During October, the Strategic Europe Quality Fund gained 4.38%, versus a 6.22% increase for the MSCI Europe.
The underperformance was due to both sector allocation (-50 bps) and stock selection (-191 bps). The month was marked by a rebound in the Energy and Financials sectors, areas where the Fund is structurally underweight.
This rebound is fairly symmetrical to the September decline. The scenario of a macroeconomic slowdown is becoming more and more consensual as both companies and investors start to acknowledge the likelihood of a 2023 recession. The question that remains is the duration and depth of the slowdown amid still burgeoning inflation and monetary tightening.
Publicis was the best performer in the portfolio for the month. The repositioning, carried out a few years ago, on digital marketing is bearing fruit. It has resulted in the company outperforming its main competitors such as WPP. We believe that this trend should continue in the coming quarters and we remain confident in the potential of this position given a still reasonable valuation.
Air Liquide reported a good third quarter, and the prospect of Linde’s delisting in Europe was also a positive technical factor. EssilorLuxottica largely reassured the market by posting better-than-expected growth in Q3, a good performance in an otherwise lacklustre Consumer sector environment.
On the detractor front, Sartorius suffered from an uninspiring quarterly publication as orders lagged expectations. With supply chain bottlenecks easing, ordering patterns from customers are returning to a more classical shape (less advanced orders). Whilst destocking is unhelpful it is likely to be a short-term headwind only, as end-user demand remains strong. We trimmed the position but stuck to our holding.
We exited three positions and added three new names during the month. We sold our position in Heineken, whose volumes in Q3 proved not as resilient, as we expected. It was replaced with Symrise, a strong Flavour & Fragrance franchise whose B-to-B business should be relatively insulated from price elasticity.
In Industrials, we sold our position on Brenntag, fearing the slowdown in demand for chemical products might be steeper than expected. We pivoted into MTU, the German aircraft engine manufacturer, whose end markets should keep improving.
In the automotive sector, we exited Michelin to build a position in the newly IPOed Porsche AG. In a sector mired in low growth and fierce competition, we deem the company offers an attractive combination of good growth opportunities and significant scale benefits vs peers; and at mid-teens multiple, its luxury credentials are reasonably valued.
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. Please do not hesitate to contact us for further information.
+44 1481 742380
The views and statements contained herein are those of Phileas Asset Management in their capacity as Investment Adviser to the Fund as of 08/11/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.