Resilience through preparation

February was another turbulent month for global equity markets. The Strategic European Silver Stars Fund continued to resist the volatile conditions posting a -1.95% return, which compares to -3.61% for the benchmark. In terms of year to date performance, the Fund has outperformed the benchmark by 3.67%.

Fund Commentary
9 Mar 2022

February was another turbulent month for global equity markets. The Strategic European Silver Stars Fund continued to resist the volatile conditions posting a -1.95% return, which compares to -3.61% for the benchmark. In terms of year to date performance, the Fund has outperformed the benchmark by 3.67%.

In the past 3 years, from 2019 to 2021, the Fund has returned +104.1%, a 48.9% outperformance of the benchmark, which returned +55.2%. Given the incredibly worrisome environment with central banks tightening and a war on our doorstep leading to volatility and uncertainty, we are so far reassured to see our portfolio resisting in this manner.

The impact on growth forecasts for the future will depend on the evolution of energy prices. Initial estimates on the impact of the current sanctions on economic activity suggest 0.5% off GDP forecasts for the Euro Area in 2022, bringing GDP growth down from 4% to about 3.5%. The downward revision in the US appears smaller. Whether these assumptions are wildly optimistic depends solely on where energy prices settle.

As mentioned in our January commentary, we continue to see the situation as binary, even if it has drastically changed since the invasion on 24th February. While it’s impossible to have a base case here, we need to contemplate various scenarios.

It appears to us that the markets, at least until the end of February, kept a cool head and remained disciplined without indiscriminate selling pressure. As the war in Ukraine drags on, things may change – we have already seen the early signs in the first days of March. We have positioned the Fund to be prepared for whatever scenario materialises.

At the end of February, cash exposure (uninvested cash (14%) and a position currently under offer (8%)) amounted to over 22% of the NAV. On top of this, looking through the portfolio, a significant number of the Fund’s holdings (10 out of 25) have a net cash position on their balance sheet at the end of 2021.

We have repeatedly mentioned in recent months that following very strong Free Cash Flow (FCF) generations in 2020 and 2021, the balance sheets of the Fund’s investments are very sound, often too sound – leading to a level of active share buyback programs unseen in the Fund’s history.

Should the situation deteriorate further, our experiences of managing funds through numerous periods of stress in financial markets over the last 20 years should prove helpful, as it has done previously. In mid-March 2020, when the world entered global lockdowns for an unknown period, the Fund became a net buyer of equities again following over three months of portfolio de-risking, taking advantage of the volatility that so many investors dislike.

We believe that relying on fundamentals remains the best approach to determine if and when the market has gone too far – it is our opinion that we are already there – provided the war remains contained to Ukraine and does not escalate to a more global conflict with NATO members.

The largest contributors to the February performance were: Albioma (+1.05%), Indra (+0.64%) and Ipsos (+0.57%). Groupe LDLC was the largest detractor during the month (-0.70%), followed by Just Eat Takeaway (-0.64%) and Bekaert (-0.54%).

Albioma benefitted from the current situation with a sharp renewed interest in Europe for renewable energy producers. Indra and Ipsos published results during the month and both are perfect illustrations of the balance sheet aspects discussed above. Based on 28th February market capitalisation, 2021 FCF translated into a 15.9% and 12.9% yield for Indra and Ipsos, respectively.

On the detractor side, Groupe LDLC adjusted its annual target for FY21/22 ending 30th March, following a downturn in activity during February as consumers, both private and professional, are adopting a wait-and-see attitude. Current price levels translate into a 3x Price-Earnings ratio ex cash, and >30% FCF yield; with net cash on the balance sheet expected to be around 42% of market capitalisation for the fiscal year ending March 2023.

Bekaert gave back part of January’s strong gains despite strong results, with >10% FCF yield in 2021, a greater than 4% dividend yield and an announced share buyback for €120 million representing 6% of the current capitalisation, pushing the shareholder return north of 10% in 2022.

There is nothing specific to mention regarding Just Eat Takeaway.

As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Download the latest factsheet. 

Please do not hesitate to contact us or visit the Strategic European Silver Stars Fund Page.

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


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 04/03/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.