Status quo for the US Federal Reserve following the worst quarter for financial markets since 2011


Fund Commentary
19 Oct 2015


Stable until mid-month, financial markets in Europe became anxious regarding the risks of a global economic slowdown, resulting from continued uncertainties surrounding the Chinese economy and the US Federal Reserve “status quo”. The stability of US interest rates was seen as a negative signal with regards to the strength of US growth and its dependency on developments in emerging markets.

Financial markets also suffered from the Volkswagen scandal that triggered a sharp fall in the automotive stocks and throughout the entire production chain (steel, mining …). In the end, the Fund’s benchmark, the Eurostoxx 600 Net Return dropped by 4.19% in September and 8.42% for the third calendar quarter, the largest quarterly decline since Q3 2011. Similar to the summer period, the performance gaps between sectors was extreme in September (between -11% to +8% relative to DJ Eurostoxx). Commodities, automotive and banks suffered the most while leisure, consumer goods and real estate managed to post positive returns.

In that context, the Fund was down by 3.84% in September, outperforming its benchmark by 0.35%. The outperformance for the third quarter amounts to 1.96%. As mentioned in the August commentary, the 15%+ cash portion was increased to close to 20% and maintained at that level throughout the month. 9 out of 26 investments recorded positive absolute returns in September. Alten was the most significant contributor to performance in September, followed by Ascom and Rieter. At the other end of the spectrum, Tom Tailor, Jacquet Metal Services and GfK were the three main detractors from performance. The Fund took advantage of the volatility to initiate a new position in Serge Ferrari which had its first public offering in June 2014. Serge Ferrari is a leader in the flexible composite material sector. The Investment Adviser met the management on several occasions since the IPO and approved of their strategy to use the IPO proceeds to enlarge its distribution team on existing and new applications.

In 2015, the world is turning a page that lasted for seven years, with emerging markets driving global economic expansion. The Chinese slowdown, the fall in commodity prices, volatility in foreign exchanges weight heavily on emerging markets growth, and this should continue in the quarters to come. This weakening in the developing world comes at a time of growth pick up in the developed economies which should enable the Federal Reserve to raise interest rates in the near future. However, inflation remains low and a series of disappointing economic releases could delay the whole decision making process. In such an uncertain environment, the Investment Adviser shall remain prudent in deploying the Fund’s capital in the short term, keeping a cash allocation to be spent only when they meet companies with long term value creation potential, significant shareholder value returns and downside protection.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 12/10/15 and are based on internal research and modelling.