Little discrimination in July post agreement between Greece and its creditors


Fund Commentary
20 Aug 2015


European markets recorded a +4.01% performance in July and recovered most of their negative performance of the previous month (-4.49%). This market upturn was triggered by the announcement in the early July of an agreement between the Greek government and its creditors. At least temporarily, it marked the end of the psychodrama that kept market participants busy and unsettled until the last days of the first semester.  

Some clouds appeared on the horizon with disappointing economic indicators from China, adding to concerns created by the plunge of the Chinese financial markets about the risk of contagion into the real economy, with obvious repercussions on a broader scale. This however was not sufficient to annihilate the positive momentum in the stock markets as those fears were counterbalanced by a positive GDP estimate for Q2 and a standstill position of the Federal Reserve in the US. Globally, the Investment Adviser acknowledged that corporate results for H1 released so far were broadly in line with expectations and coupled with a sizeable mergers and acquisitions (M&A) activity on both sides of the Atlantic. The upward trend during the month showed little discrimination either amongst sectors or countries.

In that context, the Fund was up by 3.31% in July. It mirrored the European markets performance taking into account the 15%+ cash position kept by the Fund throughout the month. On the back of an upgrade of its annual sales and profit guidance with the H1 sales report, Aubay was the most significant contributor to the performance in July, followed by Tarkett and Valtech. Aubay was already one of the top contributors in the previous month and recorded a +33% performance since the Fund inception on 5 May  which compares to +2.14% for the benchmark index. After such a move, the Investment Adviser decided to crystallise part of the gains in that position; and it is no longer part of the Fund’s top five holdings. At the other end of the spectrum, Rieter, Lisi and Mersen were the three main detractors to performance in July. Mersen appears for the second month in a row in the detractors’ list after announcing that its full year results will fall at the lower end of the anticipated guidance, both in terms of organic growth and operating margin. Albeit not being good news, the Investment Adviser’s conviction remains intact and has taken the decision to use the recent negative performance to reinforce their position in a company that trades at 8x EBIT and 10x PE with an 8% free cash flow yield for 2016.

Forecasts regarding the development of each individual business in 2015 are based on a more volatile environment. The key factors, which include the impact of the Greek crisis on investment behavior in Europe, the repercussions of EU sanctions against Russia, the slowdown in China and further developments on the currency front, make it difficult to have a clear and reliable view on the course of businesses until the end of this financial year. To date, 17 out of 26 positions held by the Fund have reported their H1 numbers.None of those releases have invalidated the thesis that underpinned the investment decisions. In most cases, the thesis were even strengthened. The Investment Adviser shall continue to invest with a conservative and disciplined approach directed towards companies sharing common characteristics: sound balance sheet, significant free cash flow generation and trading at reasonable multiples.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 12/08/15 and are based on internal research and modelling.