long term based on the difference between how we fundamentally value a company and its market price.
The strong year to date performance has been on the back of stocks such as Albioma and Boozt. The latter is a great example: 2020 has been a fantastic year for this company; being part of the top three contributors in six out of the first ten months this year. Its stock price is up over 200% year to date, or even more impressively over 350% since the March lows.
Even though Boozt has consistently upgraded its outlook (six times so far this year, the most recent after a strong November, Black Friday week specifically), forcing us to revise our assumptions and fundamental value appreciation, such a share price rally has inevitably reduced the upside potential. We have therefore reduced the size of this position from over 8% at peak to circa 2.5% today.
The reduction in Boozt and other stocks that have performed exceedingly well has led to a rebalancing of the portfolio over the last couple of months. These changes, as a result of bottom-up selection, have tended to shift the portfolio away from pandemic winners towards companies more exposed to economic recovery.
Although the market and Fund have produced such high monthly returns in November, it is anticipated that significant upsides still lie in the portfolio. The names we have been increasing over the last few months, which now represent the largest exposures, have done exceptionally well in November. However, to keep this in context, they still remain down overall year to date. As such, we believe the market still substantially undervalues their business model resilience and free cash flow generation potential. This, in our opinion, is without any doubt what will contribute to the Fund’s 2021 performance as this potential has barely been tapped in recent weeks.
The largest contributors to the performance in November were: Ipsos (+2.61%), Spie (+1.46%) and Bekaert (+1.46%). The reasons are extremely similar for all three companies: better than anticipated Q3 results highlighting strong business resilience throughout 2020 and staggering free cash flow generation, leading to material earnings and recommendation upgrades by brokers. Unsurprisingly in a month with markets up so strongly, JustEatTakeaway was the only detractor (-0.29%).
Ipsos, the Fund’s largest position since the end of July 2020, has contributed strongly to the Fund’s performance this year with the stock up 27.5% in November. The Q3 results, published in October, were largely ignored by the markets at the time, a mystery for us given how strong they were: operating margin flat after 9 months vs. 2019, €180m free cash flow over 9 months (the market cap was circa €900m when unveiled) – 20% free cash flow yield over 9 months! The November return came on the back of the market rotation, but also from several brokers’ upgrades when the company confirmed that the second lockdown, contrary to the first, had limited impact on their business.
Today, despite the 27.5% move in November and the 70% return since the March lows, the stock is still down 16% on its January 2020 highs. We still see an opportunity for this stock to achieve significant returns.
Spie’s business model has once again demonstrated its resilience during the pandemic. Organic revenues only fell 6.4% over the first 9 months of 2020. The EBITA margin contracted slightly (-50bp to 5.6% in Q3) thanks to a flexible cost structure. This, coupled with impressive debt management and the prospect of a relatively rapid return to ‘normal’ propelled the stock price by 26.5% in November. In the future, Spie should benefit from its strong ‘green’ exposure (35% of FY19 revenues derived from activities contributing to the fight against climate change) and significant exposure to the recovery programs recently unveiled by France and Germany.
Bekaert is a new position for the Fund, initiated in October. The Belgium based company produces steel wire products, ropes and coating technologies. 85% of the business is rubber reinforcement – predominantly for tyres and the oil and gas industries. The company was a strong contributor in November with the stock up 40.7% following its Q3 trading update. The business saw large rebounds in Asia, and China in particular, and the margin recovery was much stronger than anticipated.
Bekaert expects FY20 EBIT to be close to FY19 (€242m), which means significant earnings upgrades from brokers given that the consensus stood at €196m preannouncement. Margins benefitted significantly from cost-cutting and mix improvement actions. Some brokers labelled the Q3 numbers as “a turning point”, but we feel that they now have no other choice but to admit they overlooked the company if they do not want to be left behind the curve.
There is no specific news to report about JustEatTakeaway this month; the stock experienced a small impact from the sector rotations in markets.
Changes to the Fund
We are also pleased to advise investors of some updates to the Fund which you may have seen in the recent press release.
The name of the Fund is being changed to the Strategic European Silver Stars Fund and some updates are being made to closer align the prospectus with the Fund. There are no changes to the investment process or how the Fund is managed. ‘High Conviction & Concentration’ and ‘Discipline & Prudence’ remain the pillars of the investment philosophy.
The liquidity terms have been improved, enabling investors to trade on a daily, rather than a weekly basis, with one day’s notice for subscriptions and five days’ notice for redemptions, increasing flexibility for investors. Market capitalisation constraints have also been removed. The bias towards small and mid-cap companies stem from our fundamental 360-degree private equity style proprietary research, rather than being the result of a specific restriction in the mandate, and consequently, this bias will remain.
If you have any questions on the updates to the prospectus, positioning of the Fund or would like to further detail on our views please do not hesitate to contact us. Visit the Fund Page >
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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 01/12/2020 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.