Ludovic Labal and Cyril Bertrand expand on the Strategic Europe Quality Fund’s performance through January given the recent market rotation.
The Strategic Europe Quality Fund has indeed experienced a challenging start to the year. The majority of underperformance is linked to the very sharp market rotation out of Quality stocks in favour of Value, triggered by the reassessment of the Fed’s policy outlook in light of persistent inflation.
The inherently “long duration” nature of Quality stocks makes them sensitive to surprise interest rate hikes. Given the Fund’s structural overweight positioning on Quality, and relative underweight positioning on Value (e.g. no Financials or Energy sector exposure), this was a significant drag.
From a stock-specific perspective, the few earnings releases published so far are supporting our investment thesis (e.g. Richemont, Puma, Pandora, Logitech) and were not a drag on performance.
Whilst keeping to the Fund’s mandate and investment philosophy, we made some adjustments to mitigate the impact of the rotation and position the Fund adequately. We have encountered several similar rotations in the past and will therefore apply the same playbook:
1. A slight reduction in Quality exposure: from 63% on 31st December to 55% now (vs. we estimate 44% in the market).
2. Within Quality, we further reduced the “long duration” sensitivity of the segment by reducing sub-exposure to the Growth theme (e.g. Dassault Systemes and Teleperformance positions were reduced sharply on 6th January and then exited) rather than the Defensive bucket which was kept more or less similar. Growth is now 22% of the portfolio vs 33% on 31st December (we estimate 22% in the market).
3. A slight increase of the Value exposure: from 14% on 31st December to 17% now (vs. we estimate 35% in the market).
4. A slight increase in the Fund’s cash position (roughly 8%).
Even though the duration repricing has been painful, our view is that the movements have been extreme and quick, and thus in certain instances overdone. We stand ready to seize opportunities.
The economic backdrop is likely to become tougher for value and cyclical stocks (V-shaped recovery behind, cost headwinds ahead, tight credit spreads, PMIs at peak, US personal consumption expenditures way above trend) with limited fiscal or monetary ammunition to soften the blow. In this environment, we believe the Fund is well-positioned to recapture some ground in the coming months.
As always, we invite investors and prospective investors, to get in touch should you wish to discuss 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 25/01/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.